SEC Adopts Final Rules On SPACS, Shell Companies And The Use Of Projections – Part 5

On January 24, 2024, the SEC adopted final rules enhancing disclosure obligations for SPAC IPOs and subsequent de-SPAC business combination transactions.  The rules are designed to more closely align the required disclosures and legal liabilities that may be incurred in de-SPAC transactions with those in traditional IPOs.  The new rules spread beyond SPACs to shell companies and blank check companies in general.  The compliance date for the new rules is July 1, 2025.

In the first blog in this series, I provided background on and a summary of the new rules – see HERE.  Last week’s blog began a granular discussion of the 581-page rule release starting with partial coverage of new Subpart 1600 to Regulation S-K related to disclosures in SPAC IPO’s and de-SPAC transactions – see HERE.  The third blog in the series continued the summary of Subpart 1600 and in particular the new dilution disclosure requirements – see HERE.  Part 4 continued a review of new Subpart 1600 to Regulation S-K including the new prospectus cover page and summary requirements and the de-SPAC background discussion – see HERE. This Part 5 will complete the Subpart 1600 discussion before moving on to coverage of further rule amendments impacting de-SPAC transactions including non-financial disclosures, minimum dissemination periods, requiring a target to be a co-registrant, re-determining smaller reporting company status, and the PSLRA safe harbor.

New Subpart 1600 of Regulation S-K

The SEC has adopted new Subpart 1600 to Regulation S-K to: (i) set forth disclosure obligations for SPACs regarding the sponsor, potential conflicts of interest, and dilution; (ii) adding certain disclosures to the prospectus cover page and summary; (iii) require disclosures of whether law of the SPAC organizational jurisdiction requires the board of directors to determine whether the de-SPAC is advisable and in the best interests of the SPAC shareholders or make a comparable determination, and to disclose that determination; and (iv) whether the SPAC or SPAC sponsor has received any outside report, opinion, or appraisal relating to the de-SPAC transaction and certain disclosures pertaining to such report, opinion or appraisal.  The SEC has adopted numerous form changes, including to Forms S-1, F-1, S-4, F-4, Schedule 14A and 14C, and Schedule TO, to implement these new rules.

Board Determination about the De-SPAC Transaction – Reports, Opinions, Appraisals and Negotiations – Items 1606 and 1607

Item 1606 is meant to ferret out conflicts of interest and to provide increased disclosure related to the fairness of a particular proposed de-SPAC transaction.  As proposed Rule 1606(a) would have required an affirmative statement from a SPAC as to whether it reasonably believes the proposed de-SPAC transaction, and any related financing transactions, are fair or unfair to the SPAC’s unaffiliated security holders, as well as disclosing director votes on the matter (for, against or abstain).  Comments on the proposal were generally negative, many believing the proposal created a de-facto fairness opinion requirement where one did not previously exist.  I agree.

Final Rule 1606(a) instead requires disclosure as to whether the law of the SPACs organizational jurisdiction requires the board of directors (or similar governing body) to determine whether the de-SPAC transaction is advisable and in the best interest of the SPAC and its shareholders, and if so, what that determination is.  As noted by the SEC, the Delaware General Corporation Law, requires a board of directors to adopt a resolution on, and declare the advisability, of any merger or consolidation, including a de-SPAC transaction.  The final rule broadly covers all shareholders, not just affiliated holders and has removed any reference to related financing transactions.  Also, the final rule moved the director voting disclosure to Item 1606(e) as discussed below.

Related to 1606(a), proposed Rule 1606(b) would require disclosure of the material factors upon which a fairness belief was based, including the weight assigned to each factor.  The final rule makes a few modifications.  Final Rule 1606(b) requires a discussion of a non-exclusive list of factors the board considered in making a fairness determination, to the extent such factors may have been considered. Factors would include, but not be limited to, the valuation of the target company, financial projections, the terms of financing materially related to the de-SPAC transaction, any report, opinion, or appraisal, and dilution.  The final rule also removes any reference to the weight assigned to each factor.

Item 1606(c) through (e) require additional information about the de-SPAC transaction and related financings, including, shareholder approval requirements and advisor involvement.  Final items 1606(c) through (e) require the following disclosures:

• Identify any director that voted for, against, or abstained on approval of the de-SPAC transactions;

• Whether a vote of unaffiliated SPAC shareholders is required to approve the transactions;

• The use of unaffiliated advisors or representatives.

Item 1607 requires disclosure about whether or not the SPAC or SPAC sponsor received any report, opinion, or appraisal from an outside party relating to the consideration or the fairness of the consideration to be offered to security holders.  The rule also requires disclosure of certain information about such report, opinion or appraisal, if any, and any individuals involved in its preparation, including qualifications and affiliations.  Part of this disclosure includes whether an advisor, or the SPAC or SPAC sponsor, determined the consideration to be paid to or the valuation of the target company.  All such reports must be filed as exhibits to Forms S-4, F-4, Schedule TO or Schedule 14A or 14C as used in the transactions.

Tender Offer Filing Obligations – Item 1608

Item 1608 requires that a Schedule TO filed in connection with a de-SPAC transaction contain substantially the same information about a target private operating company that is required under the proxy rules.  Item 1608 also requires specific disclosures about redemptions and extensions of time when a Schedule TO is used in a de-SPAC transaction.

It should be noted that although redemption rights and the solicitation of redemptions, are in effect the same as a tender offer, where a SPAC is subject to and complies with Regulations 14A or 14C and files Schedules 14A or 14C, the SEC does not, and will not, require compliance with the separate tender offer rules.  Since an FPI is not subject to the proxy rules, it would need to file a Schedule TO complying with new Item 1608 if an F-4 is not used.

With all that said, Item 1608 will likely have very little use in practice.  As will be discussed in this blog series, the SEC has adopted new Securities Act Rule 145a that deems any business combination of an Exchange Act reporting shell company with another entity that is not a shell company, to involve the sale of securities to the reporting shell company’s shareholders.   This new rule will require a shell company to file a registration statement on Form S-4 or F-4 or determine the availability of a registration exemption for its existing shareholders prior to the closing of a transaction.  My belief is that it would be difficult if not impossible to find an available exemption and as such, every reporting shell company business combination will require a registration statement.

Structured Data Requirements – Item 1610

New Item 1610 requires SPACs to tag all information disclosed pursuant to Subpart 1600 using inline XBRL.