New Rules Have SPACs Down, But Not Dead

Soon after the Securities and Exchange Commission announced the final version of new rules to protect investors in special purpose acquisition companies, industry analysts and news outlets all but declared the so-called “blank-check” companies dead.

“The stock market killed it first, but now the SEC has picked up a shovel and buried SPACs for good,” pronounced the Michigan Journal of Economics. Bloomberg Law offered a retrospective detailing the “boom, gloom, and doom” of SPACs. Axios explored the factors that “took down the SPAC boom.”

But are they gone for good, or can SPACs be salvaged?

The final rules adopted on January 24, 2024 “better align the protections investors receive when investing in SPACs with those provided to them when investing in traditional IPOs,” according to SEC Chair Gary Gensler. Gensler has long argued in favor of placing tighter constraints on SPACs. Specifically, the final SPAC rules:

• Expand disclosures to address issues including compensation and merger targets when SPACs begin selling their shares on public exchanges and when they initiate so-called de-SPAC mergers with private companies.
• Increase exposure for SPACs in terms of their accountability for forward-looking statements by nixing safe harbors and layering on more disclosures for projections related to de-SPAC transactions.
• Require that SPAC targets sign off on registration statements for de-SPAC deals, making target companies liable for any false or misleading disclosures.

The SEC’s new SPAC transparency rules take effect July 1, 2024. Nevertheless, some observers have predicted the future still holds promise for the SPAC market. For example, Doug Ellenoff, a partner at the law firm Ellenoff Grossman & Schole LLP, noted in a report this month on Law 360 that his firm expects 25 to 35 new SPAC listings between now and the end of the year.

“There is an emerging pipeline of in-process and [already] filed SPACs that, subject to market conditions, will be hitting the markets this year,” Ellenoff said. “Except for a limited number of highly qualified first-time issuers, the clients that we are working with or that we are aware of are qualified, repeat and serial SPAC sponsors.”

SPACs also got some good news recently courtesy of a Delaware Chancery Court decision dismissing claims challenging “de-SPAC” merger disclosures. In the case, In re Hennessy Capital Acquisition Corp. IV Stockholder Litigation, the Court dismissed a “MultiPlan” claim lawsuit, a type of suit finding fault with disclosures that a SPAC made to shareholders when seeking approval of a de-SPAC transaction. The court found that the claim “would fuel perverse incentives and invite strike suits.”

Finally, the market may be learning what works for SPACs and what doesn’t. According to a new study published in Strategy Science, a company’s honesty in its communications regarding SPAC uncertainty may be key to its success and in earning investors’ trust. Study author Derek Harmon, an assistant professor of strategy at the University of Michigan’s Ross School of Business, said the ability to communicate uncertainty gives SPAC-IPOs a strategic advantage to raise funding.

“What we’re arguing, which is consistent with research in communication studies on studying cancer, studying earthquakes, studying rare weather events, is when you don’t know what you don’t know—if you communicate your uncertainty—it actually makes people trust you more,” Harmon said.