SEC Approves Final Regulations Regarding SPACs, Shell Entities, and Projection Utilization - Part 3

On January 24, 2024, the SEC finalized rules aimed at improving disclosure requirements for SPAC IPOs and subsequent de-SPAC business combination transactions. These rules are intended to align disclosure obligations and legal responsibilities in de-SPAC transactions more closely with those in traditional IPOs. The scope of these rules extends beyond SPACs to encompass shell companies and blank check companies more broadly. The compliance deadline for these new rules is set for July 1, 2025.

In the first part of this series, background information and a summary of the new rules were provided. The subsequent blog post initiated a detailed discussion of the 581-page rule release, beginning with the coverage of new Subpart 1600 to Regulation S-K concerning disclosures in SPAC IPOs and de-SPAC transactions. This blog post continues the review of new Subpart 1600 to Regulation S-K.

New Subpart 1600 of Regulation S-K:

The SEC introduced new Subpart 1600 to Regulation S-K to: (i) outline disclosure requirements for SPACs concerning sponsors, potential conflicts of interest, and dilution; (ii) include specific disclosures on the prospectus cover page and summary; (iii) mandate disclosures regarding whether the law of the SPAC's organizational jurisdiction requires the board of directors to assess the advisability of the de-SPAC and disclose that determination; and (iv) disclose whether the SPAC or its sponsor has received any external report, opinion, or appraisal related to the de-SPAC transaction and provide relevant disclosures. Additionally, the SEC has implemented numerous form changes to Forms S-1, F-1, S-4, F-4, Schedule 14A and 14C, and Schedule TO to enforce these new rules.

Dilution - Items 1602 and 1604:

The new regulations necessitate enhanced dilution disclosures in SPAC IPOs and other non-de-SPAC registered offerings (Item 1602) and de-SPAC transactions (Item 1604). Various potential sources of dilution in typical SPAC structures include shareholder redemptions, SPAC sponsor compensation, underwriting fees, warrants, convertible securities, and PIPE financings.

The SEC acknowledges that the pertinent aspects of dilution disclosure differ in SPACs compared to operating businesses. While investors use dilution to assess value versus assets and liabilities in operating companies, in SPACs, it's crucial to understand the impact of price disparities between insiders and investors and to evaluate the economics of a de-SPAC transaction.

Item 1602 - Dilution Disclosure in SPAC IPOs and Non-De-SPAC Registered Offerings:

New Item 1602(a) necessitates disclosure on the outside front cover page of a prospectus, detailing the compensation received or to be received by the SPAC sponsor, its affiliates, and promoters, the securities issued or to be issued by the SPAC to them, and the price paid or to be paid for such securities, along with whether this may result in material dilution. Tabular disclosure of net tangible book value per share is also required on the cover page.

Item 1604 - Dilution Disclosure in De-SPAC Transactions:

New Item 1604(a) requires similar disclosures for de-SPAC transactions, including details on compensation, securities issuance, and potential dilution on the outside front cover page of a prospectus. Item 1604(b) mandates a prospectus summary table disclosing relevant compensation and dilution information, alongside a description of material financing transactions and their dilutive impacts. Tabular disclosure of potential redemption levels and associated dilution is also required.

Both Item 1602 and Item 1604 necessitate descriptions of material potential sources of future dilution, along with a statement of company valuation at or above which dilution results in the non-redeeming shareholders' interest being at least the IPO price per share of common stock. Additionally, a description of methods, assumptions, estimates, and parameters used in the disclosure is required