Reuters is reporting—exclusively—that the SEC is contemplating issuing more guidance that would “rein in growth projections” made by listed SPACs and clarify when the PSLRA would be available to protect SPAC projections, “according to three people with knowledge of the discussions.” According to Reuters, the SEC guidance “would escalate its crackdown on the deal frenzy” in SPACs and could exacerbate the slowdown that has already occurred in reaction to the SEC’s previous guidance on SPAC warrants. For 2021 so far, Reuters, citing data from Dealogic, reported the value of de-SPAC transactions at a record $263 billion; however, SPACs raised only $2.5 billion during the first 20 days of April compared to $17 billion raised during the first 20 days of January.
The previous guidance, Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”) from Acting Corp Fin Director John Coates and Acting Chief Accountant Paul Munter, addressed the appropriate accounting for warrants that are typically issued in connection with the formation and initial registered offerings of SPACs. The primary issue was whether these warrants should more properly be classified as liability, rather than equity, potentially requiring some SPACs to restate their financials if the impact was material. If warrants were classified as a liability, according to the Statement, they should be “measured at fair value, with changes in fair value reported each period in earnings.”(See this PubCo post.)
Other concerns, according to Reuters, have been SPAC projections, which SPAC sponsors contend are critical for investors, but others are concerned may be misleading. Reuters reports that “the SEC is considering guidance aimed at clarifying when a key liability protection for such forward-looking statements applies to SPACs, the three sources said.” That key liability protection is the PSLRA, which offers a safe harbor for certain forward-looking statements accompanied by meaningful cautionary language, but is unavailable for statements in connection with offerings by blank check companies, penny stock issuers and IPOs.
In this statement, Corp Fin Acting Director John Coates, who insists he is neither pro-SPAC nor anti-SPAC, observed that some practitioners and commentators have argued that SPACs involve lower securities laws liability risk because, in contrast to traditional IPOs, SPACs are entitled to rely on the safe harbor for forward-looking statements in the PSLRA, allowing SPAC sponsors, targets and others involved in the SPAC to disclose projections and other valuation material that would usually not be disclosed in conventional IPO prospectuses. But, according to Coates, that claim “about reduced liability exposure for SPAC participants is overstated at best, and potentially seriously misleading at worst. Indeed, in some ways, liability risks for those involved are higher, not lower, than in conventional IPOs, due in particular to the potential conflicts of interest in the SPAC structure.” There is no “free pass” for material misstatements or omissions in de-SPAC transactions, Coates maintained.
What’s more, Coates questioned the assertion that the PSLRA safe harbor provides protection for SPACs. That, Coates argued, “is uncertain at best.” In his statement, Coates also looked to the legislative history of the PSLRA, which included “statements that the safe harbor was meant for ‘seasoned issuers’ with an ‘established track-record.’” SPAC targets, he said, “have no more of a track record” than private companies doing IPOs: “Private companies that combine with SPACs to enter the public markets have no more of a track record of publicly-disclosed historical information than private companies that are going through a conventional IPO. If there are risks to the use of cost-effective, complete, and reliable forward-looking information in any setting, those risks should be carefully evaluated in light of the goals of the federal securities laws. At the same time, the risk of misuse of such information should also be carefully evaluated in light of the economic realities of the capital formation process.” While the safe harbor specifically excludes statements made in connection with an IPO, there is no definition provided for “initial public offering” and, in Coates’s view, “that phrase may include de-SPAC transactions.” Why should a SPAC be treated differently from a traditional IPO? It’s really a question of economic substance over form. (See this PubCo post.)
According to Reuters, the “SEC guidance would aim to clarify the conditions upon which the safe harbor applies, the sources said. Those changes would likely prompt more due diligence and caution on the part of SPAC dealmakers wary of incurring liability, the people said.” Interestingly, the article observes that the guidance is being discussed by Corp Fin staff, “but it was unclear if the agency’s leadership would back them, said one of the sources.” Staff guidance is, of course, not binding.