Perfectly calibrated to slap an exclamation point on last Wednesday’s 581-page SPAC release (see this PubCo post), this new SEC Order, posted the following day, reflects settled charges against Northern Star Investment Corp. II, a SPAC, for misleading statements in its SEC filings in connection with its SPAC IPO and failed de-SPAC transaction. In the SPAC release, the SEC noted concerns from commentators regarding the adequacy of the disclosures provided to investors in SPAC IPOs and de-SPAC transactions. In this case, the SEC charged that Northern Star stated in its SEC filings that, prior to filing its S-1 for its IPO, it had had no substantive discussions with any potential target; in reality, however, Northern Star had had several discussions with the ultimate target regarding a potential SPAC business combination. According to the Director of the SEC’s Philadelphia Regional Office, “Northern Star’s failure to disclose discussions with its merger target kept investors in the dark about its future plans, information that would have been important in deciding whether to invest in this SPAC….Given that the purpose of a SPAC is to identify and acquire an operating business, SPACs should be transparent about any pre-IPO discussions with potential acquisition targets.” Northern Star was ordered to pay a civil money penalty of $1.5 million for violation of the antifraud provisions of the Securities Act.
Background
According to the Order, Northern Star was formed as a SPAC in November 2020, with no operations and a purpose of effecting a merger with an operating company, as is typical for SPACs. In January 2021, it conducted its IPO, with gross proceeds of $400 million, which were held in trust for the benefit of shareholders. Northern Star entered into a merger agreement with the target in February 2021, amended the agreement on April 7, 2021, and terminated it on November 30, 2021.
As alleged, prior to its IPO, Northern Star learned that the target’s controlling shareholder might be interested in selling the target to a SPAC. Beginning in December 2020, the SEC alleged, there were frequent communications between Northern Star and the target and its controlling shareholder. An NDA was signed, under which the target provided information to Northern Star, including actual and forecast revenue. On January 16, there were communications about a potential PIPE transaction, and valuation data generated by an investment bank was sent to Northern Star. The next day, the parties held a two-hour meeting to discuss the SPAC and PIPE. In the immediately following days through January 26, communications occurred regarding audits, investments banks, logistics, institutional investors and public relations firms.
Northern Star filed the S-1 for its IPO on January 6, 2021. After an amendment on January 15, the S-1 was declared effective on January 25. The SEC alleged that the amendment and prospectus both stated that Northern Star had “not selected any business combination target and we have not, nor has anyone on our behalf, initiated any substantive discussions with any business combination target. Accordingly, there is no current basis for investors in this offering to evaluate the possible merits or risks of the target business with which we may ultimately complete our initial business combination.” Northern Star made similar representations in the underwriting agreement. No statements were made regarding the target in any of the S-1 or prospectus filings.
The Order cautions that, “[g]iven that the purpose of a SPAC is to identify and acquire an operating business after conducting its IPO, steps a SPAC has taken in furtherance of a particular acquisition would be material to a reasonable SPAC investor, who would want to know about the SPAC’s prospects with future acquisition targets. Disclosures made in a SPAC’s IPO—including as it relates to any pre-IPO discussions or negotiations with future acquisition targets or concerning potential business combinations—need to be clear and accurate, and cannot be materially false or misleading.”
The day that the IPO closed, according to the Order, Northern Star sent the target a detailed timetable aimed at announcing the business combination and PIPE by February 22. The merger agreement was signed on February 21 and announced the next day.
The SEC alleged that the S-4, which was filed in April 2021, omitted disclosure of the communications that occurred between late December 2020 and January 26, 2021. What’s more, the S-4 expressly stated that “[p]rior to January 25, 2021, the effective date of the registration statements for the initial public offering, neither Northern Star, nor anyone on its behalf, contacted any prospective target businesses or had any substantive discussions, formal or otherwise, with respect to a transaction with Northern Star.” It wasn’t until after the effective date, they stated, that Northern Star “commenced an active search for prospective acquisition targets.”
The S-4 was never declared effective and the merger agreement was terminated on November 30, 2021. Holders of over 38 million shares exercised redemption rights.
Violations
The SEC determined that Northern Star violated Section 17(a)(2) of the Securities Act, which makes it unlawful, in the offer or sale of securities, to make false or misleading statements. Northern Star was ordered to pay a civil money penalty of $1.5 million.
