For the Birds: Statement on Adoption of Rule Regarding Special Purpose Acquisition Companies, Shell Companies, and Projections

Hester Peirce

Commissioner Hester M. Peirce

Jan. 24, 2024

Thank you, Mr. Chair. I cannot support this rule. The Commission has failed to identify a problem in need of a regulatory solution. To the contrary, the rule will exacerbate a problem—the shrinking pool of public companies—by closing down one road into the public markets. Certain features of Special Purpose Acquisition Companies (“SPACs”) needed fixing, but the market was fixing them before the Commission proposed this rule.[1] We could have assisted the market in achieving targeted and clear enhancements to SPAC disclosures without imposing unnecessary costs or venturing into merit-based regulatory territory.[2] With the time and resources it saved by engaging in a narrower rulemaking, the Commission could have undertaken a more meaningful project to assess and address the causes of the troubling dearth of public companies and the specific challenges of small companies seeking capital in the public markets.

Several years ago, in a speech about SPACs, I mentioned a flock of chickens that a family I know had acquired to be egg-layers.[3] I attempted to show that just as each chicken in that flock had a distinct personality and her own discernible aspirations—of course one wanted to cross the road, another wanted to move into the family’s house, and others were content to roost in the coop—companies too are not all the same. Some want to go public, while others are content to stay private. And companies that do want to go public will take different approaches to getting there.

Now, three years later, all but one of those chickens have progressed from egg-layer to fryer. The remaining chicken, cleverly clued in to the unhappy fate of her compatriots, has so far evaded capture. The chickens’ fate maps sadly well onto the SPAC trajectory. We went from 613 SPAC IPOs and 199 de-SPAC transactions in 2021 to 31 SPAC IPOs and 89 de-SPAC transactions last year, under the shadow of our rule proposal.[4] A few defiant chickens might survive the final rule, but today’s action will render SPACs a much less useful pathway for companies to enter the public markets. For example, the rule and accompanying release:

  • Include guidance regarding investment company status that will increase costs and harm investor protection by potentially rushing the completion of de-SPAC transactions;[5]
  • Increase costs without commensurate benefit by requiring target companies to co-register on the SPAC’s registration statement;[6]
  • Make the public projections, which have been a distinguishing feature of SPACs,[7] more costly[8] and no more accurate[9] (and maybe even less)[10] by eliminating eligibility for safe harbor protection for forward-looking statements;
  • Require new dilution disclosures that may be unduly speculative and compromise accuracy for the sake of false comparability;[11]
  • Potentially inhibit access to sound information by requiring disclosure of third-party assessments of the de-SPAC transaction;[12] and
  • Risk altering voting behavior by requiring disclosure of board director votes on approval of the de-SPAC transaction.[13]

The regulatory reaper came for SPACs and seems to have won. That outcome is disheartening. Not only is the Commission removing a potential avenue for bringing small companies into the public market, but it also fails to acknowledge, let alone grapple with, real issues around the public markets’ accessibility for small companies. The popularity of SPACs with certain types of companies was an indicator that the traditional IPO process was not working for these kinds of companies. Imposing additional regulatory obstacles on SPACs only compounds the underlying problem by further impeding these companies’ preferred pathway to the public markets. While killing the canary in the coal mine might make us regulators feel better, silencing the songbird will not improve the suffocating atmosphere that is burdening small companies’ access to our public markets.[14]

The traditional IPO process is an effective path to the public markets for many companies. The deep scrutiny that is part and parcel of a traditional IPO helps to ensure that a company is ready for all the obligations that come with being a public company. But the traditional IPO is not the right process for every company to enter the public markets. Other possible routes to the public markets include direct listings, being acquired by a public company, and de-SPAC transactions. Commenters on this proposal underscored the point that de-SPAC transactions are uniquely well suited to certain types of companies, including smaller companies,[15] “companies that are both capital intensive and relatively immature,”[16] and companies in certain industries.[17] By layering obligations on the SPAC process, we are effectively taking this option off the table for companies, some of which are likely not to go public at all. Rather than wrapping SPACs in a heavy net of regulations, we ought to have paired a more tailored set of SPAC regulations with improvements to the traditional IPO process.[18] Allowing variations between SPACs and traditional IPOs that follow from the idiosyncratic needs of different companies and the singular preferences of their investors makes sense.[19] Instead of appreciating and seeking to accommodate the unique characteristics of our vibrant small companies, the Commission flattens the landscape with an indiscriminate and inflexible set of regulations for SPACs.

Are there problems with some SPACs and de-SPAC transactions? Certainly. But do a few errant birds warrant culling the entire flock? No. One commenter pointed out that the SEC took a more measured approach after the dot.com bubble:

Following the dot.com boom, when many investors and companies were picking up the pieces of transactions that may not have been correctly priced or companies whose markets may have existed predominately in the minds of entrepreneurs, there was no rush to disqualify those technology IPOs from using the registration provisions of the Securities Act to reach retail investors.[20]

A similarly restrained approach would be wise here to ensure that growing companies can efficiently enter the public markets using the SPAC process.

The Commission justifies the rulemaking by citing “investor protection concerns,”[21] but investor protection concerns militate against a rulemaking that will make SPACs cost-prohibitive. While research suggests that retail investors may not be heavily involved in SPAC investing,[22] SPACs can expand retail investment opportunities by increasing the pool of companies in our public markets.[23]

As many observers have noted, the number of public companies has been dropping in the United States. In 1996 there were more than 8,000 listed companies on U.S. stock exchanges.[24] In mid-2022 (the last data available), that number was just over 4,200.[25] For context, real GDP has increased by 80% over the same period.[26] The 1990s saw an annual average of around 412 IPOs, while that average was only 248 IPOs over the last ten years.[27] Without SPACs, the more recent annual average drops to 132 IPOs, while the 1990s average remains largely unchanged.[28]

The Commission should seek to better understand the cause of this decline. Myriad factors are at work, but the regulatory costs facing public companies are one factor.[29] Our response to SPACs should have been a part of a broader agenda to reduce the overall costs of going and staying public. Today’s public companies face dramatically higher costs than in years past. External costs for annual reporting were around 150% higher than the start of the century,[30] while inflation increased by 71% over the same period.[31] If we do not turn the tide, these costs are likely to continue to rise. For example, the proposed public company climate rule, if adopted, it is estimated, would triple external costs from this level.[32] Rather than adding to public company obligations, we ought to be looking for ways to trim unnecessary requirements.

Not only that we are overburdening the SPAC process, but how we are doing it, is troubling. Some examples of our fancy legal footwork include:

  • Changes to the Private Securities Litigation Reform Act of 1995 (PSLRA). Three decades after the PSLRA’s passage, we magically find authority to exclude SPACs from the law’s safe harbor for forward-looking statements by rewriting the statutory definition of “blank check company.”
  • Guidance on the status of SPACs under the Investment Company Act. While the decision not to adopt the proposed regulatory provision governing SPAC investment company status may seem like a positive change, the guidance may function like a backdoor rule. Over the last twenty years, our staff reviewed “more than 1,000 SPAC IPOs” without deeming a SPAC to be an investment company.[33] The Commission appears to want to forget that history. Risk averse SPAC sponsors may turn the references in the guidance to 12- and 18 month-time periods into ironclad deadlines, despite their lack of legal grounding and inconsistency with industry practice.[34]
  • Underwriting guidance and Rule 145a. The underwriting guidance’s attempt to deem de-SPAC transactions as distributions also fails to cite directly relevant legal precedent.[35] How can a de-SPAC transaction involve a distribution when the target company generally does not sell or distribute its securities into the market?[36] Similarly, without a statutory basis, new Rule 145a of the Securities Act (which applies more broadly than just to SPACs)[37] simply deems a de-SPAC transaction to be a sale of securities from the combined company to the SPAC’s shareholders.[38]

While I cannot support this rule, I appreciate the staff’s hard work on this set of intricate legal issues. I particularly appreciated the long hours that the rulemaking team spent with me and my staff responding to our comments. Among others, I would like to thank Corey Klemmer in the Chair’s office; Erik Gerding, Jeb Byrne, Mark Saltzburg, Adam Turk, Ryan Milne, Tiffany Posil, and Dan Duchovny in the Division of Corporation Finance; and staff in the Division of Investment Management, the Division of Economic and Risk Analysis, the Office of General Counsel, and throughout the Commission.

I do have the following questions:

  1. Are there benefits of going public through a SPAC instead of a traditional IPO that are worth preserving?
  2. Looking five years into the future, if we see no SPAC IPOs or de-SPAC transactions, would this rule be a success?
  3. We do not even modestly tailor this rule for smaller companies. Companies, for example, could have been able to retain their smaller reporting status post de-SPAC until their next annual report, not just until 45 days after the de-SPAC.[39] Why didn’t we make any accommodations for smaller companies?
  4. Are we worried that PSLRA revisions and the new projection disclosures could cause issuers to release either overly pessimistic projections or to stop releasing projections altogether?
  5. Today’s interpretation of the PSLRA gives us complete discretion to revise a law’s application to a market that has raised billions of dollars over the last five years. Are there any limits on our ability to revise the definition in the statute?

[1] See, e.g., Letter from Jonathan Kornblatt at 2 (Jun. 12, 2022), https://www.sec.gov/comments/s7-13-22/s71322-20131043-300887.pdf (“There was certainly a SPAC rush which did not end well for many, but the market has already self-corrected. SPAC sponsors, investment banks, PIPE investors, and the retail crowd have already pulled back prior to the proposed sweeping regulatory changes.”); Letter from Ropes & Gray at 2 (Jun. 13, 2022), https://www.sec.gov/comments/s7-13-22/s71322-20131090-301125.pdf (“The approach taken by the Commission’s proposed rules seems particularly unnecessary because the market has taken substantial steps to self-regulate as investor sentiment has already dramatically shifted in the past 12 months away from the unbridled enthusiasm that had been present in the SPAC market (and traditional IPO market).”).

[2] See, e.g., Letter from American Securities Association at 2 (May 27, 2022), https://www.sec.gov/comments/s7-13-22/s71322-20130552-299410.pdf (recommending a more targeted set of changes).

[3] Commissioner Hester Peirce, Inside Chicken: Remarks before Fordham Journal of Corporate and Financial Law Conference: “Here to Stay: Wrestling with the Future of the Quickly Maturing SPAC Market,” SEC (Oct. 21, 2021), https://www.sec.gov/news/speech/peirce-remarks-fordham-journal-102221.

[4] Release at 14, Table 1.

[5] Although written in response to the proposed rule’s investment company safe harbor, commenters’ concerns about arbitrary timelines remain relevant in the context of the guidance. See Letter from Managed Funds Association at 8-9 (Jun. 13, 2022), https://www.sec.gov/comments/s7-13-22/s71322-20131128-301320.pdf (“Such a strict time requirement [under the safe harbor] would effectively eliminate the ability of future SPACs to seek shareholder approval for short-term extensions in order to complete pending business combinations. Notably, such temporary short-term extensions have become commonplace, particularly when accounting, regulatory or other considerations may delay a pending business combination beyond the SPAC’s original 24-month deadline. By effectively ending the use of such extensions, the Commission will be forcing the liquidation of at least some SPACs that would have otherwise completed successful business combinations if given an additional month or two to do so, thereby harming not only the SPAC but also its existing shareholders. . . . [Further,] more than 96% of SPACs in [the Commission’s] sample [in the proposed rule] would have met a requirement to complete a business combination within 36 months of its IPO date, whereas only approximately 65% of SPACs in its sample would have met a requirement to complete a business combination within 24 months.”); Letter from American Bar Association (“ABA”) at 67-68 (Jun. 17, 2022), https://www.sec.gov/comments/s7-13-22/s71322-20131981-302447.pdf (“Imposing duration limitations would run contrary to the stated intent of many of the other Proposed Rules, and would put pressure on SPACs to prioritize speed over diligence and quality, to the detriment of stockholders and contrary to a SPAC board’s fiduciary obligations. The Commission, in fact, acknowledges this concern in the Proposing Release by saying: ‘SPACs that are seeking to meet the proposed safe harbor conditions may in some cases compromise on the quality of the type of targets pursued to speed up their search, or offer to pay more for the target to complete a De-SPAC Transaction sooner, compared to under the baseline.’” (quoting Special Purpose Acquisition Companies, Shell Companies, and Projections, Securities Act 87 Fed. Reg. 29458, 29541 (May 13, 2022), https://www.govinfo.gov/content/pkg/FR-2022-05-13/pdf/2022-07189.pdf ) (internal quotation marks added).

[6] See, e.g., Letter from Freshfields Bruckhaus Deringer US LLP (“Freshfields”) at 10 (Jun. 13, 2022), https://www.sec.gov/comments/s7-13-22/s71322-20131101-301136.pdf (“In most de-SPAC transactions the shares being registered on the SPAC’s registration statement are being issued only to the target’s shareholders and are not being issued or sold by the target company. Adding the target company as a co-registrant means that, in most cases, the target company will have potential Section 11 liability with respect to its own shareholders, but this is not logical or intuitive and is not consistent with the structure of a traditional IPO. In a traditional IPO, a company’s existing shareholders at the time of the IPO do not receive registered shares and would not have potential Section 11 claims against the company due to the disclosures in the IPO registration statement.”); Letter from ABA at 4, 35-36 (“[T]he Target is not necessarily issuing any securities in a De-SPAC Transaction and there is, therefore, no basis for requiring the Target to be a co-registrant. . . . Requiring the Target to sign as a co-registrant will increase Target’s transaction expenses. Targets will be forced to substantially enhance their D&O liability insurance coverage to cover potential federal securities law liability substantially earlier in the De-SPAC Transaction process than is currently the case. . . . It is unclear if the Co-Registrant Amendment would meaningfully enhance disclosures and protections for investors in practice. First, the current requirements of the Merger Registration Statement are designed to elicit full Form 10/Form S-1 type information about the Target. There is no deficiency in the adequacy of information provided about the Target under the current rules or discrepancy between the level of disclosure required in a traditional IPO Form S-1 or F-1 registration statement and a Merger Registration Statement. Second, the Target’s directors and officers have meaningful incentives to prepare accurate disclosures for the Merger Registration Statement. Many of Target’s officers, and many of its directors, will continue on as officers and directors of the Combined Company, signing the Super 8-K, go-forward Exchange Act reports and post-Closing Form S-1 resale shelf registration that almost universally draw on the prior disclosures in the Merger Registration Statement. The Target’s directors and officers will ‘own’ the disclosures going forward.”).

[7] See, e.g., Letter from ABA at 6 (“[U]nlike companies undertaking a traditional IPO, SPACs are compelled by a combination of federal securities regulation and state corporate law to share Target projections with stockholders.”). Some have asked whether investors in traditional IPOs would benefit from similar access to forward-looking statements. See, e.g., Amanda M. Rose, SPAC Mergers, IPOs, and the PSLRA’s Safe Harbor: Unpacking Claims of Regulatory Arbitrage, 64 William & Mary L. Rev. 1757, 1823 (2023), available at https://scholarship.law.wm.edu/cgi/viewcontent.cgi?article=3995&context=wmlr (“Shielding unreasonable investors from forward-looking statements . . . comes at the expense of reasonable investors, who want and need forward-looking information to make informed investment decisions. To be sure, a subset of reasonable investors get access to this coveted information in the context of an IPO—the underwriters and those lucky enough to get invited to participate in the initial distribution. While issuers do not directly provide this information to ground-floor IPO investors (due to liability fear), they do convey their forecasts to analysts with the knowledge that the analysts will then convey information about their forecasts to potential IPO investors in private conversations. PIPE investors that invest alongside an IPO (an increasingly common occurrence) also demand and receive management forecasts. But reasonable investors that do not stand in these privileged positions are denied access to this information and are disadvantaged as a result. Is this distributional effect justified, either as a matter of fairness or efficiency?”) (citations omitted).

[8] See, e.g., Release at 275 (“We recognize that removal of PSLRA safe-harbor protection from SPACs could result in increased insurance costs for target companies.”); Letter from ABA at 63 (“At best, we believe removal of the PSLRA safe harbor will add significant additional costs for De-SPAC Transactions as transaction participants seek compensation for any real or perceived increase in liability exposure.”).

[9] See, e.g., Letter from Jennifer Schulp, Cato Institute (“Cato”) at 3 (Jun. 13, 2022), https://www.cato.org/sites/cato.org/files/2022-06/schulp-testimony-6-13-2022.pdf (“[P]rojections made by SPACs, even when able to take advantage of the PSLRA safe harbor, are not immune from liability. Financial projections made in connection with a de-SPAC transaction can be challenged by shareholders if they are not properly identified as forward-looking, not accompanied by meaningful cautionary language, or knowingly false when made (in addition to any number of other state and federal claims that may be brought). This rule change then does not attach potential liability to statements that were wholly immune, but rather attaches the heightened liability that the PSLRA explicitly reserved for certain situations.”); Letter from Vinson & Elkins at 15 (Jun. 13, 2022), https://www.sec.gov/comments/s7-13-22/s71322-20131028-300561.pdf (“We do not believe an amendment . . . would improve the quality of projections in connection with de-SPAC transactions. SPACs and target companies already have strong incentives to make sure that the projections are as reasonable as possible. They may face suits over inaccurate projections, and the target company has a strong incentive to set projections that it will be able to meet or beat once it is a public company.”) (citations omitted).

[10] See SPAC Mergers, IPOs, and the PSLRA’s Safe Harbor: Unpacking Claims of Regulatory Arbitrage at 1806 (to the extent that forward looking statements are mandated, as can be the case for de-SPAC transactions, a safe harbor for such statements may “increase the quality of the disclosures by reducing an incentive that might otherwise exist to negatively bias projections or obfuscate them, which has the twin effects of making them less vulnerable to attack in litigation and less useful to investors”).

[11] See, e.g., Letter from White & Case at 13 (Jun. 17, 2022), https://www.sec.gov/comments/s7-13-22/s71322-20132359-302926.pdf (“As a result, proposed Items 1602(a)(4) and 1602(c) would require dilution disclosure informed by purely hypothetical assumptions that would be inherently devoid of nearly all of the actual material details that typically comprise dilution disclosure in a de-SPAC transaction, including the nature, size and composition of the de-SPAC transaction and any related financing. After all, de-SPAC transactions can be structured in innumerable and diverse ways, making it impossible to base in fact any assumptions regarding such a transaction with unidentifiable terms.”).

[12] See Letter from ABA at 30-31 (“Free flow of information is critical to a board’s deliberative process and necessary for it to discharge its fiduciary duties. Requiring filing of board materials will inevitably result in a reduction of information presented to, and considered by, a SPAC’s board of directors. Board materials are typically not prepared with a view that they will be included in public filings and subject to Securities Act and Exchange Act liability. If filing these materials was required, it would require board materials to be drafted to withstand scrutiny under the Securities Act and the Exchange Act’s liability provisions. This is impractical and unworkable.”).

[13]See, e.g., Letter from Freshfields at 7 (“We oppose this disclosure requirement. First, this disclosure is not required in traditional IPOs or in traditional mergers and busine ss combinations. We believe this requirement is another example of going beyond leveling the playing field between de-SPAC transactions and traditional IPOs and, instead, prejudices companies against de-SPAC transactions. Second, the existence of this disclosure requirement will make it more difficult, and less likely, for individual directors to oppose transactions if they know that their objections will be made public. The requirement could also have the effect of inhibiting discussion among directors at board meetings.”).

[14] Kat Eschner, The Story of the Real Canary in the Coal Mine, Smithsonian Magazine (Dec. 30, 2023), https://www.smithsonianmag.com/smart-news/story-real-canary-coal-mine-180961570/.

[15] See, e.g., Letter from Committee on Capital Markets Regulation (“CCMR”) at 3 (Jun. 13, 2022), https://www.sec.gov/comments/s7-13-22/s71322-20131114-301236.pdf (“The data also suggest that SPACs are an important path to the public markets for smaller operating companies. For the 2017-2021 period, the average market capitalization of a company going public by a de-SPAC was $950 million, compared to $1.5 billion for an IPO.”). During that period, pre-IPO revenue for a company using a SPAC was $270 million but $495 million for a company that used a traditional IPO. Id. at 4.

[16] Letter from National Venture Capital Association (“NVCA”) at 3 (June 13, 2022), https://www.sec.gov/comments/s7-13-22/s71322-20131133-301325.pdf.

[17] Letter from CCMR at 4, https://www.sec.gov/comments/s7-13-22/s71322-20131114-301236.pdf (“Operating companies taken public by de-SPAC were weighted more heavily toward consumer cyclicals (18% vs. 7.5% for IPOs) and less heavily towards financials (7% vs. 13% for IPOs).”).

[18] See, e.g., Letter from Cato at 8 (“The traditional IPO process plainly fails as a ‘one-size-fits-all’ approach, with many companies choosing to remain private rather than run the IPO gauntlet. Instead of stymieing innovation in public listings, the focus should be on reforming and streamlining the traditional IPO.”), https://www.sec.gov/comments/s7-13-22/s71322-20131130-301322.pdf.

[19] For example, SPACs may facilitate more pricing, timing, and valuation certainty for an IPO. See, e.g., Letter from Loeb & Loeb LLP (“Loeb & Loeb”) at 3 (Jun. 13, 2022), https://www.sec.gov/comments/s7-13-22/s71322-20131066-301042.pdf (“With available audits, companies seeking a SPAC merger are generally encouraged (particularly when the number of available SPACs is high) to think of completing a deal in the 4-6 month range, with assurance of valuation being locked in when a definitive agreement is entered into, while companies starting down the path of the traditional IPO are typically told to set aside 2 years with no assurance of what valuation an underwriter will agree to at that point.”); see also Letter from NVCA at 3 (“We are aware of a range of reasons why some venture-backed companies prefer a SPAC transaction over a traditional IPO. These include the opportunity to partner with an experienced financing and capital markets sponsor; the utilization of long-term projections in presenting their business to the public markets that better matches the long-term investment cycle of technology; more efficient price discovery; better opportunities to partner with investors that have longer-term investment horizons; and avoiding the question of underpricing of traditional IPOs by investment banking underwriters.”).

[21] Release at 15-19.

[22] Letter from CCMR at 5 (citing Committee on Capital Markets Regulation, Nothing But The Facts: Retail Investors and Special Purpose Acquisition Companies, (Oct. 19, 2021), https://www.capmktsreg.org/wp-content/uploads/2021/10/CCMR-NBTF-SPACs-Retail-Investors.pdf ).

[23] See, e.g., Asset Management Advisory Committee, Final Report and Recommendations for Private Investments at 5, SEC (Sept. 27, 2021), https://www.sec.gov/files/final-recommendations-and-report-private-investments-subcommittee-092721.pdf (“AMAC report”) (noting that retail investors are able to access a “less diversified” pool of investments than 15 years ago because “public equity markets have become much more concentrated with fewer listed companies and a high concentration of the stock market capitalization in the top handful of companies.”). The Commission should explore other ways to expand access as well. For example, we could expand the definition of accredited investor or allow for non-accredited investors to invest in exchange traded closed-end funds that invest in more than 15% of other private funds. See Letter from the Investment Company Institute Re: Jobs 4.0 Discussion Draft at 3-6 (June 3, 2022), https://www.banking.senate.gov/imo/media/doc/ICI.pdf.

[24] The World Bank, Listed domestic companies, total – United States, https://data.worldbank.org/indicator/CM.MKT.LDOM.NO?end=2019&locations=US&start=1975&view=chart (last accessed, Jan. 19, 2024).

[25] Office of the Advocate for Small Business Capital Formation, Annual Report: Fiscal Year 2022 at 39, SEC (Sept. 15, 2022), https://www.sec.gov/files/2022-oasb-annual-report.pdf.

[26] FRED, Real Gross Domestic Product, https://fred.stlouisfed.org/series/GDPC1 (last accessed, Jan. 19, 2024).

[27] Data calculated from Table 15b of this dataset. See Jay Ritter, Initial Public Offerings: Updated Statistics, Special Purpose Acquisition Company (SPAC) IPOs, 1990-2023 (Dec. 28, 2023), https://site.warrington.ufl.edu/ritter/files/IPO-Statistics.pdf. While the release uses a different dataset, I am using this one to allow for consistent comparison across a longer time horizon.

[28] Id.

[29] For an excellent discussion of the increasing costs of being a public company, see Commissioner Mark Uyeda, Remarks at the “Going Public in the 2020s” Conference, SEC (Mar. 3, 2023), https://www.sec.gov/news/speech/uyeda-remarks-going-public-conference-030323. See also Opening statement of U.S. Representative Ann Wagner before the U.S. House Committee on Financial Services Subcommittee on Capital Markets, U.S. Public Markets Built for the 21st Century: Exploring Reforms to Make Our Public Markets Attractive for Small and Emerging Companies Raising Capital (“Mar. 2023 HFSC U.S. Public Markets hearing”) (Mar. 9, 2023), https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=408647 (“[T]he cost of entering our public markets has doubled since the 1990s, and at the same time, the number of publicly traded companies has drastically decreased. Today, there are fewer companies traded on the Nasdaq and New York Stock Exchange than there were three decades ago. In addition, fewer companies are choosing to enter the U.S. public markets through initial public offerings, or IPOs.”); Testimony from Anna Pinedo at the Mar. 2023 HFSC U.S. Public Markets hearing, https://docs.house.gov/meetings/BA/BA16/20230309/115394/HHRG-118-BA16-Wstate-PinedoA-20230309.pdf (“[T]here are fewer U.S. public companies now than there were in the 1990s. . . . The companies that are choosing to go public are waiting much longer to do so, are much larger when they approach the public markets, and, based on my own experience, generally, are not seeking to go public because they need to raise capital. They have many other different motivations for doing so, including providing liquidity for their shareholders.”); Opening statement of U.S. Senator Pat Toomey before the Senate Banking Committee, Keeping Markets Fair: Considering Insider Trading Legislation (Apr. 5, 2022), https://www.banking.senate.gov/imo/media/doc/Toomey%20Statement%204-5-22.pdf (“[T]he number of public companies continues to decrease. In fact, the number of public companies has declined 40% since its peak in the late 1990s. If not for the JOBS Act, the situation would be even worse. This decrease hurts economic growth, cuts off funding avenues for American businesses, and reduces investment opportunities for average Americans.”).

[30] To reach this estimate, I compared the Commission’s May 2002 estimated professional costs per company of completing the 10-K in May 2002 with the number in today’s release. See Disclosure in Management’s Discussion and Analysis About the Application of Critical Accounting Policies, 67 FR 35620, 35642 (May 20, 2002), https://www.govinfo.gov/content/pkg/FR-2002-05-20/pdf/02-12259.pdf; Release at 504, PRA Table 3; Release at

510, PRA Table 7.

[31] To reach this estimate, I compared costs from May 2002 to December 2023 using the U.S. Bureau of Labor Statistics’ inflation calculator, available here https://www.bls.gov/data/inflation_calculator.htm.

[32] See The Enhancement and Standardization of Climate-Related Disclosures for Investors, 87 FR 21334, 21461 (April 11, 2022), https://www.govinfo.gov/content/pkg/FR-2022-04-11/pdf/2022-06342.pdf. To reach this estimate, I updated the Commission’s total additional external costs for preparing the 10-K (found on PRA Table 4) under the proposed public company climate rule to reflect the increase in professional costs to $600 per hour from $400. Then, I compared that number to the external costs for preparing the 10-K found on page 524 of today’s release.

[33] Letter from Ropes & Gray at 13.

[34] The Commission directs us to two existing rules as helpful guides when it comes to acceptable duration. Neither of these rules is relevant. First, the Commission cites Rule 3a-2 of the Investment Company Act, which “provides a one-year safe harbor to so-called ‘transient investment companies’ which are issuers that, as a result of an unusual business occurrence may be considered an investment company under the statutory definitions but intend to be engaged in a non-investment company business.” Release at 369. This rule does not directly relate to the SPAC market. Rule 3a-2 does not seek to identify which companies are investment companies, but allows companies that meet the definition of investment company a year to transition out of that status. The Commission’s approach converts the year-long period into a factor that determines if the firm is initially an investment company. See Letter from Ropes & Gray at 11 (“[The proposed release] discuss[es] Rule 3a-2 under the Investment Company Act, which ‘provides a one year safe harbor to so-called ‘transient investment companies,’ which are issuers that, as a result of an unusual business occurrence, may be considered an investment company under the statutory definitions but intend to be engaged in a non-investment company business.’ . . . [This] example[] refer[s] to circumstances where there is no question that the issuer does in fact meet the definition of ‘investment company’ provided by the Investment Company Act but is able to avail itself of an exemption from investment company status.”).

Second, the Commission cites Rule 419 of the Securities Act, which the “Commission adopted following the enactment of the Securities Enforcement Remedies and Penny Stock Reform Act of 1990” to define and regulate blank check companies. Release at 8. The Commission notes that these companies “need not be required to be regulated under the Investment Company Act in part because, among other things, the rule limits the duration of such accounts to 18 months and restricts the nature of investments.” Release at 369. Here too the Commission is citing precedent that does not directly deal with SPACs, which fall outside of Rule 419’s definition of blank check company due to the penny stock issuer qualifier. 17 CFR § 230.419(a)(2)(ii). See Letter from Winston & Strawn LLP at 10 (Jun. 13, 2022), https://www.sec.gov/comments/s7-13-22/s71322-20131032-300790.pdf (noting, in connection with the proposed investment company safe harbor: “With respect to the 18-month requirement, the SEC cites no reason for this duration other than the Rule 419 deadline applicable to blank check companies to complete business combinations. SPACs are not subject to Rule 419 because they are not blank check companies and not required to meet the requirements of Rule 419.”).

Finally, the duration section of this guidance does not explain how a SPAC’s duration falls under any of the so-called Tonopah Factors, which the Commission has historically used to evaluate whether an issuer is an investment company. Release at 362, n.1152. One commenter argued that even a 24-month duration to complete a de-SPAC transaction is “far more restrictive than the Tonopah Factors.” Letter from Ropes & Gray at 13. Another argued that the Tonopah Factors do not address duration. Letter from Freshfields at 24.

[35] This guidance fails to cite a directly on point court case or previous official Commission position to support its claim. Neither court case the guidance references, Geiger v. SEC, 363 F.3d 481, 487 (D.C. Cir. 2004) and R.A Holman v. SEC, 366 F.2d 446, 449 (2d Cir. 1966), address SPACs.

[36] See Letter from the Securities Industry and Financial Markets Association at 8 (Jun. 10, 2022), https://www.sec.gov/comments/s7-13-22/s71322-20131265-301379.pdf (“[A] de-SPAC transaction, however, no person engages in activities that constitute ‘participation’ in statutorily specified distribution related activities because the combined business offers its securities directly to the shareholders of the counterparty, and there is no third party who acts as a conduit for the securities being distributed to the counterparty shareholders.”). See also Letter from ABA at 19, 39-40 for a similar argument.

[37] Rule 145a “specifies that a sale occurs from the post-transaction company to the existing shareholders of a reporting shell company in situations where a reporting shell company that is not a business combination related shell company enters into a business combination transaction involving another entity that is not a shell company.” Release at 294.

[38] See Letter from Vinson & Elkins at 20 (We “do not believe the Commission has statutory authority to ‘deem’ a distribution to occur when one in fact does not.”); Letter from ABA at 18 (“Similar to an ordinary M&A transaction, a De-SPAC Transaction will not result in a fundamental change in the nature of the security held by SPAC stockholders that would constitute an exchange of value and, thus, should not be deemed to constitute consideration in connection with the business combination. Whether a De-SPAC Transaction should result in a ‘sale’ within the meaning of Section 2(a)(3), and trigger a registration requirement under Section 5 of the Securities Act, should be analyzed by examining the form of the transaction using existing legal principles that already provide SPAC stockholders adequate protections. The Commission should not create a ‘sale’ and, therefore, a possible ‘distribution,’ where none exists.”).

[39] See Letter from Ernst & Young LLP at 2 (Jun. 13, 2022), https://www.sec.gov/comments/s7-13-22/s71322-20131035-300821.pdf (“An alternative approach would be for a company, upon completion of a de-SPAC transaction, to transition into or out of SRC status in conjunction with the annual report to be filed for the year of the transaction based upon the public float as of the later of four business days after the merger transactions or the end of the second fiscal quarter. Such a revision could still result in an SRC merging with a public shell exiting SRC status more quickly than under current rules while mitigating the burden and inconsistency of providing incremental information not previously required for companies accessing the public market shortly after the de-SPAC transaction.”).

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