Key takeaways from the SEC’s evolving response to the SPAC boom
13 May, 2021 22:54
source: Singularity Financial
Singularity Financial Hong Kong May 13, 2021 – As the SPAC boom continues, it is important to understand that SEC guidance on SPACs is evolving. The SEC’s statements on SPACs have quickly progressed from a short bulletin educating investors on using SPAC vehicles to take companies public, to specific guidance strongly implying that the SEC staff is carefully scrutinizing disclosures related to SPAC transactions.
On December 10, 2020, the SEC issued an investor bulletin that provided basic information on the SPAC lifecycle and urged potential investors to carefully review the SPAC’s IPO prospectus and SEC filings.
On March 31, 2021, the Division of Corporation Finance addressed restrictions on shell companies applicable to SPACs, identified books and records and internal controls requirements applicable before the business combination, and initial listing standards applicable to companies listed on national securities exchanges, such as the New York Stock Exchange or Nasdaq.
The Acting Chief Accountant Paul Munter, in turn, recognized that “where target companies often encounter complex issues is in the accounting for and reporting of its merger with the SPAC.” In addition to pointing out accounting considerations for the de-SPAC transaction, Munter also flagged issues to consider regarding internal controls, audits, and corporate governance applicable to the merger between the target and the SPAC.
On April 8, 2021, John Coates, the Acting Director of the Division of Corporation Finance, followed up with perhaps the most important SEC statement to date, signaling that the SEC would apply the same level of scrutiny to de-SPAC-related disclosures as it would to traditional IPO disclosures.
Coates warned that the SEC staff was “continuing to look carefully at filings and disclosures by SPACs and their targets.” Interestingly, Coates “focus[ed] on legal liability that attaches to disclosures in the de-SPAC transaction.” He challenged the view that SPACs are subject to lesser securities law liability than traditional IPOs, warning that the Division of Corporation Finance staff would focus on the de-SPAC transaction as the “real IPO” and apply the “full panoply of federal securities law protections.”
On April 12, 2021, Coates teamed up with Munter to issue the SEC’s most recent SPAC statement, this time focusing on potential accounting implications of terms that may be common to warrants issued as part of the units sold in SPAC IPOs. They cautioned that the accounting for warrants requires careful consideration of the specific facts and circumstances for each entity and each contract, and linked specific applicable accounting standards. This statement could indicate that, in addition to focusing on disclosures made during the SPAC process, SEC enforcement is gearing up for investigations focused on SPAC-related accounting.
So what are the key takeaways?
Morrison & Foerster LLP has given out five key takeaways according to its recent report.
1. Pay Careful Attention to Disclosures of Conflicts of Interest
The thread that ties the SEC’s SPAC statements together is that the agency views disclosure of conflicts of interest as vital. Analyzing and disclosing the different economic and business interests of each SPAC participant—from SPAC insiders like the sponsors and management team, to the IPO’s public shareholders, to third parties like underwriters—at each stage of the SPAC lifecycle is critical to litigation and enforcement risk mitigation. Indeed, Coates appears to have signaled his view that the SPAC structure itself has potential conflicts of interest that, without proper mitigation and/or disclosure, may be a source of liability risk under the federal and state securities laws.
2. Ensure the SPAC Meets SEC Shell Company and Stock Exchange Listing Requirements
The March 31, 2021 Division of Corporation Finance guidance makes it clear that SPAC management teams must be aware of shell company restrictions and SEC filing requirements, books and records and internal controls requirements, and initial listing standards of the national securities exchanges, such as the New York Stock Exchange and Nasdaq. Given that the SPAC is a newly created shell with no operating history, strictly following these requirements can be an efficient way to mitigate litigation risk.
3. Approach De-SPAC Disclosures Like Traditional IPO Disclosures
Coates’ April 8, 2021 statement could not be clearer that, as Acting Director of the Division of Corporation Finance, he views the de-SPAC transaction as the “real IPO” and expects robust de-SPAC disclosures. In addition to focusing on disclosures related to conflicts of interest, it will be prudent to ensure that the target company’s financial statements and internal controls over financial reporting meet all SEC requirements. Working with legal, accounting, and financial advisors on de-SPAC disclosures will be key, as the target company actually has operations and an operating and financial history, unlike the newly created SPAC.
4. Pay Attention to Accounting
Munter’s statements stress the importance of the combined public company having in place both the right people and processes to produce high quality financial reporting that meets SEC rules and regulations. His April 12, 2021 joint statement with Coates provides a guide for how to account for warrants. As many of these accounting considerations involve significant judgment, engaging and working closely with a top notch and independent public accounting firm is key.
5. Analyze Litigation Risk at Each Stage of the SPAC Lifecycle
SPACs have the attention of the SEC. Coates’ April 8, 2021 statement is best viewed as a detailed road map for future SEC enforcement actions and private class actions (some of which have already been filed). Coates has signaled that the SEC staff will scrutinize disclosures at every stage of the SPAC’s lifecycle. Analyzing litigation and regulatory enforcement risk at each stage of the SPAC lifecycle can help SPAC participants prepare for, and potentially minimize the risk and expense of, regulatory scrutiny and lawsuits.