Special purpose acquisition companies (SPACs) have become an important investment vehicle and source of M&A activity. SPAC transactions include aspects of both initial public offerings and business combinations.
In 2020, we’ve seen a surge in new SPAC IPOs (particularly as a percentage of overall IPOs), the amount of capital raised by SPACs and a series of high-profile SPAC business combination (De-SPAC) transactions. There is a great deal of excitement and interest in SPAC deals and how to do them. Part of the reason is that SPACs are a source of public company capital and a place to invest in anticipation of growth opportunities. As a source of capital, SPACs appear particularly enticing at a time when public company capital can be expensive and difficult to get. The flexibility allowed in structuring transactions involving SPACs – while limited in some fundamental ways – permits many different variations on the theme of raising public company capital under difficult circumstances.
In the last two weeks, the SEC staff has given new guidance about SPACs. The Division of Corporation Finance issued “CF Disclosure Guidance – Topic No. 11“, which outlines disclosure considerations for SPAC IPOs and for De-SPAC transactions.
The SEC also issued “What You Need to Know About SPACs – Investor Bulletin”. Investor bulletins are aimed at retail investors, and so tend to be pretty basic, although this particular staff summary can be helpful because of the unfamiliarity of most investors and business people with SPACs and how they differ from typical IPO companies and how De-SPAC transactions differ from typical public company mergers.
CF Disclosure Guidance – Topic 11 focuses on the various participants in SPACs – sponsors, management teams, directors, officers and affiliates, and underwriters. It emphasizes that the creation of a public company with business operations in a traditional IPO involves an investor-focused market-based price discovery mechanism. In contrast, a SPAC IPO and De-SPAC transaction also creates a public company with business operations – what is missing is the same type of market-based pricing mechanism used in a traditional IPO. The pricing decision for the business operations that a SPAC acquires is made by the participants that control the SPAC.
The Disclosure Guidance focuses on a variety of the ways that the differing economic interests and level of control between SPAC investors and other SPAC participants can adversely affect SPAC investors. Much of the guidance will be familiar to those familiar with SEC staff comment letters related to SPACs and can form the basis of a checklist before filing a registration statement for the SPAC IPO and De-SPAC transaction. The focus of the guidance is principally on disclosure of conflicts of interest and how real and potential conflicts might affect the value of a SPAC investment.
The Disclosure Guidance encourages SPACs to disclose some of the ways that participants in forming SPACs may act differently than traditional pre-IPO company participants through the course of registering and selling securities in the public capital markets. Good disclosure that illuminates potential conflicts will help smooth SEC staff review and protect SPAC participants against potential securities law liability.
If you have questions about SPAC IPOs or De-SPAC transactions, reach out to your usual Locke Lord contact or any of the authors.
