SPACs Disclosures: The SEC Leaves a Bread Crumb Trail

By Steve Soter


Remember the pandemic gloom of 2020 in the capital markets? At least there was one major exception. Issuer and investor interest in special purpose acquisition companies (SPACs) was on steroids last year. According to SPACInsider, the 248 SPAC IPOs were four times the previous record, and the $83.04 billion they raised blew away the old mark even more. Not to overstate the obvious, but corporate America is really excited about SPACs right now.

Thanks to that excitement, two December pieces of guidance from the SEC (which has been openly skeptical about SPACs) received more than passing interest from issuers. While an investor bulletin is written in very basic terms and not hugely helpful to companies, Division of Corporation Finance Topic No. 11 is a different matter. If your company is a SPAC or you are in a transaction with a SPAC, this guidance gives both parties a roadmap for disclosures that report potential conflicts of interest and other sensitive matters in ways the SEC staff will accept.


What Is A SPAC, Anyway?

First, a quick overview: Also known as “blank check companies,” SPACs have only about a decade of active use in this country. But they have become a popular vehicle for private companies to go public while avoiding the market-based pricing and investment banker-controlled deal terms from traditional IPOs.

A SPAC is nothing more than a shell company when it goes public. Investors are betting on the managerial acumen of the SPAC organizers, whom the IPO terms give a deadline – typically 18 to 24 months – to acquire or merge with a private operating company. Miss that deadline and a “self-destruct mechanism” is triggered, the SPAC is liquidated, and the IPO proceeds are returned to shareholders at a significant cost to the sponsors.


The SEC Is A Demanding Tire-Kicker

You might ask whether this guidance is really necessary. Bear in mind how worried the SEC has been about slipshod disclosures to investors when SPAC sponsors race against an acquisition deadline.

A quick review of SEC staff requests listed in one comment letter last fall involving a SPAC merger gives insights into the agency’s skepticism:

  • “Please provide a summary of the financial, business, and legal due diligence questions that arose during your diligence meetings.”
  • “Please tell us how you arrived at the Business Combination Consideration amount. Please include sufficient details and assumptions…”
  • “We note that between July 21, 2020, and September 14, 2020, you conducted an ‘extensive search’ involving the evaluation of ‘65 possible target businesses’…Please revise your disclosure to include…the basis on which you evaluated each potential target businesses, including why certain of the other potential target businesses were not pursued.”
  • “We note that the terms of the Business Combination were the result of’ ‘extensive arms’ length negotiations.’ Please…include a description of the negotiations relating to material terms of the transaction.”

Get the picture?


Disclosures That Connect The Right Dots

The SEC guidance helps with SPAC disclosures by posing questions to ask yourselves. Some of the most relevant questions are these:
 

SPAC IPO Disclosures

Key Topic

Questions Your Reporting Team Should Answer

Conflict of Interest

Have you clearly described potential conflicts of interest – including fiduciary or contractual obligations to other entities – that the SPAC sponsors, directors, or officers face? Have you revealed how those conflicts will be resolved?

Conflict of Interest

Might the SPAC pursue a merger or acquisition with a business in which the sponsors, directors, or officers have an interest? Have you disclosed how those conflicts will be resolved?

Self-Destruct Mechanism

Have you clearly described how SPAC leaders will be rewarded if they complete an acquisition and how they will absorb losses if they don’t?

Self-Destruct Mechanism

Have you explained how much control SPAC leaders have over transaction approval, whether a SPAC can quickly amend its governing rules to get a deal done, and whether it could extend the deadline?

Underwriter Compensation

Have you disclosed extra services (e.g., identifying potential targets) the SPAC underwriter might be asked to perform, and fees it would be paid?

Compensation of Sponsors/Directors/Officers

Have you clearly laid out how many SPAC shares they hold, and the acquisition price? How does that share price compare to the IPO’s?

Compensation of Sponsors/Directors/Officers

Do you explain how their relationships with affiliated entities could incentivize them to finish an acquisition – even one that isn’t in the best interests of other shareholders?

Compensation of Sponsors/Directors/Officers

Are investors told how much SPAC leaders are paid? Is any of that compensation contingent on finishing an acquisition?

Terms of Shares Given to Sponsors

Does your disclosure map out stock rights given to sponsors, directors, and officers? Do their terms differ from those public shareholders enjoy?

Terms of Shares Given to Sponsors

Have you discussed any future, public or private stock offerings and whether SPAC leaders can participate in them?


 

SPAC M&A Disclosures

Key Topic

Questions Your Reporting Team Should Answer

Financing Needs

Do you clearly describe additional financing needed to complete a deal and how it would affect public shareholders?

Financing Needs

If the SPAC will issue convertible securities, have you described their material terms and effects on investors?

Interests of SPAC Leaders in Acquisition Targets

Have you given detailed information on how the target was identified and evaluated, who initiated contact, and why this business was targeted?

Interests of SPAC Leaders in Acquisition Targets

What material factors did the board consider in approving the deal?

Interests of SPAC Leaders in Acquisition Targets

Have you clearly described any potential conflicts of interest with the sponsors, directors, and officers? Have you given detailed information about how they benefit from the transaction?

Underwriter’s Interest in the Acquisition

Have you disclosed any fees the IPO underwriter will earn when the acquisition is completed?

Underwriter’s Interest in the Acquisition

Have you explained whether any additional services for which the underwriter is compensated are conditional on finishing a transaction?


Sound Off On SPACs

While SPACs can help raise capital quickly, make sure your disclosures present a transaction clearly, anticipate the SEC’s hot buttons, and mitigate potential litigation. 

How helpful do you find the SEC’s new SPAC guidance? Make sure you are logged in as a member of SEC Professionals Group and then join the discussion at the bottom of this blog. Our voices and practical experiences can help set the tone for future guidance.

 

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