The SEC has proposed a package of new rules and rule amendments[1] regarding special purpose acquisition companies, or SPACs, which SIFMA has commented on.

What are a SPAC and a de-SPAC?

SPACs offer an alternative to traditional IPOs and have been around in various forms for decades.  A SPAC raises capital through an initial public offering (IPO) in order to acquire, by a second transaction, an existing private operating company through what is referred to as a de-SPAC transaction.

SPACs offer private companies an alternative financing arrangement, allowing them to go public outside of a traditional IPO. And, they provide a broader group of investors with an opportunity to access the private markets, which policy makers on both sides of the aisle have supported.

What has the SEC proposed?

The Securities and Exchange Commission has proposed a broad set of rules that would change the requirements regarding SPACs. The proposal includes increased disclosure to investors, which SIFMA supports.  We agree with the SEC that investors require useful and clear information in deciding whether to purchase securities in the SPAC IPO or to trade in the secondary market for post-IPO SPAC securities.  They likewise need such information when making voting, investment and redemption decisions in a SPAC’s subsequent de-SPAC transaction.

However, the proposal also contains a new rule, Rule 140a, that goes beyond the Commission’s statutory authority by treating underwriters in the SPAC IPO as underwriters in the de-SPAC transaction.

What would proposed Rule 140a do?

The SEC, in its proposing release, references concerns about “de-SPAC transactions as a mechanism for private operating companies to access the U.S. public securities markets.”[2]  The Release points to “the lack of a named underwriter in these transactions that would typically perform traditional gatekeeping functions, such as due diligence, and would be subject to liability under Section 11” of the Securities Act of 1933, as amended (the “Securities Act”), for material misstatements or omissions.[3]

To address this perceived problem, the Commission has proposed Rule 140a under the Securities Act.  This entirely new rule would provide the following:

A person who has acted as an underwriter of the securities of a special purpose acquisition company and takes steps to facilitate the de-SPAC transaction, or any related financing transaction, or otherwise participates (directly or indirectly) in the de-SPAC transaction will be deemed to be engaged in the distribution of the securities of the surviving public entity in a de-SPAC transaction within the meaning of section 2(a)(11) of the [Securities] Act.[4]

In effect, proposed Rule 140a treats an underwriter’s involvement in a fully completed distribution (the SPAC IPO) as central to assigning underwriter status months or even years later.  That subsequent underwriter status, and consequent liability, arises in a separate and distinct distribution (the de-SPAC transaction) of the securities of the combined company in a business combination involving the SPAC and one or more operating companies.

What is the impact of proposed Rule 140a?

The proposed rule erases the distinction between the two entirely separate distributions of securities registered under the Securities Act:  proposed Rule 140a treats the SPAC IPO and the later de‑SPAC transaction as one continuous distribution of securities.

It does this despite the facts that:

1. The first distribution is complete months or even years before the second distribution.
2. The two distributions involve fundamentally different securities, different investment decisions, and different purchasers.

The proposed rule also makes the underwriter of the SPAC IPO liable for both distributions to the extent it “takes steps to facilitate the de-SPAC transaction, or any related financing transaction, or otherwise participates (directly or indirectly) in the de-SPAC transaction,” even if that underwriter never participated in any purchase, offer, or sale of the securities for distribution in the later de‑SPAC transaction.

Proposed Rule 140a thus attempts to impose underwriter status on a new group:  banks that the proposed rule would deem to be underwriters of the de‑SPAC transaction under Section 2(a)(11) of the Securities Act, simply because they underwrote the earlier SPAC IPO.

What are SIFMA’s specific objections to the proposed rule?

We believe proposed Rule 140a:

• stretches the statutory definition of “underwriter” in Section 2(a)(11) of the Securities Act beyond its limits, ignoring the statutory text, legislative history and judicial interpretations of its meaning;
• runs afoul of multiple other provisions of the Securities Act, by incorrectly deeming the SPAC IPO and the later de-SPAC transaction to be one single distribution of securities;
• conflicts with the Commission’s proposed Rule 145a, which recognizes that the SPAC IPO and the subsequent de-SPAC transaction are two distinct distributions, subject to distinct registration requirements under the Securities Act;
• conflicts with longstanding policies and practices of the Commission and its Staff, which permit the initial listing of securities on U.S. stock exchanges and allow investors to make purchase, sale and voting decisions without attempting to impose Section 11 underwriter liability on any persons; and
• violates the Administrative Procedure Act (the “APA”), because proposed Rule 140a is an unreasonable interpretation of the unambiguous text of Section 2(a)(11).

The SEC contends that proposed Rule 140a will “clarify” the existing meaning of Section 2(a)(11).[5]  Rather than clarifying, however, the proposed rule has generated confusion among market participants, and distorts the meaning and exceeds the scope of the statute.

While the SEC’s SPAC proposal does contain provisions we support, we disagree on the policy and law regarding proposed expansion of underwriter liability in proposed Rule 140a.  The proposed rule contradicts and disregards extensive legislative and judicial precedent regarding what it means to be a statutory underwriter, exceeding the SEC’s statutory authority.

[1] See Special Purpose Acquisition Companies, Shell Companies, and Projections, SEC Release Nos. 33‑11048, 34‑94546 (March 30, 2022), 87 Fed. Reg. 29458 (May 13, 2022) [hereinafter “Release”].

[2]   Id. at 29461.

[3] Id. at 29462.

[4] Release at 29567 (proposing 17 C.F.R. § 230.140a).

[5] Id. at 29486 (noting that “proposed Rule 140a would clarify that the SPAC IPO underwriter is an underwriter with respect to the distribution that occurs in the de-SPAC transaction” (emphasis added)); see also id. (explaining that “[c]larifying the underwriter status of SPAC IPO underwriters in connection with de-SPAC transactions” will affirm that they are subject to Section 11 liability and thereby motivate them to “help ensure the accuracy of the disclosures in these transactions” (emphasis added)); id. at 29487 (asking whether to “limit underwriter status as clarified by Rule 140a to the entities acting as traditional underwriter in a SPAC IPO” (emphasis added)); id. at 29508 (noting that “proposed Rule 140a clarifies the underwriter status of SPAC IPO underwriters at the de-SPAC transaction stage” (emphasis added)); id. at 29534 (noting that proposed Rule 140a “would clarify the underwriter status of SPAC IPO underwriters in registered de-SPAC transactions” (emphasis added)); id. (noting that proposed Rule 140a “would clarify that a person who has acted as an underwriter in a SPAC IPO and . . . participates (directly or indirectly) in the de-SPAC transaction will be deemed” to be a statutory underwriter in the de-SPAC transaction (emphasis added)); id. at 29536 (discussing expected effects of proposed Rule 140a in “clarifying the application of underwriter liability” (emphasis added)); id. at 29558 (explaining that the proposed rule would “clarify the underwriter status of SPAC IPO underwriters in connection with de-SPAC transactions” (emphasis added)).

Kenneth E. Bentsen, Jr. is president and chief executive officer of the Securities Industry and Financial Markets Association (SIFMA) and chair of the International Council of Securities Associations (ICSA).