Damning and Deeming: Dissenting Statement on Shell Companies, Projections, and SPACs Proposal
March 30, 2022
Thank you, Chair Gensler, Renee [Jones], Charles [Kwon], and Jessica [Wachter] for the presentation. The Commission’s 2022 budget request includes additional resources to address “an unprecedented surge in non-traditional IPOs by special purpose acquisition companies.” If we adopt the rule that we are voting on today, we will not need additional resources to deal with Special Purpose Acquisition Companies (“SPACs”). The proposal—rather than simply mandating sensible disclosures around SPACs and de-SPACs, something I would have supported—seems designed to stop SPACs in their tracks. The proposal does not stop there; it also makes a lot of sweeping interpretations of the law that are not limited in effect to the SPAC context. Accordingly, I dissent.
The latest SPAC boom, which began in 2020 and continues today, has generated a number of legitimate disclosure concerns. We and others, including our Investor Advisory Committee, have asked whether investors are getting the type of information they need to understand conflicts of interest, sponsor compensation, and dilution. Over the past two years, the Division of Corporation Finance staff have poured countless hours into reviewing SPAC IPO and de-SPAC transactions. In addition to improving disclosures in individual transactions, the staff’s tireless efforts have shed light on ways our rules could be bolstered to generate better disclosures across the board. I could have supported a proposal that was rooted in the Division’s good work and focused on addressing disclosure concerns.
Today’s proposal does more than mandate disclosures that would enhance investor understanding. It imposes a set of substantive burdens that seems designed to damn, diminish, and discourage SPACs because we do not like them, rather than elucidate them so that investors can decide whether they like them. The typical SPAC would not meet the proposal’s parameters without significant changes to its operations, economics, and timeline. Among other substantive changes to how SPAC transactions are conducted, the proposal would:
- Require a SPAC to state whether it “reasonably believes that the de-SPAC transaction and any related financing transaction are fair or unfair to unaffiliated security holders of the [SPAC].” While this disclosure requirement technically does not require a SPAC board to hire third parties to conduct analyses and prepare a fairness opinion, the proposed rules clearly contemplate that this is the likely outcome of the new requirement. For example, the proposal would require disclosure of whether “an unaffiliated representative” has been retained to either negotiate the de-SPAC transaction or prepare a fairness opinion and would elicit disclosures about “any report, opinion, or appraisal from an outside party relating to . . . the fairness of the de-SPAC transaction.” For state law reasons, fairness opinions are common in many merger transactions, but (as the economic analysis acknowledges) they are not standard in de-SPAC transactions.
- Deem target companies to be co-registrants at the de-SPAC stage. That target companies have to take the steps necessary to enter the public markets does not justify redefining what it means to be a registrant. Our analysis for doing so is not persuasive, and the significant new disclosure obligations included in this proposal obviate the need for doing so.
- Eliminate the availability of the Private Securities Litigation Reform Act (“PSLRA”) safe harbor for forward-looking statements in de-SPAC transactions. The widespread use of projections in de-SPAC transaction disclosures suggests that market participants generally believe the PSLRA safe harbor is available for forward-looking statements in de-SPAC transactions and that such projections are useful for investors. Through a regulatory sleight of hand, the proposal would eliminate the safe harbor. Specifically, the proposal would change the existing definition of “blank check company” for purposes of the PSLRA—the definition Congress looked to when it wrote the PSLRA—to include SPACs by removing the “penny stock” condition. Look over there, Congress, while we rewrite the statute!
- Impose underwriter liability on SPAC IPO underwriters by deeming many of them to be underwriters at the de-SPAC stage. The proposal would deem a SPAC IPO underwriter to be an underwriter in the de-SPAC transaction if it “takes steps to facilitate the de-SPAC transaction, or any related financing transaction, or otherwise participates (directly or indirectly) in the de-SPAC transaction.” While this section describes at great length court cases and Commission guidance on the determination of underwriter status, it contains only a brief analysis of how those cases apply here. Per the release, activities that are sufficient to establish that the SPAC IPO underwriter is participating in the distribution of the target company securities are: “assisting in identifying potential target companies, negotiating merger terms, . . . finding investors for and negotiating PIPE investments” and “receipt of compensation in connection with the de-SPAC transaction.” While the desired outcome of the proposal is for underwriters to conduct due diligence at the de-SPAC stage, the Commission acknowledges that this may not be possible. A more likely result is that SPAC underwriters will do everything possible to avoid being captured by the rule, such as demanding all compensation up front, a result that may not benefit SPAC investors.
- Establish a non-exclusive safe harbor for SPACs under the Investment Company Act of 1940. While a safe harbor sounds good at first, one has to ask to what end? Does any investor in a SPAC think she is buying an investment company? Would a SPAC’s adherence to the conditions of the safe harbor, some of which will add expense or decrease the SPAC’s negotiating leverage and increase conflicts, benefit investors or harm them? Is the inclusion of such a safe harbor and the language that accompanies it a way to deem many past and present SPACs unregistered investment companies? After all, SPACs have existed for decades, so it is odd that, this late in the game, the Commission has concluded that such a safe harbor is necessary. The proposed safe harbor appears more focused on protecting our ability to enforce the Investment Company Act of 1940 than protecting investors. Our existing disclosure review process is up to the task of preventing investment companies from masquerading as SPACs.
The Commission is not just proposing changes to SPACs, but is also proposing changes to shell company business transactions. Proposed Securities Act Rule 145a would deem any business combination of a reporting shell company involving an entity that is not a shell company to involve a sale of securities to the reporting shell company’s shareholders. Proposed revisions to Item 10(b) of Regulation S-K to expand and update the Commission’s views on the use of projections also will affect business combinations other than just SPACs. I hope that market participants other than SPACs that may be affected by these other changes will hear this message, will review the release, and will provide comments on it. The Commission needs to do a better job of drawing attention to releases that have broader market effect than their headlines may suggest to ensure robust public participation in the comment process.
Underlying this proposal may be a concern that the SPAC boom is producing public companies that are not good for investors. It is not our place to decide that SPACs are good or bad. By arming investors with enhanced disclosure, we empower them to decide whether a particular SPAC is a good investment. SPAC sponsors, under the light of enhanced disclosure, might decide they need to offer more favorable terms to investors. In other words, we need to do the disclosure work and let the markets sort out whether and if substantive changes are needed in the SPAC and de-SPAC process. Some of those changes already may be happening under the existing disclosure regime.
The proposal does not adequately account for the potential cost of damming up the SPAC river. Since 2020 SPACs brought many new companies into our public markets—a welcome trend after decades of decline in the number of public companies. As I have previously argued, we could use this moment to ask whether the SPAC revival of recent years reveals shortcomings with the traditional IPO process and to consider ways to calibrate properly the rules governing IPOs, SPACs, and direct listings. Instead, today’s proposal assumes that the traditional IPO process works just fine as is, that it provides the optimal level of investor protection, and that it generates the right number and the right type of public companies. I look forward to hearing from commenters not only about SPACs, but about whether the traditional IPO process could be improved.
I would like to thank the hard-working staff of the Division of Corporation Finance, Division of Investment Management, Division of Economic and Risk Analysis, the Office of General Counsel, and others across this agency that worked on the proposal. As always, I appreciate your efforts, expertise, and engagement.
SEC, Fiscal Year 2022 Congressional Budget Justification Annual Performance Plan at 4, https://www.sec.gov/files/FY%202022%20Congressional%20Budget%20Justification%20Annual%20Performance%20Plan_FINAL.pdf.
 SEC Investor Advisory Committee,Recommendations of the Investor Advisory Committee regarding Special Purpose Acquisition Companies(Sept. 9, 2021)https://www.sec.gov/spotlight/investor-advisory-committee-2012/20210909-spac-recommendation.pdf.
 As in our recent cybersecurity and climate proposals, some substantive changes are disguised as disclosure requirements.
 Proposed Item 1606(a) of Regulation S-K.
 Proposed Item 1606(d) of Regulation S-K.
 Proposed Item 1607 of Regulation S-K.
 The economic analysis acknowledges that “only 15% of de-SPAC transactions disclosed that they were supported by fairness opinions.” See Proposing Release at 198.
 Proposed Securities Act Rule 140a.
 Proposing Release at 98.
 See Proposing Release at 100 (asking “[d]oes the SPAC IPO underwriter have the means and access necessary . . . to perform due diligence at the de-SPAC transaction stage? . . . Could such access be reasonably obtained in the course of the negotiation of the underwriting agreement for the SPAC [IPO] or otherwise?”).
 For example, the SPAC must announce a de-SPAC transaction no later than 18 months after the effective date of the SPAC’s registration statement for its IPO and complete the transaction no later than 24 months after the effective date. See Proposed Investment Company Act Rule 3a-10(a)(3)(ii)-(iii). The economic analysis finds that approximately 59% announced a transaction by 18 months and 65% completed the transaction by 24 months. See Proposing Release at 210. This condition will also exacerbate conflicts of interest that arise when sponsors of SPACs are under compensation-driven pressure to find target companies within a short time frame. While a time-limit may be appropriate, SPAC investors should be able to override it. Another condition that would impose costs and micro-manage boards without a clear benefit requires the SPAC’s board of directors to adopt an appropriate resolution evidencing that the company is primarily engaged in the business of seeking to complete a single de-SPAC transaction. See Proposed Investment Company Act Rule 3a-10(a)(5)(iv).
 See Proposing Release at 137-38 (“We believe that certain SPAC structures and practices may raise serious questions as to their status as investment companies. While a SPAC would not be required to rely on the safe harbor, we have designed the proposed conditions of the safe harbor to align with the structures and practices that we preliminarily believe would distinguish a SPAC that is likely to raise these questions from one that would not.”).
 See e.g., SEC Comment Letter re: Pershing Square Tontine Holdings Ltd. Schedule TO-Is filed on July 8, 2021 (July 16, 2021), https://www.sec.gov/Archives/edgar/data/0001811882/000000000021008861/filename1.pdf.
 The release raises, for example, concerns “that returns are relatively poor for investors in companies following a de-SPAC transaction.” Proposing Release at 14.
 See generally 2022 WilmerHale M&A Report at 12, https://www.wilmerhale.com/en/insights/publications/2022-manda-report (explaining how SPAC terms “have generally become more investor-friendly than they were in 2020 and early 2021”); Chris Metinko, As SPACs Slow, Terms Change and the Market Widens for Targets, Crunchbase News (July 29, 2021), https://news.crunchbase.com/news/as-spacs-slow-terms-change-and-the-market-widens-for-targets/; Preston Brewer, Analysis: SPAC Deal Terms & IPO Market Are Changing Fast, Bloomberg Law (Aug. 6, 2020), https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-spac-deal-terms-ipo-market-are-changing-fast.
 Commissioner Hester M. Peirce, Inside Chicken: Remarks Before Fordham Journal of Corporate and Financial Law Conference (Oct. 22, 2021), https://www.sec.gov/news/speech/peirce-remarks-fordham-journal-102221.