Tag: Investment Company Act of 1940
SEC adopts new rules on SPACs—just investor protection or will it spell the demise of SPACs?
Recently, SPACs seem to have lost much of their allure, but why? Certainly there are multiple reasons related to the capital markets, but one reason may have been the anxiety of many SPAC proponents precipitated by the proposal that the SEC advanced in 2022 to regulate SPAC and de-SPAC disclosure and liability. Commissioner Hester Peirce, who had dissented on even issuing the proposal, remarked at the time that the proposal “seem[ed] designed to stop SPACs in their tracks.” Yesterday, the SEC voted, three to two, to adopt those rules, with some changes. The new rules and amendments will affect SPACs, shell companies and the use of projections in SEC filings. The SEC is also issuing new guidance addressing potential underwriters in de-SPAC transactions, as well as the status of SPACs under the Investment Company Act of 1940 (in lieu of adopting a proposed rule). According to Gensler, “Today’s adoption will help ensure that the rules for SPACs are substantially aligned with those of traditional IPOs, enhancing investor protection through three areas: disclosure, use of projections, and issuer obligations. Taken together, these steps will help protect investors by addressing information asymmetries, misleading information, and conflicts of interest in SPAC and de-SPAC transactions.” Peirce and Commissioner Mark Uyeda dissented, in essence, viewing the new rules as “merit regulation” and overkill, with the emphasis on “kill”—that is, as Peirce commented, the “regulatory reaper came for SPACs and seems to have won.” Similarly, Uyeda remarked that, with the current SPAC market just “a shell of its former self,” the new rules show that the SEC “intends to never let them return.” The final rules will become effective 125 days after publication in the Federal Register, except that compliance with the requirement to use inline XBRL will not be mandatory until 490 days after publication in Federal Register.
Are SPACs really “investment companies”?
Not according to 49 major law firms! Earlier this month, a shareholder of Pershing Square Tontine Holdings, Ltd., filed derivative litigation against the company’s board, its sponsor and other related companies, contending that the company, a SPAC organized by a billionaire hedge-fund investor, is really an investment company that should be registered under the Investment Company Act of 1940 and that its sponsor is really an investment adviser that should be registered under the Investment Advisers Act of 1940. Had they registered, so the argument goes, they would have been subject to substantial regulation regarding the rights of the SPAC’s shareholders and the form and amount of the SPAC managers’ compensation. According to the complaint, under the ICA, “an Investment Company is an entity whose primary business is investing in securities. And investing in securities is basically the only thing that PSTH has ever done.” The complaint sought “a declaratory judgment, damages, and rescission of contracts whose formation and performance violate” the ICA and IAA. What’s especially notable about the litigation—aside from its novel premise—is that the plaintiff’s lawyers include Yale law professor John Morley and Robert Jackson, an NYU law professor and former SEC Commissioner. Now, a group of 49 major law firms—including Cooley—have issued a joint statement pushing back on the plaintiff’s claims, asserting that there is no legal or factual basis for the allegation that SPACs are investment companies.
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