Guidelines for Control or Governance
SPACs brace for tougher disclosure rules as US regulators tighten the screws
Special Purpose Acquisition Companies (SPACs) saw a surge in popularity in 2021, accounting for the majority of initial public offerings (IPOs). However, their pace has slowed since.
In the ever-evolving landscape of financial regulations, SPACs face a new wave of disclosure requirements from the Securities and Exchange Commission (SEC). Here's a breakdown of the critical developments in 2022 and their implications:
- SEC Proposed Rules (March 2022)Though finalized in 2024, the SEC's proposals of March 2022 laid the groundwork for stricter disclosures in several areas:
- Conflict-of-interest disclosures for sponsors, directors, and officers
- Transparent dilution and compensation details, including breakdowns of sponsor warrants and fees
- Scrutiny of financial projections during DeSPAC mergers, urging realistic forecasts
- Inflation Reduction Act (August 2022)Though not a direct disclosure mandate, the 1% excise tax on stock buybacks created indirect reporting responsibilities for SPACs:
- Tax impact disclosures for SPAC redemptions and liquidations
- Disclosures about jurisdictional shifts as SPACs moved to offshore locations to avoid tax risks
- Pre-2024 Compliance PracticesFrom 2022, SPACs clung to existing requirements:
- Detailed S-1/F-1 filings on sponsor economics, target sectors, and governance
- Adherence to Sarbanes-Oxley compliance with independent board majorities and audit committees
- Later Adoption (2024 SEC Rules)The 2024 rules expanded upon 2022 proposals by:
- Eliminating a safe harbor for forward-looking statements in DeSPAC transactions
- Mandating board voting disclosures and dilution impacts from compensation
While the initial preparatory steps were taken in 2022, the most significant disclosures only came into effect in 2024 under the new framework. The SEC's focus going forward remains on clarifying sponsor compensation and mitigating investor dilution risks. As we move beyond 2022, SPACs must navigate these complexities to keep up with the changing tide of financial regulations.
- With the 2024 SEC rules, crypto-focused SPACs may face increased scrutiny due to the elimination of a safe harbor for forward-looking statements in DeSPAC transactions.
- As the pace of IPOs slows, SPAC sponsors are required to make disclosure about their compensation and potential dilution effects as per the transparency proposals made by the SEC in March 2022.
- In light of the Inflation Reduction Act passed in August 2022, SPACs planning for redemptions or liquidations will need to make disclosures regarding the tax impact of such events.
- As business operations intensify, SPACs might consider revising their cheques to include requisite disclosures necessary under the revised SEC regulations implemented in 2024.
