SEC Finally Finalizes the SPAC Rules

We've been waiting nearly two years for the Securities and Exchange Commission (SEC) to finalize the rules for special purpose acquisition companies (SPACs). On January 24, it happened at last. To help us make sense of the 581-page release, we spoke with a distinguished capital markets attorney Anna Pinedo, a partner in the New York office of Mayer Brown, who focuses on securities offerings.

Here are the highlights of our conversation. You can also watch the full discussion below.

Major Impacts of the New SPAC Rules

Yelena Dunaevsky: Everyone has been focused on disclosure rules, including the treatment of and requirements for projections. Other areas of concern were the Investment Company Act issues and the anticipated changes for the financial statements. What areas will have the most impact on the SPAC market?

Anna Pinedo: The changes in the co-registrant status will impact decision-making for many target companies. When evaluating their choices in terms of how they think about liquidity opportunities, many private companies will consider whether they should go public on their own, pursue a direct listing if that's even a choice for them, combine with a SPAC, or pursue a merger & acquisition (M&A) opportunity? The possibility of being viewed as or accepting a co-registrant status may be limiting.

The other concern is the unavailability of the safe harbor under the Private Securities Litigation Reform Act (PSLRA) for projections going forward. With no safe harbor, there will be significant concern with the use of any projections in the future. In the context of an investor presentation, we may now see a very conservative use of projections, which is a fair bit of change in practice.

Were There Any Unexpected Changes?

Anna Pinedo: The market had anticipated that the SEC might adopt a softer or more nuanced version of Rule 140a on statutory underwriter status. Instead, the SEC did something entirely different.

In the release, the SEC went out of its way to say that it is not adopting or endorsing 140a but only providing guidance. I would not have predicted that, and I can't say that the guidance is really helpful or illuminating.

It was also unexpected that the SEC went ahead with the co-registrant approach because it is inconsistent with how the securities laws have been interpreted.

Yelena Dunaevsky: The proposed rules failed to consider the reality of the SPAC market. It's unfortunate that most of the comments filed in response to the proposed rules were not taken into consideration in the final version.

The rule vote was three to two.

Anna Pinedo: I agree. It's not a death knell. Over the past two years, market participants have adopted most of what's in this SEC release. As with other parts of the market, the SPAC market will find a new equilibrium and a way to make this work.

I think some elements of the final rules require some clarification, and perhaps additional guidance will come before the effective date.

Changes in Insurance Risk Factors

Yelena Dunaevsky: From a risk perspective, directors and officers (D&O) insurance underwriters who have been in the market for a long time have already adapted to what is needed.

The co-registrant bit will encourage more issuers and targets to consider whether the limits of insurance coverage they're getting are sufficient. The Investment Company Act guidance might spill into a new area of questions from insurance underwriters.

Anna Pinedo: There was a negative reaction from commenters to the Investment Company Act safe harbor. The legal profession was uniform in its view that SPACs can be distinguished clearly from investment companies and that there was no need for a safe harbor. So, that’s one area where the SEC did consider commenters' views, and it came back with guidance.

The guidance looks at some factors previously articulated in case law relating to Investment Company Act status. It's comforting that the factors are consistent with prior articulations of what's relevant in the case of evaluating whether something is or isn't an investment company.

And I suspect that law firms will probably be asked to give a no Investment Company Act opinion as an element of transactions going forward.

What About Enforcement?

Anna Pinedo: As we've said, the disclosure requirements aren't surprising. However, the disclosures are detailed regarding SPAC sponsor conflicts of interest, dilution, sponsor compensation, and various sensitivity tables.

The SEC asks for this kind of data to be presented in a more standardized way, which may provide more narrative discussion for others to focus on and take apart if they want.

Yelena Dunaevsky: Overall, the new rules are not a disaster. The market has already adapted and acted upon them for the most part.

From the enforcement statistics perspective, we are not seeing a huge change from previous years. There were some actions against individuals and advisors in 2023, which we hadn't seen previously, but not in significant numbers.

I'm not anticipating more enforcement unless the SEC is out to get SPACs on these new requirements of organizing their disclosure in certain ways and SPAC teams don’t adhere to them. We’ll have to see how that goes.

Since the rules came out, we have not seen a change in the appetite for companies to go public through a SPAC or for the advisors to get involved in the market. Since the beginning of 2024, we've seen an uptick in initial public offering (IPO) filings and additional transactions closed. We've seen an appetite for new filings.

Anna Pinedo: I think the SPAC market is mainly dependent on the broader macroeconomic environment. And there is pent-up demand, with a low number of deals in 2023 and a modest number of deals in 2022.

We anticipated much of what's in these final rules, and the correction was built into the existing practices.

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