April 22, 2021
Special-purpose acquisition companies, or SPACs, have recently surged in popularity and the SEC is paying attention. These vehicles are used to help private companies go public via a merger, or “de-SPAC,” and carry unique compliance risks. In past decades, SPACs were uncommon in the marketplace but have become increasingly prevalent in recent years.
Before utilizing SPACs in an investment strategy, there are a variety of regulatory topics a firm should consider when selecting investments and when drafting SPAC compliance policies and procedures. The SEC has recently released a series of guidance statements to help firms navigate the increasing presence of SPACs in the marketplace. Below is a summary of this guidance to help you locate the latest regulatory information.
RECENT SEC SPAC GUIDANCE
Regulators warn that SPACs are not as safe-harbor friendly as some may purport and that claiming SPACs provide reduced liability exposure can be misleading. The Private Securities Litigation Reform Act and other related laws were written prior to the current wave of SPACs and do not address all liability concerns of these securities, leaving room for certain regulatory concerns. The SEC suggests that investor disclosures are paid proper attention in order to help investors make fully informed investment and voting decisions and to properly calculate and provide forward-looking information.
SEC staff have published a list of considerations for companies before a SPAC merger takes place. The guidance discusses shell company restrictions, including key filing requirements; books and records and internal controls; and requirements for listing a SPAC on national securities exchanges.
For companies merging with a SPAC, the SEC emphasizes that a merger can create complex financial reporting issues for the target company. The guidance provides in-depth information regarding considerations for marketing, financial reporting, corporate governance, audit committees, auditors, and internal controls.
Concerning warrants issued by SPACs, the SEC provides guidance around the specific accounting and financial reporting considerations for these products. The guidance evaluates indexation, tender offer provisions, and registrant filing considerations for warrants issued by SPACs, with a focus on requirements of the U.S. Generally Accepted Accounting Principles (GAAP).
WHAT DOES THIS MEAN FOR ME?
Becoming familiar with regulatory requirements related to SPACs can help your firm in its due diligence process when selecting investments. If your firm notices through due diligence that a SPAC is not adhering to the SEC regulations and guidance listed above, investing in the company may cause compliance risks for your firm down the road.
The SEC is likely to release more investment adviser-specific guidance to address emerging compliance concerns with these products. Fairview will continue to update you with the SEC’s latest SPAC guidance. Reach out to Fairview if you have questions about SPAC-related compliance concerns or current SEC regulations.