SEC UPDATE

• Published in: The Investment Lawyer Vol. 28; no. 7; pp. 34 - 39
• Main Authors: Cross, Meredith B, Echavarria, Lorraine B, Firenze, Lisa, Friedman, Aaron, McLucas, William R, Mitchell, Elizabeth L, Mugmon, Michael, Pollner, Glenn R, Silva, Timothy F
• Format: Trade Publication Article
• Language: English
• Published: Englewood Cliffs Aspen Publishers, Inc 01.07.2021
• Subjects: Acquisitions & mergers; Business combinations; Capital markets; Corporate sponsorship; Directors; Enforcement; Financial reporting; Initial public offerings; Operating companies; Proxy statements; Public companies; Registration statements; Special purpose acquisition companies; Stockholders
• ISSN: 1075-4512

Shortly after these enforcement related requests, the SEC's Division of Corporation Finance and Office of the Chief Accountant each issued statements underscoring the need for SPACs and the companies that enter the public markets by merging with a SPAC to meet their accounting, financial reporting and governance obligations as public companies.2 On April 12, the Acting Chief Accountant and Acting Director of the Division of Corporation Finance issued a statement with significant impact regarding the accounting treatment on warrants in SPAC transactions.3 This followed an earlier statement by the SEC's Acting Director of the Division of Corporation Finance, warning SPAC sponsors about potential legal liability that attaches to disclosures in de-SPAC transactions.4 Acting Director John Coates made clear that SEC Staff are closely reviewing SPAC filings, are seeking clearer disclosure, and will be "vigilant" about SPAC and private target disclosure so that the public can make informed investment and voting decisions about these transactions. How SPACs Work A SPAC is a company with no operations that offers securities for cash via an initial public offering (IPO) and places substantially all of the offering proceeds into a trust account to fund the future acquisition of one or more private operating companies. Recent sponsors have included hedge fund managers, investment banks, private equity firms, venture capital firms and institutional asset managers. The SEC's Division of Corporation Finance Staff has indicated that it will be closely scrutinizing sponsor disclosures regarding conflicts of interest, given that the economic interests of SPAC sponsors, directors and officers are not the same as, and can be at odds with, those of SPAC investors.8 We expect the SEC Enforcement Staff likewise will scrutinize the adequacy of disclosure in offering documents, including on the following topics: * The SPAC sponsors' obligations and allegiances to parties other than the SPAC and how those allegiances may affect their evaluation of a business combination, for example, relationships between the SPAC and target company and relationships between SPAC management and target management or any private investors; * The economic interests of SPAC sponsors, especially their incentives to complete an acquisition within the specified time period, and their potential losses if one is not completed; * The control that the SPAC sponsors, directors, officers and their affiliates have over approval of a business combination transaction; * The material economic terms of the securities held by SPAC sponsors, directors, officers and affiliates, which can differ from (and potentially dilute the value of) the securities held by public shareholders; and * The degree to which additional funding, including from the sponsors or their affiliates (such as other funds managed by the SPAC sponsors or their principals), may dilute shareholders' interest in the combined company or may be provided in the form of a loan or security that has different rights from those of common shareholders.9 We anticipate the Division of Enforcement also will generally scrutinize whether the merger proxy or registration statement contains adequate disclosure about the contemplated business combination for SPAC shareholders to make informed decisions, both on whether to approve the transaction and on whether to redeem their shares.