Today [March 30, 2022], the Commission is considering a proposal to strengthen investor protections in special purpose acquisition companies (SPACs). I am pleased to support this proposal because, if adopted, it would strengthen disclosure, marketing standards, and gatekeeper and issuer obligations by market participants in SPACs, helping ensure that investors in these vehicles get protections similar to those when investing in traditional initial public offerings (IPOs).
Aristotle captured an overarching principle with his famous maxim: Treat like cases alike.
SPACs present an alternative method to go public from traditional IPOs. I don’t just mean the first stage—when the blank-check company goes public (which I call the “SPAC blank-check IPO”). I’m also referring to the second stage, often called the de-SPAC (which I call the “SPAC target IPO”).
Nearly 90 years ago, Congress addressed certain policy issues around companies raising money from the public with respect to information asymmetries, misleading information, and conflicts of interest.
For traditional IPOs, Congress gave the SEC certain tools, which I generally see as falling into three buckets: disclosure; standards for marketing practices; and gatekeeper and issuer obligations. Today’s proposal would help ensure that these tools are applied to SPACs.
First, Congress said, companies raising money from the public should provide full and fair disclosure at the time investors are making their crucial decisions to invest. To address such disclosure, today’s proposal would:
- Add specialized disclosure requirements regarding, among other things, SPAC sponsors, conflicts of interest, SPAC target IPOs, and dilution;
- Require additional non-financial disclosures about the target private operating company during the SPAC target IPO;
- Require that disclosure documents in SPAC target IPOs generally be disseminated to investors at least 20 calendar days before shareholders would have to vote to approve the transaction; and
- Align the financial statement requirements with those of traditional IPOs for business combinations between a public shell company and a private operating company, including for SPAC target IPOs.
The proposed changes would mandate that this additional information be provided to SPAC shareholders before they make voting, investment, or redemption decisions in connection with a proposed SPAC target IPO transaction.
Second, and relatedly, are standards around marketing practices. The idea is that parties to the transaction shouldn’t use overly optimistic language or over-promise future results in an effort to sell investors on the deal. Thus, today’s proposal would:
- Amend the definition of “blank check company” to encompass SPACs, such that the Private Securities Litigation Reform Act (PSLRA) safe harbor would not be available to SPACs regarding projections of target companies;
- Update the Commission’s views on disclosure of projected financial information; and
- Require additional disclosures regarding the use of projections in SPAC target IPO transactions.
Third, gatekeeper and issuer obligations. Gatekeepers, or those third parties involved in the sale of the securities such as auditors, lawyers, and underwriters, should have to stand behind and be responsible for basic aspects of their work. Thus, gatekeepers provide an essential function to police fraud and ensure the accuracy of disclosure to investors. With respect to gatekeepers and issuers, today’s proposal would:
- Subject a target company and its signing persons to liability for a SPAC target IPO registration statement filed by a SPAC;
- Deem any SPAC blank-check IPO underwriter that takes steps to facilitate a SPAC target IPO or any related financing transaction to be an underwriter in the SPAC target IPO; and
- Require that any business combination of a public shell company (other than a business combination related shell company) with a non-shell company entity be deemed a sale to the shell company’s shareholders subject to the Securities Act.
In addition to these enhancements, the proposal would address when SPACs become subject to the important investor protection framework of the Investment Company Act. The growth in SPACs has highlighted the need for sponsors to consider this carefully.
Today’s proposal includes a new safe harbor for SPACs that meet key investor protection conditions, and should help SPACs identify on which side of the line they fall. This proposed rule would be conditioned on limits on a SPAC’s holdings and a requirement that it announce a SPAC target IPO transaction within 18 months and complete the transaction within 24 months.
Ultimately, I think it’s important to consider the economic drivers of SPACs. Functionally, the SPAC target IPO is being used as an alternative means to conduct an IPO. Thus, investors deserve the protections they receive from traditional IPOs, with respect to information asymmetries, fraud, and conflicts, and when it comes to disclosure, marketing practices, gatekeepers, and issuers.
I am pleased to support today’s proposal and, subject to Commission approval, look forward to the public’s feedback. I’d like to thank the members of the SEC staff who worked on this rule, including:
- Renee Jones, Erik Gerding, Elizabeth Murphy, Lindsay McCord, Michael Seaman, Ted Yu, Luna Bloom, Adam Turk, Craig Olinger, Ryan Milne, Charles Kwon, Dan Duchovny, Michael Reedich, Kasey Robinson, Christ Windsor in the Division of Corporation Finance;
- William Birdthistle, Sarah ten Siethoff, David Bartels, Thoreau Bartmann, Lisa Reid Ragen, Rochelle Kauffman Plesset, Seth David, and Taylor Evenson in the Division of Investment Management;
- Meridith Mitchel, Malou Huth, Dan Berkovitz, Megan Barbero, Bryant Morris, Evan Jacobson, Lisa McCann, Natalie Shioji, Robert Bagnall, and Monica Lilly in the Office of the General Counsel;
- Mariesa Ho, Mattias Nilsson, Kelvin Liu, Charles Woodworth, and PJ Hamidi in the Division of Economic and Risk Analysis.
- Shehzad Niazi, Kevin Vaughn, Rachel Mincin, Anita Doutt, and Samantha Demty in the Office of the Chief Accountant;
- Haoxiang Zhu, David Shillman, Sharon Lawson, Michael Ogershok, and Sarah Schandler in the Division of Trading and Markets;
- Adam Aderton, Mark Cave, Eugene Bull, Amy Friedman, Beth Groves, Anne Hancock, Brian Higgins, Melissa Hodgman, Laura Josephs, Howard Kaplan, Sarah Mallett, Oreste McClung, Ted Reilly, Brianna Ripa, Anne Romero, Becca Schendel Norris, Corey Schuster, Justin Sutherland, Kathleen Sweeney, and Carolyn Welshhans in the Division of Enforcement; and
- Laurita Finch in the EDGAR Business Office.
1See Benjamin Johnson and Richard Jordan, “Why Should Like Cases Be Decided Alike? A Formal Model of Aristotelian Justice” (March 1, 2017), available at https://scholar.princeton.edu/sites/default/files/benjohnson/files/like_cases.pdf.(go back)
2See Gary Gensler, “Remarks Before the Healthy Markets Association Conference” (Dec. 9, 2021), available at https://www.sec.gov/news/speech/gensler-healthy-markets-association-conference-120921(go back)