As previously noted in Pillsbury’s earlier article, one factor that has contributed to the rise in SPACtivity has been the availability to SPACs of certain features unavailable to companies going public through traditional IPOs, most notably the Private Securities Litigation Reform Act (PSLRA) safe harbor for forward-looking statements. On May 21, 2021, the U.S. House Committee on Financial Services released draft legislation to amend the Securities Act of 1933 (the Securities Act) and the Securities Exchange Act of 1934 (the Exchange Act) to exclude all SPACs from the safe harbor. Section 27A of the Securities Act and Section 21E of the Exchange Act currently exclude from the safe harbor forward-looking statements made “… in connection with an offering of securities by a blank check company…” Rule 419 under the Securities Act defines a “blank check company” as “…a development stage company that has no specific business plan or purpose or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies, or other entity or person… ” and is “ … issuing penny stock ...” As the vast majority of SPACs do not issue penny stock or are structured to avoid treatment as a “blank check company” as defined in Rule 419, de-SPAC transactions have generally been viewed as eligible for the PSLRA safe harbor. The draft legislation proposes to delete the term “blank check company,” replacing it with the phrase “… a development stage company that … has indicated that its business plan is to acquire or merge with an unidentified company, entity, or person…” without reference to whether or not the company issues penny stock. As a SPAC is formed for the purpose of acquiring or merging with an unidentified entity, the proposed amendments would likely make the PSLRA safe harbor unavailable for forward-looking statements, such as projections, included in documents soliciting stockholder approval of de-SPAC transactions.
On May 24, 2021, the U.S. House Committee on Financial Services held a hearing to assess the sufficiency of investor protections, transparency, and accountability in connection with non-traditional IPOs, such as de-SPAC transactions and direct listings. While speakers expressed varying views regarding existing inefficiencies in the traditional IPO market and whether or not there should be increased regulation, others noted that any regulatory regime should be fair and consistent, whether a company becomes public through a traditional IPO, a de-SPAC transaction, a direct listing, or other means. Hearings such as these, as well as proposed legislation, may lead the SEC to develop further regulatory changes. Our Public Policy team will continue to monitor congressional developments and proposed legislation and regulatory changes, including engaging directly with key members of Congress.
If the draft legislation is adopted, the safe harbor under the PSLRA will no longer be available for forward-looking statements, including projections, to the extent such statements are included in documents (such as proxy statements) soliciting stockholder approval of de-SPAC transactions. This change may expose SPACs, private companies seeking to become public via a de-SPAC route, sponsors, and management and directors of both entities to increased liability and possibly increased D&O insurance costs. While it is possible some may consider not including projections if the legislation is adopted, since Netsmart, courts in Delaware have looked askance at companies seeking stockholder approval and not sharing projections upon which a board fundamentally relied in recommending a transaction to its stockholders. As a result, boards may face increased risk whether or not projections are included. SPACs, private companies seeking to become public via the de-SPAC route, sponsors, management, board members, financial advisors, and others involved in de-SPAC transactions will want to apply a robust due diligence and review process to any projections included in documents soliciting stockholder approval of de-SPAC transactions—a process that should include carefully drafting and reviewing accompanying disclosures and cautionary statements.