John Coates, Acting Director of the SEC’s Division of Corporation Finance, recently issued a statement addressing certain liability risks under the U.S. securities laws that should be carefully considered by those participating in the endeavors of a special purpose acquisition company (SPAC). In particular, the statement addresses liability risk related to “de-SPAC” transactions—business combinations in which the SPAC, the private company to be acquired (the target), or a new shell company issue equity to target owners, and sometimes to other investors.
The SEC staff is looking carefully at filings and disclosures by SPACs and their private targets, noting that investors need clear disclosures to make informed investment and voting decisions. In the initial offering by a SPAC, when the shell company is first raising funds to finance its acquisition of the target, certain disclosures are made, such as those about sponsors, financial arrangements and the SPAC structure. In the de-SPAC transaction, the private operating company engages in its initial public offering to investors—many of whom may not be the investors in the initial SPAC. The information, including financial statements, relevant to evaluating the investment changes dramatically in the de-SPAC transaction because the private target company has operations different from those of the SPAC.
Some people believe that the Private Securities Litigation Reform Act (PSLRA) provides safe harbor for forward-looking statements in the context of de-SPAC transactions. However, the PSLRA safe harbor excludes initial public offerings, which may include de-SPAC transactions. Further, the safe harbor only applies in private litigation, and does not prevent the SEC from taking actions to enforce applicable federal securities laws.
Even if the safe harbor applies, its procedural and substantive provisions do not protect against false or misleading statements made with actual knowledge that the statement was false or misleading. Any material misstatement in or omission from an effective Securities Act registration statement as part of a de-SPAC business combination is subject to Securities Act Section 11. Material misstatements or omissions with other filings, such as proxy solicitations or tender offers, also are subject to liability under the Exchange Act. For example, such liability could apply to a company that only discloses favorable projections and omits disclosure of equally reliable but unfavorable projections.
Investors should have access to the disclosures needed to make informed investment and voting decisions. Throughout the de-SPAC process, federal securities law protections (including those applicable to traditional initial public offerings) apply to investors. Risk drives choices about what information to present, and those involved in SPAC transactions should clearly understand the related liability risks.