M&A Public Markets SPAC

Proposed Rule Changes Could Chill Already Cool SPAC Market

When it comes to the market, there are many differences thus far between the early part of this year and last—perhaps none more pronounced than the dearth of companies going public.

Taking that point a step further is the slowdown in special-purpose acquisition companies, or SPACs. While all the rage the past two years, both SPACs going public and those finding a target to merge with are on the decline—and newly proposed rule changes by the Securities and Exchange Commission regarding blank-check firms could further affect the market, according to those in the industry.

“I don’t want to say it will kill it,” said David Ni, a partner at law firm Sidley. “But it could be a body blow.”

Changes amidst a slowdown

The proposed changes that came from the SEC late last month weren’t unexpected to many in the industry. Just last summer, the agency charged companies and people tied to the proposed merger between SPAC Stable Road Acquisition and space company Momentus with fraud after the deal’s value was slashed.

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In general, the commission and Chairman Gary Gensler have been rather public about scrutinizing blank-check companies more closely. “My first response was that I’m not surprised. The SEC has been looking at this for about 15 months,” said Jared Kelly, partner at Lowenstein Sandler.

However, what makes the SEC’s proposal a bit more unexpected is that it comes as the SPAC market has already cooled dramatically. Only 57 SPACs have gone public so far this year. Last year saw more than 600 SPACs go public for the entire year and nearly 250 in 2020, according to SPACInsider. The traditional IPO market has also slowed to a drip, as has the number of targets going public via SPACs.

The plethora of new rule changes may not help.


One of the main proposed changes involves the projections many SPACs make as part of the de-SPACing—when a SPAC vehicle acquires its target company—process. The merged entity can offer projections that go well past a year—even five or six years—and often show growth at an astronomical rate.

“Including projections and forecasts is something that makes SPACs appealing compared to traditional IPOs,” Kelly said.

The SEC proposal includes the removal of the safe harbor for forward-looking statements. In the merger and deSPAC context, a safe harbor protection gives issuers some amount of comfort concerning projections as long as proper due diligence was performed and qualifying language is included to make clear that any projections are based on assumptions and qualifications after such diligence, Kelly said.

The safe harbor does not apply to traditional IPOs, he added.

“The elimination of the safe harbor is the one (proposed change) that could have the largest effect” on the SPAC market, Ni said.

How far that liability extends—possibly to accountants or lawyers involved in the deal—is another concern some have about the proposed rule changes, although Kelly is not sure he completely sees that concern.

“I’m not sure that’s how I read it,” Kelly said. “I think the SEC just wants the disclosure to be vetted by disinterested parties, similar to a traditional IPO.”


The added liability is very similar to what underwriters face in a typical S-1 filing for a traditional IPO, and some see that as an intentional move by the commission.

“I think it’s a case of the SEC trying to bring SPACs and (traditional) IPOs closer together,” said Joshua DuClos, partner at Sidley. “But these things are very different.”

Although many companies consider SPACs as a vehicle to go public, a merger with one is actually an M&A deal, DuClos points out. In addition, a SPAC transaction does not have the same restraints as a traditional IPO, and even has the option for investors to get their money back if they do not like the proposed deal.

While the removal of the safe harbor protection could mean more lawsuits and potentially larger liability for parties involved in the deSPAC, Kelly points out it is not uncommon for public M&A and deSPAC deals to often face lawsuits already—the proposed changes would just increase the ability for plaintiffs to make additional claims in deSPAC transactions.

There’s more

While liability issues and the safe harbor removal are seen as the keys to the proposed changes, there are other significant changes. The proposed rules also include new “fairness” disclosure requirements; certain disclosure is required regarding the fairness of the deSPAC transaction to target shareholders and unaffiliated shareholders of the SPAC.

The effective result is that a fairness opinion will be included with every deSPAC deal. Previously, such opinions were included in limited circumstances, such as when there were conflicts of interest between the SPAC principals and the deSPAC target.

The proposed changes are now in a 60-day comment period, which is expected to end in late May. They could be approved within two months after that period ends. However, while many expect the commission to enact some of the proposals, they also expect some changes in what was released in March.

SEC Commissioner Hester Peirce already has dissented.

“I think most of the rules are generally fair,” Kelly said. “Some, notably the underwriter liability, go a little too far, but I expect some scaling back in the final rules.”

Kelly thinks the SEC would like to get rules in place by the fourth quarter. There are currently more than 600 SPACs looking for targets, and many are running up against their redemption walls in the fourth quarter of this year and first quarter of next year and are looking for targets.

“They want to get this done before a big wave of deSPAC activity hits,” Kelly said.

What the SEC will decide is anyone’s guess, but SPAC activity seems on the decline—likely brought about by underperformance on the public market and investors being able to find yield elsewhere amidst rising interest rates—and significant rule changes could hamper it more.

However, those in the industry seem to think the final approved changes likely will be toned down from late March.

“If approved as is, you’ll see very few SPACs in the future. … but I think the SEC wants to regulate the product more—it does not want to kill the market,” Kelly said.

Illustration: Dom Guzman

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