On January 24, 2024, the US Securities and Exchange Commission (SEC) adopted final rules relating to special purpose acquisition companies (SPACs) and other shell companies. The new rules are effective on July 1, 2024.

The SEC’s stated intention in adopting the new rules is to enhance disclosures and provide greater investor protections in transactions involving SPACs, including initial public offerings (IPOs) by SPACs and business combination transactions between SPACs and private company targets (de-SPAC transactions). The SEC also provided guidance on the use of projections, including in de-SPAC transactions.

A SPAC is a “blank check” company formed for the purpose of engaging in a merger or other business combination with one or more operating businesses within a specified period of time (typically 1-2 years). The blank check company completes an IPO and then engages in a business combination generally with a private company target in a de-SPAC transaction, in which the target company takes on the SPAC’s stock exchange listing and ultimately becomes the publicly traded company. De-SPAC transactions contain elements of both traditional IPOs and mergers and acquisitions. De-SPAC transactions were a common method for issuers to become a public company, particularly in 2020 and 2021, and these transactions continue to be a way in which companies seek to enter the public markets. The increase in the use of de-SPAC transactions, however, raised concerns within the SEC, including concerns with respect to SPAC IPOs and de-SPAC transactions related to, among other things, adequacy of disclosures, liabilities, conflicts of interest, dilution, and voting. The final rules adopted by the SEC aim to align SPAC IPOs and de-SPAC transactions more closely with traditional IPOs in terms of disclosure, procedural requirements, and investor protections.

In addition to applying to SPACs, many of the final rules also apply to other shell companies, which include companies, other than asset-backed issuers, that have (1) no or nominal operations and (2) either (i) no or nominal assets, (ii) assets consisting solely of cash and cash equivalents, or (iii) assets consisting of any amount of cash and cash equivalents and nominal other assets. This will result in the final rules having a broader impact on alternative capital raising transactions rather than just on SPAC IPOs and de-SPAC transactions.

The final rules that were adopted are described in more detail below and will, among other things:

• Require additional disclosures in SPAC IPOs and de-SPAC transactions about compensation to the SPAC’s sponsor, potential conflicts of interest, dilution, the target company, and certain other information.
• Require the target company in a de-SPAC transaction to be a co-registrant with the SPAC or other shell company and thus assume responsibility for the disclosures in the registration statement for the de-SPAC transaction.
• Deem business combination transactions involving a SPAC or other shell company to be a sale of securities to the SPAC or other shell company’s stockholders.
• Align the regulatory treatment of projections in business combinations involving SPACs and other shell companies with that in traditional IPOs under the Private Securities Litigation Reform Act of 1995 (PSLRA).

Additional Disclosures and Investor Protections in SPAC IPOs and de-SPAC Transactions

The final rules enhance disclosures and provide additional protections in SPAC IPOs and de-SPAC transactions by:

• More closely aligning the required disclosures and liabilities that may be incurred in de-SPAC transactions with those in traditional IPOs, for example, by deeming the target company an issuer that must sign the registration statement filed by a SPAC (or other shell company) in connection with a de-SPAC transaction, which will have the practical effect of the target company’s officers and directors assuming responsibility for the accuracy of the disclosures and being subject to liability under Section 11 of the Securities Act of 1933, as amended (the Securities Act), for the disclosures in the registration statement.
• Requiring additional disclosures regarding, among other things, the SPAC sponsors and their affiliates and controlling persons, SPAC sponsor (as well as affiliates and promoters) compensation, arrangements relating to the transfer of SPAC securities, restrictions on the sale of SPAC securities by the SPAC sponsor and its affiliates, conflicts of interest (actual or potential), background information on the de-SPAC transaction, and the target company.
• Requiring additional disclosures regarding any determination by a board of directors as to whether the de-SPAC transaction is advisable and in the best interests of the SPAC and its stockholders and any outside party report, opinion, or appraisal received that materially relates to the de-SPAC transaction.
• Requiring additional disclosure regarding potential dilution in any registration statement filed by the SPAC, including the registration statement for its IPO and the registration statement for the de-SPAC transaction.
• Requiring a 20-calendar-day minimum dissemination period for prospectuses and proxy and information statements filed in connection with de-SPAC transactions, where consistent with local law.
• Requiring a re-determination of smaller reporting company status following a de-SPAC transaction prior to making the first post-closing SEC filing (other than the Form 8-K filed with Form 10 information) and requiring such re-determination to be reflected in SEC filings beginning 45 days after the de-SPAC transaction closes.

Further Investor Protections in Business Combination Transactions with Shell Companies

To help ensure that investors receive Securities Act protections in business combinations involving shell companies, including de-SPAC transactions, the SEC adopted the following:

• New Rule 145a, which provides that any direct or indirect business combination of a reporting shell company (that is not a business combination–related shell company) involving another entity that is not a shell company, is deemed to involve an offer, offer to sell, offer for sale, or sale within the meaning of Section 2(a)(3) of the Securities Act. As a result, these transactions must be registered under the Securities Act or fall within an exemption from the registration requirement.
• Revisions to Regulation S-X relating to financial statement requirements applicable to transactions involving shell companies and private operating companies that will be more closely aligned with those in traditional IPOs.

Aligning Treatment of Projections under the PSLRA and Additional Disclosures

To better align the regulatory treatment of projections in business combinations involving SPACs and other “blank check companies,” with that in traditional IPOs, the final rules include the following:

• A revised definition of blank check company under the PSLRA that makes the safe harbor for forward-looking statements under the PSLRA unavailable for disclosures in registration statements, including disclosure of projections, for business combinations involving companies “that [have] no specific business plan or purpose or [have] indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies, or other entity or person,” which includes SPACs.
• Required disclosure in de-SPAC transactions related to projections, including disclosure of all material bases of the projections and all material assumptions underlying the projections, as well as the purpose of the projections and the identity of the preparing party. Required disclosure in de-SPAC transactions of whether the projections still reflect the view of the SPAC or target company as of the date of each filing related to the de-SPAC transaction.

In addition, the SEC provided additional guidance on the use of projections by all issuers, not just SPACs. Amendments to Item 10(b) of Regulation S-K will require issuers in all SEC filings to (1) distinguish “projected measures that are not based on historical financial results or operational history…from projected measures that are based on historical financial results or operational history,” (2) present the historical measure or operational history used as the basis for projections with equal or greater prominence to the projections and (3) include (i) a clear definition or explanation of any non-GAAP financial measure included in projections, (ii) a description of the GAAP financial measure to which the non-GAAP measure is most closely related, and (iii) an explanation why the non-GAAP financial measure was used instead of a GAAP measure.

Guidance on Underwriter and Investment Company Status

Although the final rules did not adopt proposed rules (1) that would have provided that underwriters in a SPAC IPO would be an underwriter in the de-SPAC transaction in certain specified circumstances and (2) that would have provided a safe harbor under which certain SPACs would not be considered an “investment company” under the definition provided under the Investment Company Act of 1940 (the Investment Company Act), the SEC did provide guidance on these two items.

Underwriter Status

The SEC believes that a de-SPAC transaction is a “distribution” of securities and acknowledged that in a de-SPAC transaction, there is generally no single party accepting securities from the issuer with a view to resell such securities to the public in a distribution in the same manner as a traditional underwriter in traditional capital raising. The SEC nevertheless believes that in a de-SPAC transaction distribution, there would be an “underwriter” present where someone is selling for the issuer or participating in the distribution of securities in the combined company to the SPAC’s investors and the broader public. Depending on the facts and circumstances, such an entity could be deemed a “statutory underwriter” even though it may not be named as an underwriter in any given offering or may not be engaged in activities typical of a named underwriter in traditional capital raising. Section 11 would apply as it would to anyone acting as underwriter with respect to a registered de-SPAC transaction, and such person will have liability for any material misstatement or omission in the registration statement (and such person would have any defenses available to the parties upon whom the statute imposes liability).

Investment Company Status

The SEC set forth its views on facts and circumstances that are relevant to whether a SPAC meets the definition of “investment company” under the Investment Company Act in light of the five-factor test that is traditionally used to determine whether an issuer is an investment company (known as the Tonopah factors). The SEC noted that a SPAC might engage in certain activities that would raise serious questions about whether it is an investment company, including activities that would affect a SPAC’s analysis under the Tonopah factors, including:

• the nature of the SPAC’s assets and income;
• the actions of the management of the SPAC;
• the duration between the SPAC IPO and the de-SPAC transaction;
• whether the SPAC seeks, or holds itself out to, investors prior to the de-SPAC transaction as a way in which the investor can be exposed to the securities held by the SPAC; and
• whether the SPAC merges with an investment company.

XBRL Tagging

In addition, the final rules require companies to tag information disclosed pursuant to new subpart 1600 of Regulation S-K in Inline XBRL, effective on June 30, 2025.

Potential Impacts

SPACs

Many market participants viewed the proposed rules released in 2022 as the likely benchmark for SEC rulemaking for SPAC IPOs and de-SPAC transactions and have worked many of the new requirements into practice over the last few years, including additional disclosures regarding SPAC sponsors’ interest in the transaction and increased diligence around projections and the target company’s disclosures, driven in large part by the banks and legal counsel helping to facilitate these transactions. So, although the final rules are effective on July 1, 2024, many companies are currently taking the new rules into consideration as they structure and work through disclosures and the overall process for ongoing transactions.

The new rules, however, will likely contribute to the continued decline in the number of SPAC IPOs and difficulties that are now facing SPACs as they search for suitable target companies and each party as they try to raise sufficient capital and close the de-SPAC transactions.

Other Shell Companies

The applicability of some of the new rules to shell companies generally, will also have an impact on other types of alternative transactions in addition to SPAC IPOs and de-SPAC transactions. In particular, the new rules, when combined with recent SEC comment letters, will impact the attractiveness of “reverse mergers,” which are common in the life sciences space, where a private company seeks to merge with a “fallen angel” to obtain access to the fallen angel’s cash and public listing and to the public markets.

The SEC has revised its approach to reviewing reverse mergers and now takes the position that if the fallen angel has no or nominal continuing operations or assigns the post-closing value of its historical operations to its pre-closing stockholders that the fallen angel is likely a shell company. The treatment of the reverse merger for accounting purposes as a reverse capitalization will also contribute to the fallen angel being treated as a shell company. This position has many negative impacts on the participants in a traditional fallen angel reverse merger, including:

• The post-closing company is not eligible to use Form S-3 for at least 12 months.
• The post-closing company is not eligible to use Form S-8 for at least 60 days.
• The post-closing company is not eligible to use Rule 144 for at least 12 months and is subject to the continuing requirements in Rule 144(i) applicable to former shell companies to have filed all Exchange Act reports other than Forms 8-K in the preceding 12 months.
• The post-closing company will not be eligible to be a well-known seasoned issuer for at least three years.
• The post-closing company will not be eligible to use a free writing prospectus for at least three years.
• Shares of affiliates of the target company cannot be registered for resale as the affiliates are deemed underwriters and may only be sold in a fixed priced offering naming the affiliates as underwriters.
• The issuance of the securities in the reverse merger must be registered under the Securities Act or fall within an exemption from the registration requirement pursuant to new Rule 145a.
• Required compliance with the new financial statement requirements under the amendments to Regulation S-X under the new rules.
• Required compliance with the new projections requirements under the new rules.
• The potential that the target company will be considered a co-registrant with the fallen angel and subject to liability under Section 11 of the Securities Act under the new rules.