The Securities and Exchange Commission (SEC) has released final rules aimed at special-purpose acquisition companies (SPACs), introducing provisions that transform SPAC-related liability and litigation landscape. This regulation broadens the potential for Securities Act liability to a wider array of market participants. Consequently, SPACs, target companies, and their executives are urged to include detailed and tailored disclosures, especially concerning forward-looking statements like financial projections.
These new rules also shed light on the role and responsibilities of financial advisers involved in SPAC transactions. Advisers may now face underwriter due diligence obligations and potential liability under Section 11 of the Securities Act for any inaccuracies or misleading statements. Significantly, the rules have amended the definition of a blank check company under the Private Securities Litigation Reform Act (PSLRA), eliminating the safe harbor protection for forward-looking statements in SPAC contexts. Such statements can only rely on common law protections like the bespeaks caution doctrine, which requires sufficiently cautionary language to mitigate misleading effects.
The SEC’s rules also introduce significant implications for target companies in SPAC transactions by categorizing them as issuers under Section 2(a)(4) of the Securities Act and requiring them to be co-registrants on the transaction-related statement. This makes target companies and their principal executive officers, as well as a majority of the board, subject to Section 11 liability for material misstatements or omissions in registration statements. While common defenses like the due diligence defense remain available, plaintiffs must still satisfy stringent procedural requisites to establish a claim.
Furthermore, the SEC has clarified that financial participants in SPAC transactions could function as underwriters, thereby falling under Section 11 liability. This interpretation hinges on the broad and flexible reading of Section 2(a)(11) of the Securities Act and implies that any entity involved in the distribution of securities to the public in a SPAC transaction could be seen as an underwriter. As a result, such participants must conduct thorough due diligence to avoid potential legal exposure.
New requirements also mandate substantial disclosures by SPACs concerning sponsor compensation, conflicts of interest, and the effects of stock dilution. These must be prominently displayed early in the registration statement or on its cover, potentially affecting related litigations, such as those in Delaware, about inadequate “net cash per share” disclosures in de-SPAC transactions.
For a more detailed review of these developments, legal professionals can refer to the comprehensive analysis provided here.