附近上门

When it comes to the market, there are many differences thus far between the early part of this year and last鈥攑erhaps 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鈥攁nd newly proposed rule changes by the regarding blank-check firms could further affect the market, according to those in the industry.

鈥淚 don’t want to say it will kill it,鈥� said David Ni, a partner at law firm . 鈥淏ut it could be a body blow.鈥�

Changes amidst a slowdown

The that came from the SEC late last month weren鈥檛 unexpected to many in the industry. Just last summer, the agency tied to the proposed merger between SPAC Stable Road Acquisition and space company with fraud after the deal鈥檚 value was slashed.

In general, the commission and Chairman have been rather public about scrutinizing blank-check companies more closely. 鈥淢y first response was that I鈥檓 not surprised. The SEC has been looking at this for about 15 months,鈥� said Jared Kelly, partner at .

However, what makes the SEC鈥檚 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 . 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.

Liability

One of the main proposed changes involves the projections many SPACs make as part of the de-SPACing鈥攚hen a SPAC vehicle acquires its target company鈥攑rocess. The merged entity can offer projections that go well past a year鈥攅ven five or six years鈥攁nd often show growth at an astronomical rate.

鈥淚ncluding projections and forecasts is something that makes SPACs appealing compared to traditional IPOs,鈥� 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.

鈥淭he elimination of the safe harbor is the one (proposed change) that could have the largest effect鈥� on the SPAC market, Ni said.

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

鈥淚鈥檓 not sure that鈥檚 how I read it,鈥� Kelly said. 鈥淚 think the SEC just wants the disclosure to be vetted by disinterested parties, similar to a traditional IPO.鈥�

IPO vs SPAC

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.

鈥淚 think it鈥檚 a case of the SEC trying to bring SPACs and (traditional) IPOs closer together,鈥� said Joshua DuClos, partner at Sidley. 鈥淏ut these things are very different.鈥�

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鈥攖he proposed changes would just increase the ability for plaintiffs to make additional claims in deSPAC transactions.

There鈥檚 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 鈥渇airness鈥� 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 .

鈥淚 think most of the rules are generally fair,鈥� Kelly said. 鈥淪ome, notably the underwriter liability, go a little too far, but I expect some scaling back in the final rules.鈥�

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.

鈥淭hey want to get this done before a big wave of deSPAC activity hits,鈥� Kelly said.

What the SEC will decide is anyone’s guess, but SPAC activity seems on the decline鈥攍ikely brought about by underperformance on the public market and investors being able to find yield elsewhere amidst rising interest rates鈥攁nd 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.

鈥淚f approved as is, you鈥檒l see very few SPACs in the future. 鈥� but I think the SEC wants to regulate the product more鈥攊t does not want to kill the market,鈥� Kelly said.

Illustration: