Will the SEC’s Changes to the Foreign Private Issuer Definition Affect SPACs?

For this month's SPAC Notebook, we examine how potential SEC changes to the definition may affect special purpose acquisition companies (SPACs). I am joined by Anna Pinedo, head of capital markets at Mayer Brown and an expert on US securities law. Here are the highlights of our conversation, edited for clarity. You can also watch the complete discussion below.

Yelena Dunaevsky: Anna's team at Mayer Brown published an article about this issue on their Free Writings and Perspectives blog. That article focuses on the wider market, but we want to focus here on how changes to the FPI definition might affect SPACs. Let's begin with some background. 

Anna Pinedo: Foreign private issuers have always had some advantages in the United States. For example, they aren't subject to quarterly reporting. They don't have to do Form 10-Qs. They have more time than their US counterparts to do an annual report. 

Additionally, they don't have to make beneficial ownership reports for their directors and officers, so they're not subject to Section 16 and the accompanying short-swing profits rules, which are pretty burdensome for US filers.

Foreign private issuers do have to comply with Section 13 rules, and they are subject to a number of corporate governance accommodations. For example, SEC allows them to rely on their home country rules as opposed to the corporate governance and rules of the exchange on which they are listed.  And both the NYSE and Nasdaq allow foreign private insurers to rely on home country rules as opposed to the corporate governance rules of the exchange. 

Yelena Dunaevsky: That sounds to me like a pretty favorable position that the SEC has granted so far to foreign private issuers as compared to what US issuers need to comply with. So what do you think motivated the SEC to reexamine the foreign private issuer definition at this stage? 

What Prompted the Possible Definition Change? 

Anna Pinedo: The catalyst for this concept release was actually the rollback of some of those accommodations under former SEC Chair Gary Gensler. Many of the rules adopted during the Gensler term didn't have the usual accommodations for foreign private issuers.

For example, the cybersecurity incident disclosure rules didn’t really provide accommodations or lesser standards for foreign private issuers when the SEC was considering and then adopting them. Similarly, when the SEC considered and then adopted the now-vacated rules relating to climate change, no significant accommodations were made for foreign private issuers. 

So, some SEC commissioners began to question whether the SEC was changing its philosophy with respect to foreign private issuers. 

In a 2024 speech, Commissioner Mark Uyeda called upon the SEC to provide clarity on how it wanted to move forward regarding foreign private issuer disclosure. This speech came at a time when Congress and, generally, the government were facing a lot of debate and pressure about China-based companies. There were a lot of concerns about China- based companies and appropriate disclosures and investor protections as they related to such companies. 

So there's a strong element of concern about China-based companies that is reflected in the concept release. 

Read Our Blog: Foreign Private Issuers: Time to End the Free Lunch? 

How Could SPACs Be Affected? 

Yelena Dunaevsky: There are 69 requests for comment in the concept release, and some of them will affect SPACs and de-SPACS more than others. So if you had to pick a few of the concepts being addressed there as being more important for SPACs specifically, which would those be? 

Anna Pinedo: A question that comes up frequently is whether there's regulatory arbitrage going on and whether, for some foreign private issuers, the country of domicile is different from the headquarters. That is very much an issue for some companies that have their headquarters in Asia, but their legal domicile is in the Caymans. 

That may be less of an issue for SPACs, but interestingly, the concept release does a very good job of reaching into history when the concept of FPIs first came into being. Originally, the definition was focused on companies that were domiciled outside the United States, had a principal trading market outside the United States, and were regulated outside the United States by a foreign regulator in their home country but wanted a second listing in the United States. 

Originally, FPIs were subject to lighter regulation on the theory that their home country regulator was already doing a job or taking the lead, if you will, and had principal oversight over them. For SPACs specifically, what would be important is whether any rule amendments will introduce a foreign trading volume requirement, because most SPACs, or many SPACs, are domiciled in Cayman but have only one listing—their listing in the US. 

Yelena Dunaevsky: Interestingly, the concept release lists Cayman Islands as the most popular FPI jurisdiction. 

Anna Pinedo: Will there be any kind of foreign trading volume test or an addition of a major foreign exchange listing requirement? That would be significant and potentially add a new cost. Also, any kind of additional foreign listing requirement could come with a new series of corporate governance or additional criteria to be met, and the new SPAC sponsor would have to pay close attention to that. 

Read Our Blog: SPAC Perspective: What Do We Do About Cayman? 

Yelena Dunaevsky: There has been more of a recent focus on business combinations with companies that are domiciled outside the US. At the recent SPAC conference, there were multiple foreign teams, domiciled all over the world that were looking to merge with a SPAC. We are likely to see more of those combinations in the upcoming de-SPAC wave.  In light of some of the potential rule changes here, do you think any of those foreign targets would be deterred from seeking a combination with a US-listed SPAC? 

Anna Pinedo: Foreign targets should not be deterred from seeking a combination with a US-listed SPAC. The SEC is seeking input from commenters, which is a very welcome thing, and it’s important for the SPAC community to participate in this process. 

Anna Pinedo: There will ultimately be a rule proposal, followed by a comment period on any proposed rule emanating from it. 

90-Day Comment Period Is Underway 

Yelena Dunaevsky: The comment period extends through August, and I encourage everyone to make their voice heard with the new SEC administration. It looks like the SEC is moving in the direction of more openness and transparency, which is a welcome and positive development.