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SEC Proposes Rules to Enhance Disclosure and Investor Protection Relating to Special Purpose Acquisition Companies, Shell Companies, and Projections


On March 30, 2022, the Securities and Exchange Commission proposed new rules and amendments to enhance disclosure and investor protection in initial public offerings by special purpose acquisition companies (SPACs) and in business combination transactions involving shell companies, such as SPACs, and private operating companies.[1] The proposed rules have principally addressed the following: In initial public offerings by SPACs, the new rules require disclosure with respect to, among other things, compensation paid to SPAC sponsors, conflicts of interest, and sources of dilution.[2] They also would require additional disclosures regarding business combination transactions between SPACs and private operating companies, including disclosures relating to the fairness of these transactions.[3] The proposed rules would deem any business combination transaction involving a reporting shell company, including a SPAC, to involve a sale of securities to the reporting shell company’s shareholders and would amend a number of financial statement requirements applicable to transactions involving shell companies.[4] The rules would more closely align the required financial statements of private operating companies in transactions involving shell companies with those required in registration statements for an initial public offering. The new rules update the guidance regarding the use of projections in Securities and Exchange Commission filings as well as require additional disclosure regarding projections when used in connection with business combination transactions involving SPACs.[5] Such disclosure will allow investors to better assess the reliability of the projections and whether they have a reasonable basis. The proposed rules include a new safe harbor under the Investment Company Act of 1940 that if a SPAC satisfies certain conditions that limit its duration, asset composition, business purpose, and activities, it would not be an investment company and therefore would not be subject to regulation under that Act.[6] If adopted, the proposed new rules would have a significant impact on the current SPAC market. [1] [2]-[6]

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