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In a decisive 3-2 vote along party lines, the U.S. Securities and Exchange Commission (SEC) has unveiled stringent measures to enhance oversight of special-purpose acquisition companies (SPACs). The 581-page rule aims to address concerns surrounding conflicts of interest, insider compensation, and various fees tied to SPAC deals.

Heightened Disclosure Requirements

Under the new rules, companies engaging in SPAC offerings must provide increased disclosure on conflicts of interest, insider compensation, and fees related to equity dilution. The SEC also clarified that SPACs will no longer enjoy a legal safe harbor that previously reduced liability for forward-looking projections.

Closing the Gap with Traditional IPOs

SEC Chair Gary Gensler emphasized that the rules are designed to align SPAC oversight with traditional initial public offerings (IPOs). The move seeks to ensure that investors in SPACs receive the same time-tested protections as those in traditional IPOs.

"IPOs are IPOs, and as Aristotle once said, 'treat like cases alike,'" Gensler affirmed.

Stricter SEC Rules Raise The Bar For SPAC Offerings : Dissenting Voices

The SEC's decision faced opposition from Republican commissioners Hester Peirce and Mark Uyeda. They expressed concerns that the new rules could stifle market participants' interest in pursuing IPO alternatives, ultimately leading to fewer public companies.

Uyeda accused the SEC of engaging in "merit regulation," imposing burdensome regulations on SPACs under the guise of discouraging this alternative to traditional IPOs.

Stricter SEC Rules Raise The Bar For SPAC Offerings : The SPAC Boom and Its Fallout

The SEC's move comes nearly two years after regulators initially proposed increased oversight for SPACs. These blank-check companies experienced a surge in popularity around 2020, driven by government stimulus and low-interest rates during the COVID-19 pandemic.

However, the SPAC market has faced challenges, including higher interest rates, a supply glut, and poor post-merger stock performances. Last year, only 31 SPACs went public, raising $4 billion, compared to 613 traditional IPOs that raised $162 billion.

Shared Liability and Financial Projections

In addition to heightened disclosure requirements, the new rules stipulate that target companies involved in SPAC mergers will assume liability for disclosures filed during the merger process, known as "de-SPAC." This shared legal responsibility aims to enhance transparency and accountability.

Moreover, the SEC clarified that financial projections disclosed before SPAC mergers will not benefit from liability protection under the Private Securities Litigation Reform Act of 1995, leveling the playing field with traditional IPOs.

Navigating the Investment Company Act

The SEC rules also provide guidance on determining whether a SPAC meets the definition of an investment company under the Investment Company Act of 1940. This entails additional regulations and disclosure requirements.

Regulators are also offering guidance on whether underwriters of original blank-check IPOs assume liability for potential disclosures during a merger. The SEC's move seeks to address concerns that fewer investment banks would participate in SPACs due to increased liability.

Emphasis on Fairness and Shareholder Interests

The rules require disclosures in "de-SPAC" mergers to indicate whether a board of directors or a similar body has determined that the SPAC merger is in the best interests of shareholders. This includes fairness reports issued by third parties to alleviate concerns about potential unfair incentives benefiting insiders over common shareholders.

Stricter SEC Rules Raise The Bar For SPAC Offerings : Countdown to Implementation

The new SEC rules are set to take effect 125 days after publication in the Federal Register, ushering in a new era of heightened scrutiny for SPAC offerings.