“Statement Regarding SPAC Matter,” is the latest from SEC Commissioner Hester Peirce. Seems completely anodyne, doesn’t it? But, as they say, looks can be deceiving. Instead, it’s a withering criticism of the SEC’s failure to declare a SPAC registration statement effective in time to allow a de-SPAC merger to go forward, implicitly suggesting at the end that the SEC may have displayed a lack of good faith in its Kafkaesque process (her metaphor, not mine), which had the effect of stringing the registrant along for many months until it was too late to go forward and liquidation was the only possible result. Peirce presumes the failure to declare effectiveness was based on the SEC’s “newfound hostility to SPAC capital formation.” Of course, as none of the correspondence with the SEC has been posted, we really have no independent information about what happened or precisely why the registration statement was not declared effective; it’s certainly possible that the deal was more thorny than the norm. Peirce calls SEC “inaction on a request for acceleration of the effective date of a registration statement…highly unusual.” But then, so is her statement.
Alberton Acquisition Corporation is a British Virgin Islands SPAC that went public in 2018 and, in October 2020, entered into a de-SPAC merger agreement with SolarMax Technology, a Nevada corporation that is an “integrated solar energy company” with operations in the U.S. and China. Along the way, Alberton received several delisting notices from Nasdaq for various failures—to hold an annual meeting, to timely file a 10-Q and, most relevant here, for failure, as a SPAC, to complete a business combination within 36 months of the effectiveness of its IPO registration statement. Alberton received two extensions from Nasdaq to complete its merger with SolarMax, the last terminating on April 26, 2022. In an 8-K filed on March 8, Alberton reported that it was told by Nasdaq that “April 26, 2022 represents the full extent of the Panel’s discretion to grant continued listing while the Company is non-compliant. As a result, if the merger is not completed and the Company does not demonstrate compliance with the applicable Nasdaq listing requirements by April 26, 2022, the Panel will issue a final delist determination and the Company will be suspended from trading on Nasdaq.” Then, in an April 14 press release, Alberton disclosed that SolarMax had given notice that it intended to terminate the merger agreement “because it reasonably believed that the proposed merger… would not be completed by April 26, 2022.” Alberton explained that, as of April 13, 2022, its S-4 registration statement had not been declared effective by the SEC and, if Alberton could not “commence mailing of a definitive proxy statement on April 14, 2022, [Alberton] will not be able to consummate the Merger by April 26, 2022 and will be forced to dissolve and liquidate.” Unfortunately, as noted above, none of the correspondence with the SEC related to the S-4 has been posted, so we have no independent insight as to why the SEC did not declare the S-4, originally filed on December 30, 2020, effective on a timely basis.
In her statement, Peirce said that she was troubled by the SEC’s failure to declare the registration statement effective, typically a “routine step.” And, Peirce notes, because no action was taken by the SEC, “there is no obligation to explain why the registration statement was not declared effective.” Peirce nevertheless posits that the only logical explanation for this failure is the SEC’s “newfound hostility to SPAC capital formation.” She notes first that the SPAC shareholders approved four extensions of the timeline to complete a de-SPAC transaction and that SPAC filed eight amendments to its S-4, including the last one on April 4. Throughout that same time period, the SEC staff made a number of statements regarding SPACs, such as its statement about proper accounting for warrants (see this PubCo post), which led to many restatements, including a restatement by Alberton. (Note that Alberton also restated its financials because of its incorrect categorization of certain shares as permanent equity. See this PubCo post.) In addition, SEC Chair Gary Gensler issued a statement regarding China-based companies. Most significantly, she said, last month, the SEC proposed new rules regarding SPACs, which included a proposed non-exclusive safe harbor under the Investment Company Act of 1940.
Peirce then quoted remarks from the Director of the Division of Investment Management, suggesting that the safe harbor would offer some certainty to SPACs that satisfied the conditions of the safe harbor, but, for SPACs that did not satisfy those conditions, “we would expect that those SPACs should be consulting closely with their advisors and considering carefully their compliance obligations. And finally, I would just say, certainly for those SPACs that also fall outside the safe harbor, I would expect that the staff would also be taking a look at them.”
Peirce also highlighted the Director’s statement that the proposal was the first time that the issue of whether SPACs were investments companies had been “specifically addressed” by the SEC. Peirce appeared to view that history as key: “After all,” she observed,
“SPACs have been around for a long time, and the Commission has not suggested that it thinks that any of them, let alone many of them, are investment companies. Without affording some notice, the Commission cannot turn on a dime and start treating SPACs that do not meet an arbitrarily determined timeline as investment companies. Because of the timing—less than a month after the release of the SPAC proposal, one cannot help wondering, however, whether this SPAC might be a victim of the parameters of a non-exclusive safe harbor that have not yet been adopted. After all, the SPAC has been going back and forth with staff in our Division of Corporation Finance for months. With the end of the road finally in sight, when the SPAC sought to have its registration statement go effective, it did not get the response that virtually everyone gets at this stage of the process. That appears to be the death knell of the SPAC, which robs the investors of the opportunity to decide whether they approve the merger agreement.”
In the end, Peirce expressed concern that other SPACs would suddenly face “existential questions from the Commission at the eleventh hour. If so, why not let them know earlier in the process that there is a problem?” Implicitly comparing the experience of SPAC registrants to that of visitors to Prague’s Franz Kafka International Airport (voted “most alienating”) in this video from The Onion (worth watching) cited in a footnote, she remarks that it “is not a good look for the Commission to run a SPAC through the gauntlet of addressing disclosure comments only to say, ‘Oh, and by the way, now you are too old to be anything other than an investment company.’ We must always engage registrants in the same good faith that we expect of them. A failure to do so would undermine the credibility of this agency.”