U.S. Securities and Exchange Commission tightens the disclosure and investor protection norms for IPOs through SPAC

The U.S. Securities and Exchange Commission has issued rules to enhance disclosures and provide additional investor protection in IPOs by special purpose acquisition companies (SPACs) and in subsequent business combination transactions between SPACs and target companies (de-SPAC transactions).

Broadly, SPACs are shell companies organized and managed by a sponsor for the purpose of merging with or acquiring one or more unidentified private operating companies, commonly known as a de-SPAC transaction, within a certain time frame. While structured as an M&A transaction, the de-SPAC transaction also is the functional equivalent of the private target company’s IPO.

The final rules, among other things provide for:

(a) Additional disclosures about SPAC sponsor compensation, conflicts of interest, dilution, the target company, and other information that is important to investors in SPAC IPOs and de-SPAC transactions;

(b) In certain situations, the target company in a de-SPAC transaction to be a co-registrant with the SPAC (or another shell company) and thus assume responsibility for the disclosures in the registration statement filed in connection with the de-SPAC transaction;

(c) Deem any business combination transaction involving a reporting shell company, including a SPAC, to be a sale of securities to the reporting shell company’s shareholders; and

(d) Better align the regulatory treatment of projections in de-SPAC transactions with that in traditional IPOs under the Private Securities Litigation Reform Act of 1995 (PSLRA).

Recently, U.S. Securities and Exchange Commission has charged Northern Star SPAC for Material Misrepresentations in its IPO-Related Disclosures as it had stated that neither the company, nor anyone acting on its behalf, had initiated any substantive discussions with any potential target companies prior to the IPO. However, the order finds that Northern Star had engaged in discussions with a target company and that company’s controlling shareholder in connection with a potential SPAC business combination dating back to December 2020 and continuing for several weeks. Furthermore, according to the SEC’s order, after announcing a merger agreement with the target company, Northern Star did not adequately disclose its interactions with the target company in its Form S-4 filings.

The U.S. Securities and Exchange Commission therefore found Northern Star SPAC by virtue of the same violated Section 17(a)(2) of the Securities Act, 1933 and thereby ordered cease and desist and penalty of $1.5 million.

A copy of the final U.S. Securities and Exchange Commission Rules is accessible at: https://www.sec.gov/news/press-release/2024-8

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