Warshaw Burstein LLP | SEC Proposes Rule Changes for SPACs to Enhance Disclosure and Protect Investors
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SEC Proposes Rule Changes for SPACs to Enhance Disclosure and Protect Investors

by Jordan Kohn and Brian Daughney

Big changes may be on the horizon for special purpose acquisition companies (“SPACs”). The Securities and Exchange Commission (SEC) voted on Wednesday, March 30, 2022, to propose new rules for SPACs which, if adopted, would require SPACs to provide increased investor disclosures focused primarily on their ownership and performance forecasts. The proposed rules and amendments are designed to enhance disclosure and investor protection in initial public offerings (IPOs) by SPACs and in business combination transactions involving shell companies, such as SPACs, and private operating companies.

The proposed new rules and amendments would require, among other things, additional disclosures about SPAC sponsors, conflicts of interest, and sources of dilution. They would also require additional disclosures regarding business combination transactions between SPACs and private operating companies, including disclosures relating to the fairness of these transactions. The new rules would also address issues relating to projections made by SPACs and their target companies, including the Private Securities Litigation Reform Act safe harbor for forward-looking statements and the use of projections in Commission filings and business combination transactions.

In some cases, SPACs may have to register as investment companies under the Investment Company Act of 1940. However, SPACs that limit their duration, asset composition, business purpose and activities, for example, would not need to register under the Investment Company Act. The changes to the rules would give SPAC and IPO investors a similar level of protection.

For SPAC underwriters and sponsors, however, greater liability for due diligence and the credibility of financial projections may require a restructuring of their business models.

The public comment period will remain open for 60 days following publication of the proposing release on the SEC's website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.

We will continue to monitor developments as they occur. Please feel free to reach out to Brian Daughney (bdaughney@wbny.com) or Jordan Kohn (jkohn@wbny.com) with any questions.