Special Purpose Acquisition Companies, Shell Companies, and Projections

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rules; guidance.

SUMMARY:

The Securities and Exchange Commission (“Commission”) is adopting rules intended to enhance investor protections in initial public offerings by special purpose acquisition companies (commonly known as SPACs) and in subsequent business combination transactions between SPACs and private operating companies (commonly known as de-SPAC transactions). Specifically, we are adopting disclosure requirements with respect to, among other things, compensation paid to sponsors, conflicts of interest, dilution, and the determination, if any, of the board of directors (or similar governing body) of a SPAC regarding whether a de-SPAC transaction is advisable and in the best interests of the SPAC and its security holders. We are adopting rules that require a minimum dissemination period for the distribution of security holder communication materials in connection with de-SPAC transactions. We are adopting rules that require the re-determination of smaller reporting company (“SRC”) status in connection with de-SPAC transactions. We are also adopting rules that address the scope of the safe harbor for forward-looking statements under the Private Securities Litigation Reform Act of 1995. Further, we are adopting a rule that would deem any business combination transaction involving a reporting shell company, including a SPAC, to be a sale of securities to the reporting shell company's shareholders and are adopting amendments to a number of financial statement requirements applicable to transactions involving shell companies. In addition, we are providing guidance on the status of potential underwriters in de-SPAC transactions and adopting updates to our guidance regarding the use of projections in Commission filings as well as requiring additional disclosure regarding projections when used in connection with business combination transactions involving SPACs. Finally, we are providing guidance for SPACs to consider when analyzing their status under the Investment Company Act of 1940.

DATES:

Effective date: The final rules are effective on July 1, 2024.

Compliance date: The compliance date for the final rules, other than 17 CFR 229.1610, is July 1, 2024. The compliance date for 17 CFR 229.1610 is June 30, 2025.

FOR FURTHER INFORMATION CONTACT:

Mark Saltzburg, Office of Rulemaking, Division of Corporation Finance, at (202) 551–3430; with respect to 17 CFR 230.145a (Rule 145a under the Securities Act of 1933), the Office of Chief Counsel, Division of Corporation Finance, at (202) 551–3500; with respect to 17 CFR 210.15–01 (Rule 15–01 of Regulation S–X), Ryan Milne, Office of Chief Accountant, Division of Corporation Finance, at (202) 551–3400; with respect to amendments relating to projections disclosure and tender offer rules, Daniel Duchovny, Office of Mergers & Acquisitions, Division of Corporation Finance, at (202) 551–3440; and with respect to guidance under the Investment Company Act of 1940, Rochelle Kauffman Plesset, Seth Davis, or Taylor Evenson, Senior Counsels; or Lisa Reid Ragen, Branch Chief, Chief Counsel's Office, Division of Investment Management, at (202) 551–6825; U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

The Commission is adopting new 17 CFR 210.15–01, new 17 CFR 229.1601 through 229.1610 (Item 1600 series of Regulation S–K), and new 17 CFR 230.145a. We are also adopting amendments to:

Table of Contents

I. Introduction

II. New Subpart 1600 of Regulation S–K

A. Definitions

1. Proposed Definition: “De-SPAC Transaction”

2. Comments: Definition of “De-SPAC Transaction”

3. Final Definition: “De-SPAC Transaction”

4. Proposed Definition: “Special Purpose Acquisition Company (SPAC)”

5. Comments: Definition of “Special Purpose Acquisition Company (SPAC)”

6. Final Definition: “Special Purpose Acquisition Company (SPAC)”

7. Proposed Definition: “SPAC Sponsor”

8. Comments: Definition of “SPAC Sponsor”

9. Final Definition: “SPAC Sponsor”

10. Proposed Definition: “Target Company”

11. Comments: Definition of “Target Company”

12. Final Definition: “Target Company”

B. Sponsors

1. Proposed Rules

2. Comments

3. Final Rules

C. Conflicts of Interest

1. Proposed Rules

2. Comments

3. Final Rules

D. Dilution

1. Proposed Rules

2. Comments

3. Final Rules

E. Prospectus Cover Page and Prospectus Summary Disclosure

1. Proposed Rules

2. Comments

3. Final Rules

F. De-SPAC Transactions: Background, Reasons, Terms, and Effects

1. Proposed Item 1605

2. Comments: Item 1605

3. Final Item 1605

G. Board Determination About the De-SPAC Transaction; Reports, Opinions, Appraisals, and Negotiations

1. Proposed Item 1606(a)

2. Comments: Item 1606(a)

3. Final Item 1606(a)

4. Proposed Item 1606(b)

5. Comments: Item 1606(b)

6. Final Item 1606(b)

7. Proposed Items 1606(c) Through (e)

8. Comments: Items 1606(c) Through (e)

9. Final Items 1606(c) Through (e)

10. Proposed Item 1607

11. Comments: Item 1607

12. Final Item 1607

H. Tender Offer Filing Obligations

1. Proposed Item 1608

2. Comments: Item 1608

3. Final Item 1608

I. Structured Data Requirement

1. Proposed Item 1610

2. Comments

3. Final Item 1610 and Tagging Compliance Date

III. Disclosures and Liability in De-SPAC Transactions

A. Non-Financial Disclosures in De-SPAC Disclosure Documents

1. Proposed Rules

2. Comments

3. Final Rules

B. Minimum Dissemination Period

1. Proposed Rules

2. Comments

3. Final Rules

C. Private Operating Company as Co-Registrant

1. Proposed Rules

2. Comments

3. Final Rules

D. Re-Determination of Smaller Reporting Company (SRC) Status

1. Proposed Rules

2. Comments

3. Final Rules and Guidance

E. PSLRA Safe Harbor

1. Proposed Rules

2. Comments

3. Final Rules

F. Underwriter Status and Liability in Securities Transactions

1. Proposed Rule

2. Comments

3. Declining To Adopt Proposed Rule 140a; Commission Guidance on Underwriter Status in De-SPAC Transactions

IV. Business Combinations Involving Shell Companies

A. Shell Company Business Combinations and the Securities Act of 1933

1. Proposed Rule

2. Comments

3. Final Rule

B. Financial Statement Requirements in Business Combination Transactions Involving Shell Companies

1. Proposed Rule 15–01(a), Rule 1–02(d), and Form Instructions: Audit Requirements

2. Comments: Rule 15–01(a), Rule 1–02(d), and Form Instructions: Audit Requirements

3. Final Rule 15–01(a), Rule 1–02(d), and Form Instructions: Audit Requirements

4. Proposed Rule 15–01(b): Number of Years of Financial Statements

5. Comments: Rule 15–01(b): Number of Years of Financial Statements

6. Final Rule 15–01(b): Number of Years of Financial Statements

7. Proposed Rule 15–01(c): Age of Financial Statements

8. Comments: Rule 15–01(c): Age of Financial Statements

9. Final Rule 15–01(c): Age of Financial Statements

10. Proposed Rules: 15–01(d), 1–02(w)(1), 3–05(b)(4)(ii), 3–14(b)(3)(ii): Acquisition of a Business or Real Estate Operation by a Predecessor

11. Comments: Rules 15–01(d), 1–02(w)(1), 3–05(b)(4)(ii), 3–14(b)(3)(ii): Acquisition of a Business or Real Estate Operation by a Predecessor

12. Final Rules 15–01(d), 1–02(w)(1), 3–05(b)(4)(ii), 3–14(b)(3)(ii): Acquisition of a Business or Real Estate Operation by a Predecessor

13. Proposed Rule 15–01(e): Financial Statements of a Shell Company Registrant After the Combination With Predecessor

14. Comments: Rule 15–01(e): Financial Statements of a Shell Company Registrant After the Combination With Predecessor

15. Final Rule 15–01(e): Financial Statements of a Shell Company Registrant After the Combination With Predecessor

16. Proposed Rule 11–01(d)

17. Comments: Rule 11–01(d)

18. Decline to Adopt Rule 11–01(d)

19. Proposed Item 2.01(f) of Form 8–K

20. Comments: Item 2.01(f) of Form 8–K

21. Final Item 2.01(f) of Form 8–K

22. Proposed Rules 3–01, 8–02, 10–01(a)(1): Balance Sheets of Predecessors

23. Comments: Rules 3–01, 8–02, 10–01(a)(1): Balance Sheets of Predecessors

24. Final Rules 3–01, 8–02, 10–01(a)(1): Balance Sheets of Predecessors

25. Other Shell Company Matters

V. Enhanced Projections Disclosure

A. Proposed Items 10(b) and 1609 of Regulation S–K

1. Proposed Rules

2. Comments

3. Final Rules

VI. The Status of SPACs Under the Investment Company Act

A. Background

B. SPAC Activities

1. The Nature of SPAC Assets and Income

2. Management Activities

3. Duration

4. Holding Out

5. Merging With an Investment Company

C. Conclusion

VII. Other Matters

VIII. Economic Analysis

A. Baseline and Affected Parties

1. SPAC Initial Public Offerings

2. De-SPAC Transactions

3. Blank Check Companies

4. Shell Company Business Combinations

B. Benefits and Costs of the Adopted Rules

1. Disclosure-Related Rules

2. Liability-Related Rules

3. Shell Company-Related Rules

4. Enhanced Projections Disclosure (Amendments to Item 10(b) of Regulation S–K)

C. Effects on Efficiency, Competition, and Capital Formation

1. Efficiency

2. Competition

3. Capital Formation

D. Reasonable Alternatives

1. Disclosure-Related Rules

2. PSLRA Safe Harbor Guidance

3. Expanding Disclosure in Reporting Shell Company Business Combinations

4. Enhanced Projections Disclosure

IX. Paperwork Reduction Act

A. Summary of the Collections of Information

B. Estimates of the Effects of the Final Rules on the Collections of Information

C. Incremental and Aggregate Burden and Cost Estimates

1. Current Inventory Update To Reflect $600 Per Hour Rather Than $400 Per Hour Outside Professional Costs Rate

2. PRA Burden and Cost Estimates Resulting From the Final Rules

X. Final Regulatory Flexibility Analysis

A. Need for, and Objectives of, the Final Rules

B. Significant Issues Raised by Public Comments

C. Small Entities Subject to the Final Rules

D. Projected Reporting, Recordkeeping, and Other Compliance Requirements

E. Duplicative, Overlapping or Conflicting Federal Rules

F. Agency Action To Minimize Effect on Small Entities

Statutory Authority

I. Introduction

Special purpose acquisition companies, or SPACs, first began to emerge in the 1990s as an alternative to blank check companies after blank check companies began to be regulated more strictly pursuant to 17 CFR 230.419 (“Rule 419” under the Securities Act of 1933 (“Securities Act”)), a rule the Commission adopted following the enactment of the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (“Penny Stock Reform Act”). SPACs are shell companies organized and managed by a sponsor for the purpose of merging with or acquiring one or more unidentified private operating companies, commonly known as a de-SPAC transaction, within a certain time frame. The de-SPAC transaction is a hybrid transaction that contains elements of both an initial public offering (“IPO”) and a merger and acquisition (“M&A”) transaction. While structured as an M&A transaction, the de-SPAC transaction also is the functional equivalent of the private target company's IPO, because it results in the target company becoming part of a combined company that is a reporting company and provides the private target company with access to cash proceeds that the SPAC had previously raised from the public. As part of this process, the shareholders of the SPAC go from owning shares in a shell company to owning shares in a combined company that conducts the business of the private target. As a result, the de-SPAC transaction implicates disclosure and liability concerns associated with both IPOs and M&A transactions. Additionally, parties involved in the SPAC process, such as the SPAC sponsor, may have incentives to consummate a de-SPAC transaction that are not present in a traditional IPO or M&A transaction. Further, as discussed in the Proposing Release, the shareholders and management of a private operating company may believe there to be certain advantages of combining with a SPAC compared with conducting an underwritten IPO.

To have the necessary context for the concerns unique to SPACs and de-SPAC transactions, it is critical to understand the structure and lifecycle of a SPAC. Once formed, a SPAC will conduct its IPO in the form of a firm commitment underwritten IPO of $5 million or more in units consisting of redeemable shares and of warrants. The underwriting fees for a SPAC IPO typically approximate 5% to 5.5% of the offering proceeds, and a significant portion of those fees (around 3% of the IPO proceeds) are conditioned on the completion of a de-SPAC transaction. The SPAC sponsor is usually compensated through a “promote” or “founder's shares”— i.e., discounted SPAC shares received prior to the SPAC's IPO that generally only have value if a de-SPAC transaction occurs.

Following its IPO, a SPAC places all or substantially all of the IPO proceeds into a trust or escrow account. The SPAC typically registers its shares and warrants under section 12(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and lists the units (typically consisting of a common share and a fraction of a warrant) for trading on a national securities exchange.

Next, the SPAC seeks to identify a target company for a de-SPAC transaction within the time frame specified in its governing documents. If the SPAC does not complete a de-SPAC transaction within that time frame, it may seek an extension (often requiring approval from its shareholders) or dissolve and liquidate. If the SPAC enters into a business combination agreement with a target company, the SPAC files a Form 8–K (or Form 6–K if the SPAC is a foreign private issuer (“FPI”) that reports on Form 20–F) announcing the transaction that includes certain information on the material terms of the business combination agreement. The parties structure the de-SPAC transaction in different forms that may have tax or other regulatory advantages. Prior to the closing of the de-SPAC transaction, the shareholders of the SPAC typically have the opportunity to either: (1) require the SPAC to redeem their shares prior to the de-SPAC transaction and receive a pro rata share of the amount in the IPO proceeds and related assets subject to the trust or escrow arrangements (including interest thereon and commonly less amounts released to pay income and franchise taxes), or (2) remain a shareholder of the surviving company after the business combination. To offset shareholder redemptions or to fund larger de-SPAC transactions, SPACs often conduct additional private capital-raising transactions, typically in the form of private investment in public equity (PIPE) transactions.

Regardless of its form, a de-SPAC transaction often is accompanied by the need to attain shareholder approval for certain items ( e.g., amendments to the governing documents of the SPAC, or authorization of additional securities for issuance), and, in such cases, a SPAC provides its shareholders with a proxy statement on Schedule 14A or an information statement on Schedule 14C. If the SPAC, the target company, or a holding company must register the offer and sale of its securities to be issued in the de-SPAC transaction, the entity typically files a registration statement on Form S–4 or F–4 to do so. If no registration statement or proxy or information statement is required, the SPAC may disseminate a tender offer statement ( i.e., a Schedule TO) for the redemption offer to its security holders with information about the target company.

Finally, after the completion of the de-SPAC transaction, the combined company must file a Form 8–K within four business days that includes information about the target company equivalent to the information that a new reporting company would be required to provide when filing a Form 10 under the Exchange Act.

In recent years, the U.S. securities market experienced a significant increase in the number of SPAC IPOs, as shown in Table 1 below.

As shown above in Table 1, SPAC IPOs represent a significant share of the U.S. IPO market in recent years. While we recognize that, like overall IPO activity, the SPAC IPO market has declined recently, SPAC IPOs nonetheless constituted over half of all U.S. IPOs respectively in 2020, 2021, and 2022, and constituted 43% of all U.S. IPOs in 2023. The number of de-SPAC transactions has also been significant relative to the number of non-SPAC U.S. IPOs.

A similar trend has occurred when considering total proceeds for SPAC IPOs as a percentage of total proceeds raised in all U.S. IPOs over this period. SPAC IPO proceeds represented 46%, 49%, and 59% of total proceeds raised in all U.S. IPOs respectively in 2020, 2021, and 2022. This percentage declined to 15% in 2023.

During the years of increase in SPAC IPOs, many market observers raised concerns about various aspects of the SPAC structure and the hybrid nature of the de-SPAC transaction. Among other things, commentators expressed concerns about SPAC sponsor compensation and other costs that can have a dilutive effect on a SPAC's shareholders, potential conflicts of interest in the SPAC structure and de-SPAC transactions ( e.g., the SPAC sponsors' compensation being contingent on the completion of the de-SPAC transaction could lead sponsors to enter into de-SPAC transactions that are unfavorable to unaffiliated shareholders), and SPAC governing documents and stock exchange listing rules under which SPAC shareholders can vote in favor of a proposed de-SPAC transaction yet redeem their shares prior to the closing of the transaction.

Some commentators have expressed concerns regarding the adequacy of the disclosures provided to investors in SPAC IPOs and de-SPAC transactions in terms of explaining the potential risks and effects for investors related to these transactions and the potential benefits for the SPAC sponsor and other affiliates of the SPAC. For example, even though the de-SPAC transaction essentially serves as the IPO of the target company in the form of an M&A transaction, investors may not receive the same information about the target company as they would in a registration statement for a traditional IPO, because a filing for an M&A transaction has different disclosure requirements.

There are also additional disclosure and liability concerns that stem from the hybrid nature of the de-SPAC transaction. For example, some commentators have criticized the use of projections in de-SPAC transactions that, in their view, have appeared to be unreasonable, unfounded, or potentially misleading, particularly where the target company is an early stage company with no or limited sales, products, and/or operations and have expressed concern that some SPACs have taken the position that the Private Securities Litigation Reform Act of 1995 (“PSLRA”) safe harbor applies to forward-looking statements made by SPACs in connection with de-SPAC transactions. The target company also is often not required to sign a registration statement filed for a de-SPAC transaction (except in transaction structures where the target company survives the de-SPAC transaction) and, by extension, would not take on section 11 liability even though, similar to a traditional IPO, reliable information about the business of the target company is critical to investors when deciding whether to approve the transaction and to invest in the combined company through their redemption decision. Finally, commentators have noted that, unlike a traditional IPO, a registered de-SPAC transaction lacks a named underwriter that would typically perform traditional gatekeeping functions, such as due diligence on the target company, and would be subject to liability under section 11 of the Securities Act for the registration statement.

In response to a number of these and other concerns, the Commission staff provided guidance relating to SPACs on five occasions between December 2020 and April 2021. Then, in March 2022, the Commission proposed new rules and rule amendments to enhance existing disclosure requirements and investor protections in SPAC IPOs and in de-SPAC transactions. On July 13, 2022, the U.S. Securities and Exchange Commission Small Business Capital Formation Advisory Committee (“Small Business Capital Formation Advisory Committee”) issued recommendations related to this proposal.

While we recognize that the number of SPAC IPOs has declined since 2021, the investor protection concerns regarding SPACs and the hybrid nature of the de-SPAC transaction identified in the Proposing Release do not depend on market fluctuations. In addition, as noted above, notwithstanding the recent decline, SPAC transactions have become a much larger part of the U.S. securities markets over the last decade and could continue to grow as macroeconomic and other factors change. Accordingly, after considering comments received on the proposal, we are adopting final rules that will provide for greater transparency and more robust investor protections in SPAC IPOs and de-SPAC transactions. The final rules will enhance the completeness, usefulness, and comparability of the disclosures provided by SPACs and target companies at the SPAC IPO and de-SPAC transaction stages and will provide other important protections for investors in this market, all of which may promote market efficiency. Further, given that the de-SPAC transaction essentially is an IPO of the target company in the form of an M&A transaction, the final rules also will ensure that investors receive similar information about the target company and similar protections as in a traditional IPO in connection with the de-SPAC transaction. The final rules also will provide investors with information about, and protections with respect to, the M&A elements of de-SPAC transactions, particularly regarding the transaction approval process and conflicts of interest.

To these ends, we are adopting new subpart 229.1600 of 17 CFR part 229 (“subpart 1600” of Regulation S–K) that sets forth specialized disclosure requirements for SPAC IPOs and de-SPAC transactions. New subpart 1600 contains provisions that, among other things:

• Require additional disclosures about the SPAC sponsor, potential conflicts of interest, and dilution;
• Require certain disclosures on the prospectus outside front cover page and in the prospectus summary of registration statements filed in connection with SPAC IPOs and de-SPAC transactions; and
• Require additional disclosures regarding de-SPAC transactions, including (1) if the law of the jurisdiction in which the SPAC is organized requires its board of directors (or similar governing body) to determine whether the de-SPAC transaction is advisable and in the best interests of the SPAC and its shareholders, or otherwise make any comparable determination, disclosure of that determination, and (2) if the SPAC or SPAC sponsor has received any outside report, opinion, or appraisal materially relating to the de-SPAC transaction, certain disclosures concerning the report, opinion, or appraisal.

In addition, we are adopting amendments to provide procedural protections and to align the disclosures provided to investors, as well as the legal obligations of companies, in de-SPAC transactions more closely with those in traditional IPOs. Specifically, we are adopting final rules that:

• Amend the registration statement forms and schedules filed in connection with de-SPAC transactions to require additional disclosures about the target company;
• Provide that a target company in a registered de-SPAC transaction is a co-registrant on the registration statement used for the de-SPAC transaction such that the target company will be subject to liability under section 11 of the Securities Act;
• Make the PSLRA safe harbor unavailable to SPACs (including with respect to projections of target companies seeking to access the public markets through a de-SPAC transaction), by defining “blank check company” to encompass SPACs (and other companies that would be blank check companies but for the fact that they do not sell penny stock); and
• Require re-determination of SRC status following a de-SPAC transaction.

We also are providing guidance regarding potential underwriter status under section 2(a)(11) of the Securities Act in de-SPAC transactions.

In addition, to provide reporting shell company shareholders, including SPAC shareholders, with more consistent Securities Act liability protections regardless of transaction structure, we are adopting new Rule 145a that specifies that any business combination of a reporting shell company, other than a business combination related shell company, involving another entity that is not a shell company involves a sale of securities to the reporting shell company's shareholders. We are also adopting new 17 CFR 210.15–01 (“Article 15” of Regulation S–X), as well as related amendments, to more closely align the financial statement reporting requirements in business combinations involving a shell company and a target company with those in traditional IPOs.

With respect to effectiveness and compliance with the final rules, in response to commenters, we have set an extended effective date for the new rules ( i.e., July 1, 2024, which is 125 days after the date of publication of this release in the Federal Register ). This extended period before the final rules are effective will provide sufficient time for an initial public filing to be made under the existing rules for any transactions that are currently pending or planned. Any filings made on or after the effective date must comply with the final rules.

We are also issuing guidance regarding the status of SPACs under the Investment Company Act of 1940 (“Investment Company Act”). We have decided not to adopt proposed 17 CFR 270.3a–10 (“Rule 3a–10” under the Investment Company Act) which would have provided a safe harbor from the definition of investment company under section 3(a)(1)(A) to SPACs that complied with the rule's conditions. Whether a SPAC is an investment company as defined in the Investment Company Act is a question of facts and circumstances. Given the individualized nature of this analysis, and because, depending on the facts and circumstances, a SPAC could be an investment company at any stage of its operations such that a specific duration limitation may not be appropriate, we have decided not to adopt proposed Rule 3a–10. We are, however, providing guidance as to the type of activities that would likely raise serious questions about a SPAC's status as an investment company under the Investment Company Act.

II. New Subpart 1600 of Regulation S–K

The Commission is adopting final rules to add new subpart 1600 to Regulation S–K. The new subpart sets forth disclosure requirements applicable to SPACs regarding, among other things, the sponsor, potential conflicts of interest, and dilution and requires certain disclosures on the prospectus cover page and in the prospectus summary. The Commission is also adopting final rules to amend a number of forms and schedules used by SPACs for IPOs and de-SPAC transactions to require the information set forth in subpart 1600. To the extent that the disclosure requirements in subpart 1600 address the same subject matter as the existing disclosure requirements of the forms or schedules, the requirements of subpart 1600 are controlling.

A. Definitions

1. Proposed Definition: “De-SPAC Transaction”

The Commission proposed to define the term “de-SPAC transaction” as a business combination such as a merger, consolidation, exchange of securities, acquisition of assets, or similar transaction involving a SPAC and one or more target companies (contemporaneously, in the case of more than one target company).

2. Comments: Definition of “De-SPAC Transaction”

One commenter recommended we add the term “reorganization” to the non-exhaustive list of transactions set out in the proposed definition of de-SPAC transaction.

One commenter recommended the definition of de-SPAC transaction refer to “initial business combination” not “business combination.” Another commenter recommended the definition be named “initial business combination” instead of “de-SPAC transaction.”

In response to a request for comment, one commenter said there was no need to tie the definition of de-SPAC transaction to transactions that are permitted under exchange listing standards, particularly if the definition of SPAC includes non-listed shell companies.

3. Final Definition: “De-SPAC Transaction”

After considering the comments received, we are adopting the definition of de-SPAC transaction as proposed with a modification discussed below. Under the final rules, the term de-SPAC transaction means a business combination, such as a merger, consolidation, exchange of securities, acquisition of assets, reorganization, or similar transaction, involving a special purpose acquisition company and one or more target companies (contemporaneously, in the case of more than one target company).

We agree with one commenter's recommendation to add the term “reorganization” to the non-exhaustive list of transactions set out in the definition of de-SPAC transaction. It is our understanding some transactions commonly considered to be de-SPAC transactions may be considered reorganizations. Hence, we have added the suggested term to the final definition.

A few commenters suggested the definition of de-SPAC transaction should use the phrase “initial business combination.” We recognize the phrase “initial business combination” may be used interchangeably with “business combination” or “de-SPAC transaction” in the marketplace today, but we believe the simpler proposed term “business combination” used in the body of the de-SPAC transaction definition will be clearer to market participants. One of these commenters suggested the term “initial business combination” should be used because “[s]ubsequent acquisitions by the former SPAC after Closing should not be considered a De-SPAC Transaction.” We note that a company that is no longer a SPAC would not be subject to the disclosure items in subpart 1600 of Regulation S–K.

We agree with the commenter who said there was no need to tie the definition of de-SPAC transaction to transactions that are permitted under exchange listing standards, particularly if the definition of SPAC includes non-listed shell companies. A narrower definition may inappropriately exclude transactions that should be included, such as those involving over-the-counter-traded SPACs. We continue to believe, as indicated in the Proposing Release, that the definition of de-SPAC transaction should include less common transactions that may or may not be permitted under exchange listing rules but for which the enhanced disclosure and procedural requirements in the final rules may be appropriate because they raise the same investor protection concerns.

4. Proposed Definition: “Special Purpose Acquisition Company (SPAC)”

The Commission proposed Item 1601 to define the term “special purpose acquisition company (SPAC)” to mean a company that has indicated that its business plan is to (1) register a primary offering of securities that is not subject to the requirements of Rule 419; (2) complete a de-SPAC transaction within a specified time frame; and (3) return all remaining proceeds from the registered offering and any concurrent offerings to its shareholders if the company does not complete a de-SPAC transaction within the specified time frame.

5. Comments: Definition of “Special Purpose Acquisition Company (SPAC)”

One commenter indicated they saw no need for a definition of the term “SPAC,” as the commenter saw “no reason why the Proposed Rules should not apply to all shell companies, other than business combination shell companies, inclusive of blank check companies” and also indicated the proposed definitions of “SPAC” and “de-SPAC transaction” were circular, stating, “The proposed definition of `de-SPAC transaction' should be revised to eliminate the reference to `a special purpose acquisition company' in order to eliminate circularity.”

A few commenters did not support including the requirement that a SPAC “return all remaining proceeds from the registered offering and any concurrent offerings to its shareholders” in the proposed SPAC definition. One of these commenters said this aspect of the definition is “unnecessary and should be eliminated or revised to only refer to the plan to return proceeds from the registered offering” because “SPACs often hold a modest amount of working capital outside of their trust accounts that they use to fund operating expenses.” According to the commenter, “[i]f a shell company had such cash remaining at the point when the public shareholders exercise their redemption rights, it would be inappropriate to exclude such shell company from the [p]roposed [r]ules based solely on retaining such cash.” Another commenter recommended that we change this aspect of the definition to use the phrase “redeem the equity securities issued in the registered offering if the company does not complete a de-SPAC transaction within the specified time frame.”

One commenter recommended we narrow the definition of SPAC to only “a blank check company as defined in § 230.419(a)(2).” Another commenter, who opposed defining “SPAC,” noted that the proposed definition “is not limited to companies listed on a national securities exchange” and “would include shell companies traded in over-the-counter markets, which are not what would generally be considered to be `SPACs.' ” That commenter noted that a “logical distinction could be drawn based on exchange listing, rather than on whether the offering is by a blank check company and therefor subject to Rule 419.” The same commenter recommended that, if we adopt a new definition, we clarify that a company “ceases to be a SPAC for purposes of the rules after consummation of a de-SPAC transaction.”

In response to requests for comment, one commenter said that “it is clear what entities are SPACs, without the need for additional boxes to check.”

6. Final Definition: “Special Purpose Acquisition Company (SPAC)”

After considering the comments received, we are adopting the definition of special purpose acquisition company (or SPAC) as proposed, with certain modifications discussed below. Under the final rules, the term special purpose acquisition company (SPAC) means a company that has: (1) indicated that its business plan is to: (i) conduct a primary offering of securities that is not subject to the requirements of § 230.419 (Rule 419 under the Securities Act); (ii) complete a business combination, such as a merger, consolidation, exchange of securities, acquisition of assets, reorganization, or similar transaction, with one or more target companies within a specified time frame; and (iii) return proceeds from the offering and any concurrent offering (if such offering or concurrent offering intends to raise proceeds) to its security holders if the company does not complete a business combination, such as a merger, consolidation, exchange of securities, acquisition of assets, reorganization, or similar transaction, with one or more target companies within the specified time frame; or (2) represented that it pursues or will pursue a special purpose acquisition company strategy.

One commenter did not see a need for a new defined term “SPAC,” because, in the commenter's view, enhanced disclosures should apply to all shell companies (other than business combination shell companies) and not only to those companies defined as SPACs. Several of the rules being adopted in this release will enhance disclosures for investors in non-SPAC shell companies. However, the proposed individual disclosure items in the Item 1600 series of Regulation S–K were largely tailored to SPAC transactions. For the reasons we discuss in this release below in connection with the specific rules we are adopting, we believe it is appropriate at this time to apply enhanced disclosure in connection with companies meeting the definition of SPAC. However, we will continue to consider whether enhanced disclosure in other shell company transactions, such as reverse mergers with public shell companies, would be appropriate or necessary in the future.

This commenter further observed there was circularity in the proposed definitions of “SPAC” and “de-SPAC transaction.” We agree the final rules should eliminate this circularity. Although the commenter made the suggestion to revise the definition of “de-SPAC transaction” rather than addressing the issue by revising the definition of “SPAC,” we believe it would be clearer to avoid circularity by revising the definition of “SPAC.” We have replaced the term “de-SPAC transaction” in the definition of “SPAC” with “business combination, such as a merger, consolidation, exchange of securities, acquisition of assets, reorganization, or similar transaction, with one or more target companies.”

Several comments focused on the aspect of the proposed SPAC definition regarding the return of proceeds and suggested that special purpose acquisition companies may not return “all remaining proceeds.” We agree with commenters that the proposed term “return all remaining proceeds” could inappropriately exclude companies that take some portion of cash out of trust for anticipated expenses and therefore do not return “all” proceeds at the time of redemption. To avoid excluding such companies, we have revised the definition to use the term “return proceeds” instead of “return all remaining proceeds.” We have also added a parenthetical reference “(if such offering or concurrent offering intends to raise proceeds)” that qualifies the term “offering and any concurrent offering” to account for the fact there may be some SPAC offerings that do not raise proceeds.

We do not believe it is necessary to revise the definition to refer only to the plan to return proceeds from the primary offering, rather than the primary offering and any concurrent offering. We understand SPACs typically place proceeds of concurrent offerings in trust and return these proceeds if the SPAC does not complete a de-SPAC transaction within the specified time frame.

We are not adopting the recommendation that we should replace the terms related to the return of proceeds with alternative terms related to the redemption of equity securities. We continue to believe, as the Commission indicated in the Proposing Release, that the definition should not include certain criteria, including the issuance of redeemable securities, that could result in an overly narrow definition by including transactional terms that have not applied to every SPAC offering in the past or that could change as the SPAC market continues to evolve.

One commenter recommended we narrow the definition of SPAC to only “a blank check company as defined in § 230.419(a)(2).” The Rule 419 definition of “blank check company” includes a requirement that the company is issuing penny stock. The proposed definition of SPAC reflects the fact that special purpose acquisition company structures often are designed to avoid issuing penny stock but continue to pose disclosure and other investor protection concerns. Special purpose acquisition companies frequently do not issue penny stock and, therefore, would not meet the definition in § 230.419(a)(2). Thus, the inclusion of the suggested criterion would inappropriately exclude many or all special purpose acquisition companies from the SPAC definition.

Another commenter indicated the SPAC definition should draw a distinction based on exchange listing, which would exclude shell companies traded in over-the-counter markets. In the commenter's view, shell companies traded in over-the-counter markets are not generally considered to be SPACs. While companies commonly considered to be SPACs often list on a national securities exchange, we do not believe the SPAC definition should be limited to such listed entities. While carving out companies traded over-the-counter might leave out only a few (or zero) companies today, prevailing structures may further evolve over time just as they have evolved over time in the past, and we believe investors in those over-the-counter companies engaged in the same kinds of business as exchange-traded companies should have the same investor protections provided by the rules we are adopting.

Furthermore, we are adding a new clause to the definition that provides that the term special purpose acquisition company also includes a company that has represented it pursues or will pursue a special purpose acquisition company strategy. In the Proposing Release, the Commission asked if the proposed definition provides a workable approach to determining which issuers would be subject to the requirements of proposed subpart 1600. In addition, the Commission asked whether there were any potential opportunities for regulatory arbitrage in shell company or SPAC transactions that the Commission should consider addressing. After further consideration of these regulatory arbitrage concerns, we have revised the final rule to include new paragraph (b)(2) to Item 1601 concerning pursuit of a special purpose acquisition company strategy. Variations on common SPAC structures could cause some companies to fall technically outside one of the three prongs of paragraph (1) of the final SPAC definition. When companies make representations they pursue or will pursue a special purpose acquisition company strategy, they may be indistinguishable to investors from companies that meet the other components of the definition. As a result, we believe investors in such companies should benefit from the enhanced disclosures applicable to SPACs. Therefore, even where a company technically does not meet one of the three prongs in paragraph (1) of the final definition of SPAC, if it represents, directly or indirectly, that it pursues or will pursue a SPAC strategy, then pursuant to paragraph (2) of the final definition of SPAC, the company would meet the definition of a SPAC.

Similarly, to avoid the risk that certain varieties of SPACs may fall outside the definition because of minor technical distinctions from the prongs of the definition, we have changed the proposed term “register a primary offering” to “conduct a primary offering” to account for evolving SPAC structures that may not conduct a registered offering. We do not believe it would be appropriate for companies in de-SPAC transactions to avoid the disclosure (or any other) requirements of these final rules only because the initial SPAC transaction was not registered. As noted in the Proposing Release, we intend this definition to be sufficiently broad to take into account potential variations in the SPAC structure and the possibility that SPACs may continue to evolve. This adjustment to the definition will ensure that appropriate disclosures are provided at the de-SPAC stage regardless of the structure of the initial SPAC transaction. In the final definition, we have also made a corresponding revision to change the proposed term “registered offering” to “offering.”

One commenter recommended we clarify that a company ceases to be a SPAC upon consummation of a de-SPAC transaction. For the avoidance of doubt, we are providing guidance that, if a company that meets the SPAC definition has completed a de-SPAC transaction or, in the case of one or more target companies, contemporaneous de-SPAC transactions, then the company no longer meets the definition of a SPAC and that such companies are not required to comply with the enhanced disclosures under Regulation S–K applicable to SPACs in registration statements they file in later periods after the completion of such de-SPAC transactions.

We are not requiring a check box on form cover pages indicating SPAC status as the enhanced disclosure provided by registrants pursuant to the Item 1600 series of Regulation S–K will make clear the registrant is a SPAC.

7. Proposed Definition: “SPAC Sponsor”

The Commission proposed to define the term “SPAC sponsor” as the entity and/or person(s) primarily responsible for organizing, directing or managing the business and affairs of a SPAC, other than in their capacities as directors or officers of the SPAC as applicable.

8. Comments: Definition of “SPAC Sponsor”

One commenter said the proposal “should be revised to eliminate the need for a defined term `SPAC sponsor' ” and, “[i]nstead, the rules should require disclosure regarding the SPAC's directors, officers and affiliates.” This commenter also said “the definition's exclusion of directors and officers in their capacities as such would result in there being no `sponsor' for many SPACs.” This commenter also said the proposal “blur[red] the lines between the roles and responsibilities of the SPAC sponsor and that of the SPAC board and officers.”

Another commenter recommended an alternative definition of “SPAC sponsor”: “the entity and/or person(s) that (1) own all or a portion of the privately placed common equity securities of the special purpose acquisition company and (2) are primarily responsible for directing and managing the business and affairs of a special purpose acquisition company other than in their capacities as (i) directors or officers of the special purpose acquisition company or (ii) third-party service providers to the special purpose acquisition company, as applicable.” The commenter said that “the `SPAC sponsor' should be the entity or persons who have both ownership of [s]ponsor shares and responsibility for directing and managing the SPAC.” The commenter said that their suggested definition will “identify the entity or persons that are currently identified as [s]ponsors in registration statements for the SPAC.”

9. Final Definition: “SPAC Sponsor”

After considering the comments received, we are adopting the definition of SPAC sponsor as proposed with certain modifications discussed below. Under the final rules, the term SPAC sponsor means any entity and/or person primarily responsible for organizing, directing, or managing the business and affairs of a special purpose acquisition company, excluding, if an entity is a SPAC sponsor, officers and directors of the special purpose acquisition company who are not affiliates of any such entity that is a SPAC sponsor.

The definition is designed to be sufficiently broad that appropriate entities or persons will be subject to the enhanced disclosure requirements applicable to SPAC sponsors. Although a sponsor of a SPAC may perform a variety of functions within the SPAC's structure, we intend for the SPAC sponsor definition to encompass activities that, based on the staff's experience reviewing SPAC filings and public commentary, are commonly understood to be sponsors of SPACs or with persons referred to as sponsors in current registration statements.

We do not believe it would provide investors with adequate information to tie the SPAC sponsor definition to persons with particular titles, because the definition and corresponding disclosure requirements are intended to capture all parties who perform certain activities that result in such parties having key substantive influence over the SPAC. The suggestion to replace “SPAC sponsor” with “directors, officers, and affiliates of the SPAC” would require disclosure from directors and officers not commonly considered to be sponsors today and, as indicated by the Commission in the Proposing Release, would overlap unnecessarily with current required disclosure concerning directors and officers. Also, “directors, officers, and affiliates of the SPAC” may not include external management companies and their principals that should be included in the definition on the basis of their activities. While State law may provide that directors manage the business and affairs of a corporation and may not provide that any one director has any more authority than any other director, the phrase “primarily responsible” in the definition of SPAC sponsor is not limited to solely directors or solely directors and officers. Other persons, such as third-party management companies and their affiliates, frequently are primarily responsible for the organization, direction, or management of the business and affairs of SPACs today and would be SPAC sponsors under the definition we are adopting.

One commenter recommended an alternative definition of SPAC sponsor that featured, among other things, carve-outs from that alternative definition for directors and officers of the SPAC and for third-party service providers. This commenter also suggested that the proposed definition's exclusion of directors and officers in their capacities as such would result in a null set of SPAC sponsors. Having considered this comment, we have made changes to the final definition. We are not adopting the proposed term “other than in their capacities as directors or officers,” because it could be unclear under the proposed definition whether any action taken on behalf of the SPAC by a director or officer of a SPAC is “other than in that person's capacity as an officer or director.” As the commenter noted, this could result in no such persons being considered SPAC sponsors. To address such potential ambiguities, in the final rule, we have changed the term “other than in their capacities as directors or officers of the special purpose acquisition company as applicable” to “excluding, if an entity is a SPAC sponsor, officers and directors of the special purpose acquisition company who are not affiliates of any such entity that is a SPAC sponsor.” Based on the staff's experience, we understand that a SPAC sponsor entity is typically involved in the SPAC. However, if the SPAC sponsor is not an entity, then we want to make sure the appropriate persons are captured within the SPAC sponsor definition. An officer or director of the SPAC that is an affiliate of an entity that is a SPAC sponsor would also be a SPAC sponsor under the final definition. For example, in the case of a hypothetical SPAC where a third-party management company is a SPAC sponsor and a person is a director of both the SPAC and this third-party management company, then this person would also be a SPAC sponsor.

We are not adopting the suggestion to exclude “third-party service providers” from the definition of SPAC sponsor. As discussed above, some third-party service providers will be “SPAC sponsors” under the definition where they are “primarily responsible for organizing, directing, or managing the business and affairs” of the SPAC. Other third-party service providers, however, will not fall within the definition of SPAC sponsor where they are not “primarily responsible” for organizing, directing, or managing the business and affairs of a SPAC. For example, external legal counsel that only assists in the formation of a SPAC by drafting its certificate of incorporation and bylaws on behalf of a client would not be “primarily responsible” for “organizing . . . the business and affairs of a SPAC.” Other third-party service providers may perform similar administrative or ministerial activities for a SPAC or provide outside legal or accounting advice neither of which would cause them to be “primarily responsible” for organizing, directing, or managing the business and affairs of the SPAC and thus they would not be SPAC sponsors.

10. Proposed Definition: “Target Company”

The Commission proposed to define the term “target company” as an operating company, business, or assets.

11. Comments: Definition of “Target Company”

One commenter asserted that “the concept of `assets' being a `target company' yields anomalous results under certain proposed rules (such as requiring assets to sign a registration statement) and the concept of a `business' may be vague (as a business may be a product line, rather than an entity that could sign a registration statement).” Another commenter suggested “deleting the term `assets' from the definition or clarifying that a target company includes assets where the acquisition of such assets is intended to constitute the SPAC's initial business combination.”

12. Final Definition: “Target Company”

After considering the comments received, we are adopting the definition of target company as proposed. Under the final rules, the term target company means an operating company, business or assets.

To address commenters' concerns about the use of the terms “assets” and “business” in the definition of target company, we have revised certain registration statement form instructions, as discussed in more detail below. We believe these changes address the commenters' concerns. Therefore, we do not believe it is necessary to make changes to the proposed definition of “target company.” In addition, although an asset purchase transaction may be a different form of transaction for the purposes of other legal requirements, including State law, we do not believe a SPAC combination with a target company taking the form of an asset purchase should be excluded from the definition of de-SPAC transaction merely for this reason.

B. Sponsors

1. Proposed Rules

The Commission proposed Item 1603(a) to require additional disclosure about the SPAC sponsor, its affiliates, and promoters in registration statements and schedules filed in connection with SPAC registered offerings and de-SPAC transactions, including disclosure of the following:

• The experience, material roles, and responsibilities of these parties, as well as any agreement, arrangement, or understanding (1) between the SPAC sponsor and the SPAC, its executive officers, directors, or affiliates, with respect to determining whether to proceed with a de-SPAC transaction and (2) between the SPAC sponsor and unaffiliated security holders of the SPAC regarding the redemption of outstanding securities;
• The controlling persons of the SPAC sponsor and any persons who have direct and indirect material interests in the SPAC sponsor and the nature and amount of their interests, as well as an organizational chart that shows the relationship between the SPAC, the SPAC sponsor, and the SPAC sponsor's affiliates;
• Tabular disclosure of the material terms of any lock-up agreements with the SPAC sponsor and its affiliates; and

• The nature and amounts of all compensation that has or will be awarded to, earned by, or paid to the SPAC sponsor, its affiliates, and any promoters for all services rendered in all capacities to the SPAC and its affiliates, as well as the nature and amounts of any reimbursements to be paid to the SPAC sponsor, its affiliates, and any promoters upon the completion of a de-SPAC transaction.

2. Comments

Broadly categorized, commenters on proposed Item 1603(a) or generally on the types of SPAC sponsor issues covered by proposed Item 1603(a) focused on six areas: (1) general comments that expressed support for the proposals, (2) promoter requirements, (3) compensation, (4) transfers of SPAC ownership, (5) interests in the SPAC sponsor and the organizational chart requirement, and (6) agreements.

i. General Comments

A number of commenters generally supported the proposed enhanced disclosure requirements regarding SPAC sponsors. Commenters cited a number of benefits to investors as the reasons for their support, including the following five benefits: (a) placing investors in a better position to evaluate the merits of SPAC and de-SPAC transactions, (b) illuminating financial incentives of SPAC sponsors that may affect de-SPAC transaction outcomes, (c) providing compensation information that may promote more informed investment decisions, (d) providing SPAC sponsor ownership interest information that may affect investor ability to vote on de-SPAC transactions, and (e) providing information about SPAC sponsor experience that may help investors assess the SPAC sponsor's ability to find a target company.

Also, several commenters suggested that proposed Item 1603(a) would codify, to an extent, existing disclosure practices.

ii. Promoters

Some commenters said Item 1603 should not apply to “promoters.” One commenter asserted that application to the SPAC sponsor and its affiliates would include all significant participants in the SPAC and thus the “promoter” provision would not significantly benefit investors. Another commenter said that “disclosure regarding a promoter of the SPAC's initial public offering that will have no involvement with the de-SPAC transaction would be immaterial to investors.”

iii. Compensation

A number of commenters suggested that the proposed disclosure requirements regarding sponsor compensation would provide useful information to investors. A few commenters expressed the view that sponsor compensation is already sufficiently disclosed.

One commenter said the SPAC sponsor “20 percent promote is fully and fairly disclosed and has been for decades.” Another commenter said they “believe the sponsor's compensation and reimbursement are already sufficiently disclosed in response to existing disclosure requirements and that incremental disclosure requirements are thus not merited.”

One commenter that did not support the additional proposed disclosure requirements stated that, if the Commission were nonetheless to impose new requirements, “the reference to `compensation' should be revised to refer instead to all equity and rights to cash held by the SPAC directors and officers and their affiliates, as certain equity interests may be purchased for value ( i.e., not be `compensation') and reimbursement of advances or repayment of loans would not be compensation.” Another commenter said “sponsor compensation comes almost entirely in the form of capital gains associated with securities issued in the `promote' resulting from stock price increases after the de-SPAC transaction, and quantifying such compensation may involve speculation or be subject to criticism as incomplete.”

Another commenter said that, “in addressing non-equity compensation and reimbursements, proposed Item 1603(a)(6) should explain its requirement to identify other compensation and reimbursements that are material, individually or in the aggregate and that the required disclosure may be qualitative and not quantitative, except where amounts are above a specified de minimis threshold, similar to the approach taken in certain respects under the existing compensation disclosure framework in Item 402 of Regulation S–K [17 CFR 229.402].”

iv. Transfer of SPAC Ownership

Several commenters recommended we adopt requirements to disclose transfers of SPAC securities by the SPAC sponsor and others. One commenter recommended, in response to request for comment, adding a sentence at the end of Item 1603(a)(6) that states: “Disclose any arrangements under which the SPAC sponsor, its affiliates and any promoters have transferred ownership of any securities in the SPAC to other parties in exchange for compensation or other benefit to the sponsor, its affiliates, any promoters, or to the SPAC.” The commenter said that “SPAC sponsors at times sell off a portion of their promote or other securities to a `risk-capital syndicate' as a way of cashing out early on a portion of the compensation they receive for their work on the SPAC” and that “the amount of interest that a sponsor retains in securities of the SPAC is material for investors seeking to evaluate the incentive of the sponsor in pursuing a SPAC merger.” Another commenter suggested expanding current Forms 3 and 4 director and officer reporting requirements to cover SPAC sponsors and their transactions in SPAC securities after the de-SPAC transaction. Similarly, another commenter recommended disclosure of post-de-SPAC transaction transfers, noting “this reporting could be time limited, for example to two years” following the de-SPAC transaction.

v. Interest in SPAC Sponsor and Organizational Chart

One commenter said that the proposed approach departs from the traditional approach to beneficial ownership reporting and recommended that this item should clarify that “an indirect economic interest in less than 10% of a SPAC's founder shares or warrants through ownership of equity interests in a [SPAC] [s]ponsor should not, in and of itself and absent other factors, be considered a direct or indirect material interest in the [SPAC] [s]ponsor.” Another commenter said the identity of natural persons controlling the sponsor is already disclosed in response to existing 17 CFR 229.403 (“Item 403” of Regulation S–K).

vi. Agreements

One commenter recommended that the Commission should revise proposed Item 1603(a)(8) to “specify that if a SPAC, the SPAC sponsor, or any affiliated party enters into an agreement regarding the redemption of outstanding securities of the SPAC after the date of the merger registration statement or proxy, that the SPAC be required to issue a proxy amendment or similar filing prior to the redemption deadline to inform SPAC shareholders of the new agreement.”

Another commenter said the material terms of lock-up agreements are already disclosed as a matter of industry practice and that requiring additional disclosure would “go beyond the disclosure requirements applicable to lock-up agreements that are entered into in connection with a traditional IPO.” Regarding proposed requirements to disclose any exceptions to relevant lock-up agreements, one commenter recommended excluding exceptions that are not material or are customary. This commenter noted that frequently these exceptions provide that the transferee agree to the lock-up agreement as a condition of the transfer.

3. Final Rules

After considering the comments received, we are adopting Item 1603(a) as proposed with certain modifications we discuss below. Additionally, for clarity and consistency throughout Item 1603, we have replaced the term “executive officers” with the term “officers.”

i. General Discussion

Item 1603(a)'s disclosure requirements will provide a SPAC's prospective investors and existing shareholders with detailed information relating to the SPAC sponsor that could be important in understanding and analyzing a SPAC, including how the rights and interests of the SPAC sponsor, its affiliates, and any promoters may differ from, or may conflict with, those of public shareholders. Given that a SPAC does not conduct an operating business, information about the background and experience of the SPAC sponsor is important in assessing a SPAC's prospects for success and may be a relevant factor in the market value of a SPAC's securities. Corresponding disclosure with respect to SPAC sponsor affiliates and promoters will also provide investors with important information, because the SPAC sponsor's affiliates and any promoters of the SPAC may also carry out activities similar to those of a SPAC sponsor. Furthermore, the enhanced disclosure regarding the SPAC sponsor's compensation and the SPAC sponsor's agreements, arrangements, or understandings may be helpful to a SPAC's prospective investors and existing shareholders in considering whether to acquire or redeem the SPAC's securities and in evaluating the potential risks and merits of a proposed de-SPAC transaction, because it could highlight additional motivations for completing a de-SPAC transaction.

Several commenters suggested that proposed Item 1603(a) would codify, to an extent, existing disclosure practices. We agree that the requirements in Item 1603 to provide detailed disclosure about the SPAC sponsor, the SPAC sponsor's experience, and its rights and interests will codify existing disclosure practices. This will help ensure that issuers provide consistent and comprehensive information across transactions, so that investors can make more informed investment and voting decisions.

i. Promoters

We are retaining the applicability of Item 1603 to promoters. We disagree with the commenters who asserted that Item 1603 should not apply to “promoters” and that the disclosure regarding a promoter would not significantly benefit investors or would be immaterial to investors. Certain persons are explicitly included as a “promoter” under Securities Act Rule 405 and Exchange Act Rule 12b–2. There may be facts and circumstances involving a SPAC where a person may be considered either a “promoter,” “SPAC sponsor,” “officer,” or “director” or may be more than one of these. As with a SPAC sponsor, the promoter's background and experience, compensation, and conflicts of interest are material information for investors in the SPAC IPO (particularly given the absence of an operating business) and any de-SPAC transaction. Such information will enable investors to better understand promoter incentives and activities. A registrant is not required to repeat the same disclosure twice merely because a person fits in two categories (for example, both a “promoter” and a “SPAC sponsor”).

Additionally, in the final rules, we have made technical changes to ensure consistent reference to “SPAC sponsor, its affiliates, and promoters” among disclosure requirements relating to the cover page, summary, and body sections of the prospectus.

ii. Compensation

We are adopting the SPAC sponsor compensation disclosure largely as proposed with certain modifications in response to comments. We disagree with the commenter who suggested that—because sponsor compensation and reimbursement are already disclosed under existing disclosure requirements and current market practice provides for similar disclosure as to the material terms of lock-up agreements—the proposed additional disclosure requirements should not be adopted. On the contrary, we believe compliance with the final rules will be minimally burdensome where disclosure of this information is already market practice and will create a uniform and transparent regime across-the-board, maintaining a minimum standard of disclosure across transactions, even if market practice were to change in the future.

We agree with comments that returns based on the price appreciation from the “promote” stake owned by the SPAC sponsor may be a significant source of potential remuneration to the SPAC sponsor that investors would want to know about in making their investment and voting decisions. As a result, we have added terms explicitly requiring disclosure of the amount of securities issued or to be issued by the SPAC to the SPAC sponsor, its affiliates, and promoters and the price paid or to be paid for such securities. For example, where a SPAC sponsor purchased a 20 percent ownership interest in the SPAC, this interest and the purchase price would be required to be disclosed under the revised provision and would not be excluded on the basis of not being “compensation.”

Pursuant to these changes, any mechanisms, such as an anti-dilution provision, to keep the SPAC sponsor ownership at a certain level (or similar mechanisms for affiliates or promoters) and any potential cancellation of shares issued or to be issued to the SPAC sponsor (or its affiliates or promoters) or increase in shares issued to the SPAC sponsor (or its affiliates or promoters) will be required to be disclosed since these features would affect shares issued or to be issued to those parties. The approach taken in the final rules will address the concerns over speculation related to quantifying compensation expressed by one commenter, because these contractual terms are known at the time of the IPO and therefore do not require any speculation about possible stock price changes after the de-SPAC transaction.

Regarding the comments concerning reimbursement of advances and repayment of loans, we do not believe it is necessary to modify the proposed term “reimbursement.” The term is not limited to specific types of reimbursements. Any funds outlaid by the SPAC sponsor that are later returned to the SPAC sponsor would constitute a “reimbursement” under the rule, notwithstanding that the return of the funds to the SPAC sponsor may also include other amounts (such as accrued interest).

We are not adopting another commenter's recommendation that required disclosure be qualitative rather than quantitative unless the amounts are above a specified de minimis threshold. Because de minimis thresholds for several categories of compensation could be significant on an aggregate basis, if quantitative disclosure were only required above a certain de minimis threshold, investors may not receive the complete set of compensation information they need to evaluate the structure of the SPAC in which they may invest. We would not object, however, to the registrant disclosing de minimis reimbursements (such as for perquisites that are de minimis) by providing an aggregate total of those de minimis reimbursements by category rather than on an item-by-item basis. We view such disclosure as consistent with the requirement in Item 1603(a)(6) to disclose the reimbursements' “nature.”

iii. Transfer of SPAC Ownership

In response to several commenters' recommendation to disclose transfers of SPAC securities by the SPAC sponsor and others, we are modifying Item 1603(a)(6) to require such disclosure. We agree that disclosure of share transfers by a SPAC sponsor, its affiliates, and promoters would provide important information to investors seeking to evaluate the incentives of these parties. We believe it would also be important for investors to know if the SPAC ownership level of these parties has changed because of cancellation of the securities. Accordingly, in the final rule, we have revised proposed Item 1603(a)(6) to add the requirement: “Disclose any circumstances or arrangements under which the SPAC sponsor, its affiliates, and promoters, directly or indirectly, have transferred or could transfer ownership of securities of the SPAC, or that have resulted or could result in the surrender or cancellation of such securities.” With respect to indirect transfers, for example, if there was a transfer of ownership interests in the SPAC sponsor or ownership interests in a holding company that owns interests in the SPAC sponsor, then disclosure would be required under this item.

At this time, we are not making any changes to add requirements to disclose transfers after the de-SPAC transaction occurs, because we believe, for most SPACs, SPAC sponsors will already have Form 3 and 4 reporting obligations.

iv. Interest in SPAC Sponsor and Organizational Chart

We are adopting Item 1603(a)(7) as proposed except that we are not adopting the proposal to provide an organizational chart.

One commenter said that “proposed Item 1603(a)(7) should clarify that . . . an indirect economic interest in less than 10% of a SPAC's founder shares or warrants through ownership of equity interests in a Sponsor should not, in and of itself and absent other factors, be considered a direct or indirect material interest in the Sponsor.” We do not believe that the disclosures of material interests in the SPAC sponsor should be based on a bright-line absolute percentage of ownership, whether based on percentage ownership of shares of the SPAC or based on percentage ownership of shares of the SPAC sponsor. As a general matter, we note that registrants regularly apply materiality standards that are not tied to absolute percentages in connection with their disclosure under the Federal securities laws. We believe a bright-line standard would not be appropriate here because the percentage of ownership of a SPAC sponsor that is material could differ from SPAC sponsor to SPAC sponsor. Also, we note that percentage ownership is not the only way in which a material interest in the SPAC sponsor may be present. For example, where a person has a voting interest but no economic interest in the SPAC sponsor, the required disclosure would need to be provided with respect to such voting interest.

Related to our consideration of this comment, however, we have determined not to adopt the proposed organizational chart requirement in Item 1603(a)(7). The proposed organizational chart requirement would have required graphical display of levels of ownership that are above the level of direct ownership of the SPAC sponsor ( i.e., tracing “upstream” through layers of interest-holders to the ultimate interest-holder). It also would have required graphical display of levels of ownership of companies other than the SPAC sponsor (but that would be under common control with the SPAC sponsor) that are below these interest-holders ( i.e., tracing “downstream” through layers of affiliated controlled persons). We believe, in this context at this time, particularly with respect to institutions with an interest in the SPAC sponsor that may have complex company organizational structures, the complexity of the upstream and downstream tiers of ownership discussed above may be difficult to prepare graphically. As a result, we are not adopting the organizational chart requirement.

Another commenter said the identity of natural persons controlling the sponsor is already disclosed in response to existing Item 403 of Regulation S–K. Item 403 requires security ownership information concerning certain beneficial owners and management, but new Item 1603(a) will elicit additional information because of its requirements concerning background, experience, and roles, among other things. Also, while current Item 403(a) requires identifying any person who is known to be the beneficial owner of more than five percent of any class of the SPAC's voting securities, new Item 1603(a)(7) adds a requirement to name controlling persons of the SPAC sponsor. Furthermore, to the extent portions of Item 1603(a) may overlap with Item 403 as they may pertain to specific registrant facts and circumstances, registrants are not required to provide duplicative disclosure. Therefore, we do not expect that any partial overlap—depending on specific registrant facts and circumstances—in disclosure that could be required under the final rule with disclosure required under Item 403 would impose significant additional burdens on registrants.

v. Agreements

We are adopting Item 1603(a)(8) and (9), concerning agreements, as proposed. Final Item 1603(a)(8) provides that the registrant must describe any agreement, arrangement, or understanding, including any payments, between the SPAC sponsor and unaffiliated security holders of the special purpose acquisition company regarding the redemption of outstanding securities of the special purpose acquisition company. One commenter recommended that the Commission should revise proposed Item 1603(a)(8) to “specify that if a SPAC, the SPAC sponsor, or any affiliated party enters into an agreement regarding the redemption of outstanding securities of the SPAC after the date of the merger registration statement or proxy, that the SPAC be required to issue a proxy amendment or similar filing prior to the redemption deadline to inform SPAC shareholders of the new agreement.” We do not believe it is necessary to revise the item in the manner suggested to capture events that follow the filing of a proxy statement in connection with a de-SPAC transaction, as we believe registrant obligations to amend such filings under current law, including to ensure disclosure are not misleading, are sufficient.

Final Item 1603(a)(9) provides that the registrant must disclose, in a tabular format to the extent practicable, the material terms of any agreement, arrangement, or understanding regarding restrictions on whether and when the SPAC sponsor and its affiliates may sell securities of the special purpose acquisition company, including: the date(s) on which the agreement, arrangement, or understanding may expire; the natural persons and entities subject to such an agreement, arrangement, or understanding; any exceptions under such an agreement, arrangement, or understanding; and any terms that would result in an earlier expiration of such an agreement, arrangement, or understanding.

In response to the commenter who stated that the required additional disclosure would go beyond the disclosure requirements applicable to lock-up agreements entered into in connection with a traditional IPO, we believe that, based on Commission staff experience reviewing filings, registrants in IPOs currently provide information that is analogous to the Item 1603(a)(9) required information. To the extent Item 1603(a)(9) may incrementally require more disclosure compared to IPOs, we believe this is appropriate because investors in SPACs often focus heavily on the nature of the SPAC sponsor's interest in the SPAC and because agreements, arrangements, or understandings regarding restrictions on whether and when the SPAC sponsor and its affiliates may sell securities of the SPAC often can be more complex than lock-up agreements in IPOs. For example, SPAC lock-up agreements often include provisions that depend on certain levels of stock price appreciation.

With respect to the suggestion to exclude from this disclosure customary exceptions to lock-up agreements, we are concerned that almost all, if not all, exceptions found in any lock-up agreement could be determined to be customary by a registrant, which would mean they would not be disclosed to investors under the suggested approach. Further, even where lock-up agreements are filed as an exhibit, exceptions to SPAC lock-up agreements considered “customary” by industry participants may be difficult for a reasonable investor to understand, and therefore narrative disclosure in the body of the filing may help investors understand these terms.

In addition, we believe each such exception to a lock-up agreement is important to investors because exceptions to restrictions on transfer in lock-up agreements can result in the sale of a significant amount of shares that could affect the trading price of the SPAC or of the post-de-SPAC transaction combined company. In addition, in connection with disclosure in a SPAC IPO, to the extent that an investor may have invested in the SPAC based in part on the experience and expertise of the SPAC sponsor and its affiliates, we believe the disclosure about exceptions to lock-up agreements could be important to these investors in understanding the extent to which the interests of the SPAC sponsor and investor are aligned. Similarly, this information is important in connection with disclosure in a de-SPAC transaction. For example, this information remains important in connection with a de-SPAC transaction where the SPAC sponsor will have a continuing management role at the post-de-SPAC transaction combined company. Also, for example, even where the SPAC sponsor may not have a continuing management role, this information is important where the SPAC sponsor may have the ability to express views that influence the current management of the post-de-SPAC transaction combined company—potentially due to the size of the SPAC sponsor's ownership stake in the combined company or the value of the SPAC sponsor's ongoing counsel based on the SPAC sponsor's expertise. In each of these examples, we believe the disclosure about exceptions to lock-up agreements will be important because it will help the investor understand the extent to which the interests of the SPAC sponsor and investor are aligned.

While one commenter suggested that current market practice is for transferees who receive shares pursuant to an exception from a lock-up to agree to the lock-up as a condition of the transfer, we do not believe this means information about exceptions to lock-up agreements will not be important to investors. If the SPAC sponsor or affiliates may divest their ownership of the SPAC, this may affect investor evaluation of the SPAC and the incentives of the SPAC sponsor, regardless of whether a transferee is also subject to transfer restrictions. Investors may consider the potential amounts of shares that could be transferred to be an important factor that could affect the market valuation of the issuer. Moreover, based on the Commission staff's experience, some registrants today already discuss each exception in detail, while others discuss the exceptions in general terms.

C. Conflicts of Interest

1. Proposed Rules

SPAC sponsors and others may have material potential or actual conflicts with the interests of investors that could have adverse effects on those investors. The Commission proposed conflicts of interest disclosure requirements in certain items in proposed Item 1602, 1603, 1604, and 1605 in connection with SPAC registered offerings other than de-SPAC transactions, such as IPO transactions, and in connection with de-SPAC transactions, described in more detail below.

The Commission proposed Item 1602(a)(5) and (b)(7), which apply to registered offerings other than de-SPAC transactions, to require that some of these conflicts of interest disclosure requirements appear on the prospectus front cover page and in the prospectus summary, respectively. The Commission also proposed prospectus cover page and prospectus summary conflict of interest disclosure requirements in connection with de-SPAC transactions in proposed Item 1604(a)(4) and (b)(3).

The Commission proposed that Item 1603 (including 1603(b) regarding conflicts of interest) apply to de-SPAC transactions, as well as other registered offerings, including SPAC IPOs. Proposed Item 1603(b) would require disclosure of any actual or potential material conflict of interest between (1) the SPAC sponsor or its affiliates or the SPAC's officers, directors, or promoters, and (2) unaffiliated security holders. This proposed item included any conflict of interest with respect to determining whether to proceed with a de-SPAC transaction and any conflict of interest arising from the manner in which a SPAC compensates the SPAC sponsor or the SPAC's executive officers and directors or the manner in which the SPAC sponsor compensates its own executive officers and directors. In addition, the Commission proposed Item 1603(c) to require disclosure regarding the fiduciary duties each officer and director of a SPAC owes to other companies.

Furthermore, in connection with de-SPAC transactions, the Commission proposed Item 1605(d) to require disclosure of any material interests in the de-SPAC transaction or any related financing transaction held by the SPAC sponsor and the SPAC's officers and directors, including fiduciary or contractual obligations to other entities as well as any interest in, or affiliation with, the target company.

2. Comments

Broadly categorized, commenters on the conflicts of interest proposals focused on five areas: (1) general comments, including those with general expressions of support for or opposition to the proposals, (2) SPAC and target company officer and director conflicts of interest, (3) de-SPAC conflicts of interest, (4) addition of disclosure of “break-even” thresholds, and (5) additional responses to Commission requests for comment.

A number of commenters generally supported the proposed enhanced disclosure requirements in regard to conflicts of interest and fiduciary duties.

Several commenters suggested that the proposed disclosure requirements would codify, to an extent, existing disclosure practices. Some commenters suggested that proposed disclosure requirements about conflicts of interest and fiduciary duties would provide useful information to investors.

One commenter said that “in requiring disclosure of known actual or potential material conflicts of interest, proposed Item 1603(b) should clarify that a knowledge-based standard is the appropriate standard in determining whether disclosure is required under this item.”

Another commenter recommended “that disclosures should include the names of all sponsors and their financial arrangements with SPACs” and “information on the nature of the claims the investors have on the SPAC if no de-SPAC transaction takes place” during the applicable period or they choose to exit before the de-SPAC is completed.

A few commenters discussed issues related to potential SPAC and target company officer and director conflicts of interest. One of these commenters recommended that “there should be mandatory disclosures of conflicts of interest among SPAC directors, SPAC officers, target company directors and target company officers.” Another of these commenters recommended that “proposed Item 1603(c) should be limited to those situations where the fiduciary duties of an officer or director owed to other companies might reasonably be expected to present a potential conflict with respect to a potential de-SPAC transaction or the SPAC's ability to pursue de-SPAC transaction opportunities.”

Some commenters viewed proposed Item 1605, including proposed Item 1605(d) concerning conflicts of interest in connection with de-SPAC transactions, as redundant with current rules. One of these commenters said these disclosures are “duplicative of those already prescribed in the existing regulatory schemes for proxy materials and registration statements filed in connection with de-SPAC transactions.” In lieu of adopting proposed Item 1605, the commenter recommended a “uniform methodology to address conflicts of interest arising from business combinations in general by revising Items 1004(a)(2) and 1013(b) of Regulation M–A [17 CFR 229.1004(a)(2) and 229.1013(b)] and Item 403 of Regulation S–K to incorporate the provisions of proposed Item 1605.” The other commenter opposed the adoption of new disclosure requirements with “respect to material interests in a prospective de-SPAC transaction or any related financing transaction held by the sponsor and the SPAC's officers and directors,” because this “would be redundant with the existing requirements of Schedule 14A Item 5.”

Some commenters recommended that certain additional disclosures should be required. One commenter on the proposal said that registrants “should also provide, in an easily understandable, tabular format. . .the break-even points for non-redeeming investors under different scenarios, the break-even point for the sponsor, the ownership distribution for non-redeeming investors, the effects of outstanding warrants and sponsor shares, and the resulting ownership of the target company for non-redeeming shareholders and alternative investors.” Another commenter said that registrants should provide a break-even average share price for the sponsor, which would inform investors and, in the commenter's opinion, the target company. The commenter said “this will be a simple numerical representation of the effective cost basis of the sponsor and can be used to ascertain the extent to which a sponsor's position differs from that of other investors.” One commenter stated that “SPACs should disclose the minimum post-merger share value at which proceeding with the SPAC merger will yield a higher return to the SPAC sponsor than liquidating the SPAC.”

A few commenters responded to requests for comment in the proposal related to whether we should also require a description of any policies and procedures used to minimize potential or actual conflicts of interest. One commenter said that “a requirement for disclosure of policies and procedures or assessment and management of conflicts of interest would result in incremental boilerplate disclosures.” Another commenter said it would be “superfluous to require a description of any policies and procedures used or to be used to minimize potential or actual conflicts of interest in addition to what proposed Item 1603 has already prescribed.”

One commenter responded to requests for comment related to whether SPACs should be required to provide additional disclosure regarding material conflicts of interest in Exchange Act reports following their IPOs. The commenter said that, “regarding disclosure in Exchange Act reports following the SPAC IPO and the Form 8–K announcing the signing of the de-SPAC transaction, additional disclosure should be required only where the conflict of interest is material and has not been previously disclosed.”

3. Final Rules

We are adopting Items 1602(a)(5) and (b)(7), 1603(b), 1604(a)(4) and (b)(3), and 1605(d) substantially as proposed, except for the changes discussed below. Having considered comments received, we are adopting the final rules to provide information to investors about the material potential or actual conflicts that SPAC sponsors and others covered by the final rules may have with the interests of investors. These conflicts could influence the actions of the SPAC to the detriment of its unaffiliated security holders. The potential conflicts of interest of SPAC sponsors and others may be particularly relevant for investors to the extent that they arise when a SPAC and its management are deciding whether to engage in a de-SPAC transaction. The SPAC sponsor's compensation structure creates incentives to complete a de-SPAC transaction. These incentives may induce a SPAC sponsor and others to compel the SPAC to complete the de-SPAC transaction on unfavorable terms to avoid liquidation of the SPAC at the expiry of this period.

There are numerous situations that could give rise to these potential conflicts. For example, SPAC sponsors or their affiliates may have a potential conflict of interest stemming from the nature of the SPAC sponsor's compensation or security ownership (particularly where the security owned is purchased at disparate prices, often substantially lower than the price paid by public security holders). This type of potential conflict of interest may present significant financial incentives to pursue a de-SPAC transaction even in the absence of attractive target company transaction opportunities.

SPAC sponsors and their affiliates may also sponsor multiple SPACs, which may result in decisions regarding the allocation of these persons' time and target company acquisition opportunities that may adversely affect SPAC security holders. Alternatively (or in addition), SPAC sponsors and their affiliates may owe employment, contractual, or fiduciary duties to other companies than the SPAC, which, among other things, may affect the ability of the SPAC to execute a de-SPAC transaction or may affect the terms to which a SPAC agrees in any ultimate de-SPAC transaction. In these situations, the SPAC sponsor and others covered by the final rules may not only be incentivized to take actions that benefit other entities, but they may be compelled by these other duties to do so, potentially at the expense of the SPAC and its security holders. In addition, SPAC sponsors and their affiliates may seek to enter a de-SPAC transaction with a target company they are affiliated with when superior target company transaction opportunities may be available.

The final rules will provide investors with a more complete understanding of the conflicts of interest related to an investment in a SPAC, including in situations like the examples above. Investors will have improved information concerning interests of the SPAC sponsor and others covered by the final rule that could reduce the value of their investment or that could result in opportunities potentially available to the SPAC not being realized. In this way, the final rules will allow investors to analyze risks associated with potential conflicts of interest regarding a SPAC more accurately.

We are not including a knowledge qualifier in conflicts of interest disclosure, as suggested by one commenter, because we expect the SPAC and its officers and directors will be in a position to know their own conflicts and that the SPAC may obtain similar information from the SPAC sponsor, its affiliates, and promoters (who will be in a position to know their own conflicts) by virtue of the relationship between the SPAC and the SPAC sponsor and between the SPAC and any promoters. In addition, we note that registrants can rely on 17 CFR 230.409 and 240.12b–21 with respect to information unknown or not reasonably available.

Another commenter recommended the conflicts of interest disclosures should include: names of all sponsors and their financial arrangements with SPACs; claims investors have on the SPAC if no de-SPAC transaction takes place; and claims investors have on the SPAC if investors exit before the de-SPAC transaction. We note that all of those items were included in the proposal, and we are adopting them as proposed.

A few commenters discussed issues related to potential SPAC and target company officer and director conflicts of interest. One of these commenters recommended the conflicts of interest disclosures cover SPAC officers, SPAC directors, target company officers, and target company directors. In considering the comment, we observed that proposed Item 1604 was inconsistent with proposed Items 1603(b) and 1605(d) by not covering SPAC officers and directors. We do not believe there are any special factors warranting such a difference. As a result, we have modified the language in Item 1604 to require disclosure regarding SPAC officers and directors as in the other adopted items. This change to Item 1604(a)(4) (cover page) and (b)(3) (prospectus summary) will ensure the benefits of the rule that we discuss generally above will apply to these rules as well. With respect to target company officers and directors, we believe that disclosure of their conflicts of interest is consistent with co-registration requirements in connection with the final amendments to registration forms and with final Rule 145a. As discussed in connection with those requirements, since the de-SPAC transaction is in substance an offering by the target company, the conflicts of interest of target company officers and directors may be important to investor investment, redemption, and voting decisions. Thus, we have amended Items 1603(b), 1604(a)(4) (prospectus cover page) and (b)(3) (prospectus summary), and 1605(d) to require this disclosure. We would not expect registrants to provide duplicative disclosure merely because a person falls into more than one of the categories of persons covered by the final rules.

One commenter recommended that we limit Item 1603(c) disclosure to those situations where officer or director fiduciary duties owed to other companies might reasonably be expected to present a potential conflict with a SPAC's de-SPAC transaction opportunities. We do not agree with this recommendation, because we do not believe conflicts will only arise in situations where there are fiduciary duties owed to other companies that are expected to present a potential conflict with a SPAC's de-SPAC transaction opportunities. For example, a director's obligations to other companies may compete with his or her attention to the SPAC. Because we believe this information is material to investors, we are not making any changes to the proposal in this respect in the final rules we are adopting.

Some commenters expressed the view that proposed Item 1605, including proposed Item 1605(d) concerning conflicts of interest in connection with de-SPAC transactions, would be redundant with current rules. The Commission is not making changes in the final rules we are adopting in response to these comments. Given the unique qualities of de-SPAC transactions, we believe registrants will benefit from the centralization of the SPAC-related requirements in the Item 1600 series of Regulation S–K rather than in a different location as suggested. Regarding any potential for redundancy with other Commission rules, if there are facts and circumstances that may result in required disclosure under a current rule being the same as under any of the rules we are adopting, registrants will not be required to repeat disclosures (except where the applicable rule may require, such as by calling for the disclosure in a specific location such as the prospectus cover page or prospectus summary).

Some commenters recommended we adopt certain requirements (in addition to those proposed) involving “break-even” disclosure. With respect to disclosure of a SPAC sponsor's “break-even” price per share, one commenter said this would help investors “ascertain the extent to which a sponsor's position differs from that of other investors.” We believe that the other conflicts of interest disclosures required by the final rules will provide sufficient information to allow investors to understand the potential differences in incentives between them and a SPAC sponsor, and as a result we are not adopting the suggested “break-even” disclosure.

We are not requiring registrants to provide “break-even” price per share disclosure regarding non-redeeming investors as suggested by commenters because each investor would already know the basis at which they acquired the shares of the SPAC and the SPAC may not know this information for many of its investors, who could have acquired the shares at a variety of prices through the public market. We are likewise not requiring disclosure suggested by commenters that would provide a price at which the SPAC sponsor would recoup their investments in the SPAC. We believe such disclosure could be confusing for investors, as many SPAC sponsors may consider such amounts as sunk costs, which they do not consider when deciding whether to proceed with a de-SPAC transaction. As a commenter notes, SPAC sponsors may be incentivized to proceed with de-SPAC transactions below the initial SPAC share price; however, that is largely because SPAC sponsors lack redemption rights. Generally, SPAC shareholders would seek de-SPAC transactions that result in share prices that exceed their redemption value. SPAC sponsor decisions to proceed with a transaction may be driven by the SPAC sponsor's expectation of their future deal flow and potential legal or reputational concerns among other factors. The “break-even” disclosure suggested by commenters would not take into account these factors. Moreover, none of these factors can be easily quantified, and the ones that can be quantified would be burdensome to produce and potentially difficult for investors to analyze and assess (given the difficulty in reliably quantifying those factors) and also would not be easily comparable across different SPACs (given the SPAC-specific and SPAC sponsor-specific nature of those factors). The rules as adopted will improve investors' ability to understand the SPAC sponsor's conflicts of interest, and we are concerned that adding a disclosure that takes into account difficult-to-quantify factors like the ones discussed above would detract from the disclosures that we are adopting.

In the final rules, we are not requiring a description of policies and procedures used to minimize potential or actual conflicts of interest. We believe the other disclosures we are adopting regarding conflicts of interest, including new Item 1603, will appropriately address investor protection concerns in this regard. We are also not making any changes that would expand the Series 1600 of Regulation S–K disclosures regarding conflicts of interest beyond registration statements, proxy statements, information statements, and tender offer statements as proposed to other Exchange Act reports (such as to Form 10–Q, 10–K, or 8–K).

Finally, we are making additional minor or technical changes in the final rules. First, we are making a change to the description of persons against whose interests the conflicts must be compared against from “unaffiliated security holders” to “unaffiliated security holders of the SPAC” in Items 1603(b) and 1604(a)(4) (prospectus cover page) and (b)(3) (prospectus summary). This change will avoid any potential ambiguity or confusion regarding whether target company officers and directors must compare their interests to security holders of the target company or security holders of the SPAC.

Second, we are making a technical change in final Item 1605(d) to use “or” instead of “and” each time in the phrase “held by the SPAC sponsor and the special purpose acquisition company's officers . . . and directors.” This change makes clear the disclosure should apply with respect to each named person and not only where all such persons share the same interest.

Third, we have made certain technical changes in some of the final rules regarding conflicts of interest to clarify the sets of persons being compared.

Fourth, in final Item 1603(b), we are changing each reference to “the SPAC sponsor” to “any SPAC sponsor” because there can be more than one such sponsor.

Fifth, we have revised the phrase “State whether there may be actual or potential conflicts of interest . . .” in proposed Item 1602(a)(5) to add a materiality qualifier such that the phrase in final Item 1602(a)(5) provides “State whether there may be actual or potential material conflicts of interest. . . .” This change makes prospectus cover page disclosure requirements under Item 1602(a)(5) consistent with the similar provisions of Item 1603(b), which require disclosure in the body of the disclosure document. We believe both provisions should contain the same materiality qualifier, because the provisions are related since Item 1602(a)(5) requires the registrant to provide a cross-reference to related disclosures in the prospectus, which includes disclosures made under Item 1603(b).

D. Dilution

1. Proposed Rules

Information about dilution conveys important information to investors about factors that may affect the value of a security holder's interest in a SPAC. Dilution in current Commission filings is typically measured by calculating changes in net tangible book value per share. There are a number of potential sources of dilution in common SPAC structures, including: (a) shareholder redemptions, (b) SPAC sponsor compensation, (c) underwriting fees, (d) warrants, (e) convertible securities, and (f) PIPE financings.

The Commission proposed several new rules that would require additional information about SPAC dilution in connection with registered offerings by SPACs, including IPOs, and in connection with de-SPAC transactions. With respect to registered offerings by SPACs (including IPOs) other than de-SPAC transactions, the Commission proposed Item 1602(a)(3) and (4), (b)(6), and (c). With respect to de-SPAC transactions, the Commission proposed Item 1604(a)(3), (b)(4), (5), and (6), and (c). Each of these proposed disclosure requirements is addressed in more detail below.

First, with respect to SPAC IPOs, in Item 1602(a)(3), the Commission proposed that the prospectus outside front cover page include, among other things, disclosure of whether compensation of the SPAC sponsor and its affiliates may result in a material dilution of the purchasers' equity interests. Also, the Commission proposed Item 1602(a)(4) to require on the outside front cover page of the prospectus, disclosure in the tabular format specified below the “estimated remaining pro forma net tangible book value per share at quartile intervals up to the maximum redemption threshold,” consistent with the methodologies and assumptions used in the disclosure provided pursuant to Item 506 of Regulation S–K:

Instruction 1 to Item 1602(a)(4) provided that, if the offering includes an over-allotment option, separate rows must be included in the tabular disclosure showing remaining pro forma net tangible book value per share with and without the exercise of the over-allotment option.

In addition, in Item 1602(b)(6) the Commission proposed that for SPAC IPOs, the summary prospectus include, among other things, disclosure of the extent to which compensation of the SPAC sponsor, its affiliates, and promoters may result in a material dilution of the purchasers' equity interests. In addition to the prospectus cover page and prospectus summary requirements for SPAC IPOs, the Commission also proposed Item 1602(c) regarding dilution. This proposed item would require, in addition to the disclosure required by § 229.506 (Item 506 of Regulation S–K), a description of material potential sources of future dilution following the registered offering by the special purpose acquisition company. This proposed item also would require disclosure in tabular format of the amount of future dilution from the public offering price that will be absorbed by purchasers of the securities being offered, to the extent known and quantifiable.

The other dilution provisions proposed by the Commission related to de-SPAC transactions. The Commission proposed Item 1604(a)(3) to require on the outside front cover page of the prospectus, among other things, disclosure of whether compensation of the SPAC sponsor, its affiliates, and promoters may result in a material dilution of the equity interests of non-redeeming shareholders who hold the securities until the consummation of the de-SPAC transaction. Proposed Item 1604(a)(3) also required the provision of a cross-reference, highlighted by prominent type or in another manner, to the locations of related disclosures in the prospectus.

Three additional proposed rules with respect to de-SPAC transactions, Item 1604(b)(4) through (6), each required prospectus summary disclosure. First, proposed Item 1604(b)(4) required, among other things, tabular disclosure of whether compensation of the SPAC sponsor and its affiliates has resulted or may result in a material dilution of the equity interests of unaffiliated security holders of the special purpose acquisition company. Second, proposed Item 1605(b)(5) required, among other things, disclosure of the dilutive impact, if any, of any financing transactions that have occurred or will occur in connection with the consummation of the de-SPAC transaction on unaffiliated security holders. Third, proposed Item 1604(b)(6) required disclosure of the rights of security holders to redeem the outstanding securities of the special purpose acquisition company and the potential impact of redemptions on the value of the securities owned by non-redeeming shareholders.

For de-SPAC transactions, the Commission also proposed Item 1604(c) to require a description of each material potential source of future dilution that non-redeeming shareholders may experience by electing not to tender their shares in connection with the de-SPAC transaction. Under Item 1604(c), proposed Item 1604(c)(1) required the provision of a sensitivity analysis disclosure in tabular format that expresses the amount of potential dilution under a range of reasonably likely redemption levels. Proposed Item 1604(c)(1) also required, at each redemption level in the sensitivity analysis, quantification of the dilutive impact on non-redeeming shareholders of each source of dilution, such as the amount of compensation paid or to be paid to the SPAC sponsor, the terms of outstanding warrants and convertible securities, and underwriting and other fees. Additionally, proposed Item 1602(c)(2) required a description of the model, methods, assumptions, estimates, and parameters necessary to understand the sensitivity analysis disclosure.

2. Comments

A number of commenters generally supported some or all of the proposed enhanced dilution disclosure requirements. Several of these commenters suggested that proposed dilution disclosure requirements would provide useful information to investors. Other commenters, however, generally opposed or raised concerns regarding some or all of the proposed enhanced dilution disclosure requirements. Several of these commenters expressed views that the proposed disclosure requirements regarding dilution would not be helpful to investors. Specific comments on various aspects of the proposal are described below.

Several commenters addressed issues related to levels of redemption in connection with proposed SPAC dilution disclosure. One commenter said that the “quantitative disclosure currently required under S–K Item 506 at IPO is not helpful for investors, as the output is largely driven by the maximum redemption scenario which can differ based on (i) different provisions of the SPAC's constituent documents. . .and (ii) the interpretation of those constituent documents.” In lieu of disclosure using the methodology in existing Item 506 as was proposed, this commenter said that “SPACs should present the per share amount of cash (or securities) in trust, under a range of hypothetical redemption scenarios and after giving effect to sponsor equity, underwriter compensation and IPO expenses.” To promote comparability, this commenter also suggested that “the hypothetical redemption scenarios include a maximum of 100% of the public shares (regardless of any provisions of the SPAC's constituent documents that might theoretically limit redemptions) less any shares subject to a binding commitment to not be redeemed.”

Another commenter, who expressed the general view that “proposed Items 1602(a)(4) and 1602(c) of Regulation S–K should not be adopted,” said that “it is unclear whether a maximum redemption threshold for purposes of proposed Item 1602(a)(4) should require or call for anything other than the redemption of 100% of the SPAC's public shares.” This commenter also said that “a maximum redemption scenario for a SPAC would vary across different de-SPAC transactions” because of the various ways the redemption level is impacted, including by the SPACs' governing documents, listing requirements, and negotiated conditions in the de-SPAC transaction. The commenter observed that “some de-SPAC transactions are structured such that certain funding mechanisms, such as backstop, forward purchase or PIPE arrangements, apply only in the event of certain redemption thresholds, further complicating the ability to make the assumptions required by proposed Item 1602(a)(4).” As a result, this commenter asserted that “any purported maximum redemption scenario disclosed at the time of IPO cannot be based on reasonable assumptions given the inherent lack of specifics available at the time of the IPO for a prospective de-SPAC transaction.”

The same commenter said that “a SPAC may actually become subject to a maximum redemption scenario that is lower than the quartile intervals required to be presented by proposed Item 1602(a)(4).” One commenter recommended the Commission require dilution disclosure at a 90% redemption level, stating it “could be particularly useful to investors if recent redemption activity is indicative of future activity.”

Commenters raised concerns that dilution disclosure would be characterized by uncertainty, be based on hypothetical assumptions, or depend on unknown variables. One commenter said that the proposed disclosure under Item 1602(a)(4) and (c) would require “dilution disclosure informed by purely hypothetical assumptions” and that “lengthy and detailed caveats regarding the assumptions would be needed.” As a result of these concerns, the commenter concluded that “proposed Items 1602(a)(4) and 1602(c) of Regulation S–K would only confuse and mislead investors.” Other commenters noted that dilution disclosure at the IPO stage would depend on unknown variables, which one of these commenters said will mean the disclosure is not meaningful. One of these commenters suggested that “tabular disclosure and sensitivity analyses in SPAC IPO registration statements should be limited to the sources of dilution in existence or contracted at the time of the IPO.”

Several commenters expressed concerns that the proposed dilution disclosure would not provide meaningful information to investors. One of these commenters said that “proposed Items 1602(c) and 1604(c) are ambiguous as to what is required to be considered as dilution and how that dilution is to be measured and presented.” This commenter said they do not believe current Item 506 disclosures are useful to investors and do not believe investors will find the similar disclosures proposed to be required by Items 1602(a)(4) and (c) and 1604(c) to be any more useful. One commenter said, “the proposed additional dilution disclosure to be included in an IPO prospectus (proposed Item 1602) would just capture in one place information already being disclosed with perhaps some new caveats about potential for dilutive financings and accordingly not result in a better informed investor.”

The Commission proposed that the calculation of pro forma net tangible book value be done consistent with the methodologies and assumptions used in the disclosure provided pursuant to Item 506 of Regulation S–K. One commenter said that “[Item 506] presentation is not meaningful to investors and in some instances the presentation may actually show that there is a decrease in net tangible book value from the offering after giving effect to the redeemable shares.”

Another commenter said that, without an identified de-SPAC target or structured de-SPAC transaction, the limited information at the time of the SPAC IPO used to calculate the proposed Item 1602(a)(4) disclosures would produce “an absurd result.” The commenter expressed the view that the disclosure provided based on this limited information would not be useful because “all of a SPAC's shares sold to public investors in the SPAC's IPO (the public shares) are required to be classified as temporary equity upon the completion of the IPO,” which would mean that “the calculation of pro forma net tangible book value per share in accordance with U.S. GAAP [Generally Accepted Accounting Principles] inevitably produces a deficit and remains the same constant figure across any assumed redemption thresholds.”

Another commenter said that “proposed Item 1602(a)(4) would require disclosure of the estimated remaining pro forma net tangible book value per share at specified redemption levels consistent with the methodologies in Item 506 of Regulation S–K” but noted that “Item 506 does not provide a definition for net tangible book value,” and, as a result, the commenter has “observed diversity in such calculations.” The commenter recommended “that the Commission include a definition of net tangible book value in the final rule to enhance the usefulness and comparability of the dilution disclosures for investors in SPAC transactions and other registered securities offerings as applicable.”

One commenter recommended that the Commission give “illustrative examples and calculations” of the dilution disclosure to ensure “robust, transparent, and consistent dilution disclosures.” Another commenter said they “agree with the proposal to add sensitivity tables to show the dilution across a range of redemption scenarios and would suggest the SEC provide a format to standardize that disclosure.” One commenter recommended that “sensitivity analyses should only be required for sources of dilution, such as warrants, where the dilutive impact varies based on changing equity values or other variables.”

In response to a request for comment asking whether we should require disclosure of net cash per share (in addition to, or in lieu of the proposed dilution disclosures), several commenters recommended we require net cash per share disclosure. One commenter said that, in lieu of the proposed dilution disclosure, “SPACs should present the per share amount of cash (or securities) in trust, under a range of hypothetical redemption scenarios and after giving effect to sponsor equity, underwriter compensation and IPO expenses.” Another commenter said that “the actual net cash per share for non-redeeming shareholders under different redemption scenarios should be displayed in an easily understandable, tabular format.”

A different commenter said they “support clear disclosure of net cash per share after taking into account all sources of dilution and dissipation of cash, under various redemption scenarios.” This commenter said that reductions in net cash may be attributable to a variety of sources, including: (a) sponsor compensation and investment terms, (b) share redemption, (c) exercise of warrants, fractional warrants and convertible securities, (d) PIPE financing, and (e) underwriting fees. The commenter also said that “[g]iven the complexity and contingencies involved in the de-SPAC process, investors . . . need clear information about potential consequences to inform their understanding of the true cost of the business combination.”

One group of commenters said that “the final rules for SPAC mergers should require SPACs to prominently disclose the amount of net cash underlying each share at the time of a de-SPAC transaction,” including on the cover page of the registration statement. These commenters also said, with respect to the proposed Item 1604(c) requirement to describe “each material potential source of future dilution” for non-redeeming SPAC shareholders, that the dilution concept included in the provision reflects a concept of dilution that is focused on “ownership dilution,” not the kind of dilution (and dissipation of cash) that reduces the net cash underlying a SPAC share. These commenters concluded that, as proposed, none of the disclosures in Item 1604(c) of Regulation S–K would inform investors about the net cash underlying a SPAC share. These commenters also provided a formula for the calculation of net cash per share: (a) total cash (consisting of the sum of cash from SPAC public shareholders plus cash from PIPEs or forward purchase agreements minus cash expenses minus the value of warrants minus the value of other equity derivatives), divided by (b) total shares (consisting of public shares plus founder shares plus PIPE or forward purchase agreement shares plus other shares plus shares issuable under rights). Another commenter supported using this calculation of net cash per share after taking into account all sources of dilution and dissipated cash under 25%, 50%, 75%, 90%, and 100% redemption scenarios.

One commenter said they “read proposed Item 1604(c)(1) as requiring a determination of the enterprise valuation that will result in a stockholder's `interest per share' (calculated by reference to a pro forma closing date balance sheet. . .). . .being at least equal to the $10 price per share paid in the IPO.” The commenter said “this is the equivalent of requiring a traditional IPO to include in its Item 506 dilution section alternative price ranges, the midpoint of which would not result in dilution to IPO investors,” which the commenter said “we can safely assume would be materially different from the proposed cover page range due to the significant disconnect between market prices and net book value per share.” The commenter said “if misunderstood by the reader, this proposed disclosure also has the dangerous potential to lead a SPAC shareholder to view the disclosure as a guarantee that the stock will not trade down in the aftermarket.”

One commenter on the proposal said that “[f]or de-SPAC transactions, the most meaningful information would be the expected value per share, using the agreed equity value of the target company plus net cash proceeds from the de-SPAC transaction under a range of hypothetical redemption scenarios.” The commenter said, “Given that SPAC warrants are almost uniformly out of the money at the agreed per share equity value used in the de-SPAC transaction (typically the $10 IPO per unit price), conveying the potential dilutive effect of the warrants can be handled in many different ways.” The commenter suggested disclosing “the percentage ownership of the surviving company at various hypothetical share increments above $10 per share, utilizing the treasury share method.”

One commenter recommended that the Commission should consider requiring that intermediaries provide information about “the sponsor, actual and potential conflicts of interest, [and] how much a non-redeeming SPAC investor's interest will be diluted” in a separate “Key Risks and Conflicts form” that is detached from the prospectus, so that the disclosure receives more investor attention and focus.

One commenter said that disclosures about “any lock-up periods or earnout provisions for sponsors or underwriters would be of significant interest to investors and should be required if part of the SPAC offering.”

3. Final Rules

i. Overview of Final Rules and Changes From Proposal

After considering the comments received, regarding dilution disclosure in SPAC registered offerings (such as SPAC IPOs) other than de-SPAC transactions, we are adopting Item 1602(a)(3) and (4), (b)(6), and (c) as proposed, except for certain modifications we discuss below. Regarding de-SPAC transactions, we are also adopting Item 1604(a)(3), (b)(4), (5), and (6), and (c) as proposed, except for certain modifications we discuss below. Each of these provisions is discussed in detail below.

a. Overview of Final Item 1602 Dilution Disclosure (IPOs and Non-De-SPAC Transaction Registered Offerings) and Changes From Proposal

1. Item 1602(a)

Final Item 1602(a)(3) requires, on the outside front cover page of the prospectus in plain English, a statement of the amount of the compensation received or to be received by the SPAC sponsor, its affiliates, and promoters, the amount of securities issued or to be issued by the SPAC to the SPAC sponsor, its affiliates, and promoters and the price paid or to be paid for such securities, and whether this compensation and securities issuance may result in a material dilution of the purchasers' equity interests. Final Item 1602(a)(3) also requires the provision of a cross-reference, highlighted by prominent type or in another manner, to the locations of related disclosures in the prospectus. Final Item 1602(a)(3) is different from the proposal only with respect to changes made regarding SPAC sponsors and securities issuances discussed above in section II.B.

Final Item 1602(a)(4) requires, with respect to SPAC IPOs, on the outside front cover page of the prospectus in plain English, disclosure in the tabular format specified at quartile intervals based on percentages of the maximum redemption threshold: the offering price; as of the most recent balance sheet date filed, the net tangible book value per share, as adjusted, as if the offering and assumed redemption levels have occurred and to give effect to material probable or consummated transactions (other than the completion of a de-SPAC transaction); and the difference between the offering price and such net tangible book value per share, as adjusted.

Final Table 1 to Paragraph (a)(4) provides:

Final Instruction 1 to Item 1602(a)(4) provides, if the offering includes an over-allotment option, separate rows in the tabular disclosure must be included showing the information required by paragraph (a)(4) with and without the exercise of the over-allotment option.

Final Item 1602(a)(4) includes several changes compared to the proposal. First, we have clarified in the final rule how to calculate the required dilution information. In response to the proposal, some commenters generally sought clarification, such as illustrative examples, calculations, or definitions, in connection with the dilution calculation. We believe the changes in the final rules will be simpler for registrants to follow and comply with because they provide clear steps regarding how the dilution disclosure should be determined. In addition, we have deleted proposed references to calculating dilution “consistent with the methodologies and assumptions used in the disclosure provided pursuant to § 229.506 (Item 506 of Regulation S–K).” These references to Item 506 are not necessary given the changes made to clarify how to calculate the required dilution information. This change also ensures that redeemable common stock is not treated as temporary equity for purposes of the calculation in a way that could undermine the meaningfulness of the dilution disclosure as we discuss in more detail below in response to comments. Relatedly, we are revising Item 6 of Form S–1 to state that the registrant must “Provide the information required by Item 506 of Regulation S–K (§ 229.506 of this chapter), unless the registrant is a special purpose acquisition company (as defined in Item 1601 of Regulation S–K),” because the requirements of Item 1602(a)(4) are intended to supplant the requirements of Item 506 for SPACs.

In addition, we have deleted proposed references in Item 1602(a)(4) to “estimated remaining pro forma net tangible book value per share” as the name for the dilution measurement and instead refer to “net tangible book value per share, as adjusted.” We were concerned that references to “estimated remaining pro forma net tangible book value per share” could be ambiguous and that registrants could misinterpret the term to require estimation of what the net tangible assets of a combined company might be in any ultimate de-SPAC transaction. The deletion of this term and its replacement with the new term helps clarify that registrants should not include any estimates of the assets of any ultimate target company in this calculation.

In addition, in final Item 1602(a)(4), we have replaced the proposed phrase “at quartile intervals up to the maximum redemption threshold” with “at quartile intervals based on percentages of the maximum redemption threshold.” We believe registrants could mistakenly interpret the proposed terms to require quartile intervals based on the total number of shares issued in the offering for the three redemption levels in the table other than the maximum redemption level. We believe this change will eliminate that potential for misinterpretation.

2. Item 1602(b)

Final Item 1602(b)(6) requires the prospectus summary to include in plain English in a tabular format, the nature and amount of the compensation received or to be received by the SPAC sponsor, its affiliates, and promoters, the amount of securities issued or to be issued by the SPAC to the SPAC sponsor, its affiliates, and promoters and the price paid or to be paid for such securities, and, outside of the table, the extent to which this compensation and securities issuance may result in a material dilution of the purchasers' equity interests. Final Item 1602(b)(6) is different from the proposal only with respect to changes made regarding SPAC sponsors and securities issuances discussed above in section II.B.

3. Item 1602(c)

Final Item 1602(c) requires disclosure in a tabular format for the same quartile intervals as in Item 1602(a)(4): the offering price; net tangible book value per share, as adjusted, determined in the same manner as in Item 1602(a)(4); and the difference between the offering price and such net tangible book value per share, as adjusted. Final Item 1602(c) also requires that the tabular disclosure must show: the nature and amounts of each source of dilution used to determine net tangible book value per share, as adjusted; and the number of shares used to determine net tangible book value per share, as adjusted; and any adjustments to the number of shares used to determine the per share component of net tangible book value per share, as adjusted. Final Item 1602(c) also requires a description of each material potential source of future dilution following the registered offering by the special purpose acquisition company, including sources not included in the table with respect to the determination of net tangible book value per share, as adjusted. Final Item 1602(c) also requires a description of the model, methods, assumptions, estimates, and parameters necessary to understand the tabular disclosure.

Final Item 1602(c) contains several changes from the proposal. We have clarified in the final rule that Item 1602(c) dilution should be calculated in the same way as in Item 1602(a)(4) and have deleted references in proposed Item 1602(c) to Item 506 of Regulation S–K, consistent with changes discussed above made to final Item 1602(a)(4) in this respect. In addition, we have clarified that the table in Item 1602(c) should show the nature and amounts of each source of dilution and the number of shares used in the calculation in order to eliminate any ambiguity and the potential that registrants could misinterpret the item to mean that the table merely needs to show the final dilution information and not the line items that went into its calculation.

With respect to the proposed requirement to describe material potential sources of future dilution, the final rules specify that the description should be located outside the table. The final rules also state that the description of each material potential source of future dilution outside of the table should include “sources not included in the table with respect to the determination of net tangible book value per share, as adjusted.” We are making this change to clarify that the disclosure outside of the table is not to be merely duplicative of the sources of dilution used for the calculation of the measure of dilution within the table. Without these changes, the item could have been misinterpreted by registrants to require only disclosure of the same sources of dilution used in the tabular calculation of dilution, only in a non-tabular format. Depending on a SPAC's specific facts and circumstances, the non-tabular disclosure of “each material potential source of future dilution” under Item 1602(c) may need to discuss a broader set of items than “material probable or consummated transactions” that are included for purposes of calculating the tabular dilution measure.

We have also clarified that underlying factors such as assumptions that are necessary to understand the table must be described in order to eliminate any ambiguity under the proposal that no such information is required beyond the numbers in the dilution table. This clarification also makes final Item 1602(c) consistent with final Item 1604(c), which contained a proposed provision to this effect (that we are adopting as discussed in detail below).

b. Overview of Final Item 1604 Dilution Disclosure (De-SPAC Transactions) and Changes From Proposal

1. Item 1604(a)

Final Item 1604(a)(3) requires, on the outside front cover page of the prospectus in plain English, a statement of the amount of the compensation received or to be received by the SPAC sponsor, its affiliates, and promoters in connection with the de-SPAC transaction or any related financing transaction; the amount of securities issued or to be issued by the SPAC to the SPAC sponsor, its affiliates, and promoters and the price paid or to be paid for such securities in connection with the de-SPAC transaction or any related financing transaction; and whether this compensation and securities issuance may result in a material dilution of the equity interests of non-redeeming shareholders who hold the securities until the consummation of the de-SPAC transaction. Final Item 1604(a)(3) also requires the provision of a cross-reference, highlighted by prominent type or in another manner, to the locations of related disclosures in the prospectus. Final Item 1604(a)(3) is different from the proposal only with respect to changes made regarding SPAC sponsors and securities issuances discussed above in section II.B.

2. Item 1604(b)

Final Item 1604(b)(4) requires that the prospectus summary must include in plain English, in a tabular format, the terms and amount of the compensation received or to be received by the SPAC sponsor, its affiliates, and promoters in connection with the de-SPAC transaction or any related financing transaction, the amount of securities issued or to be issued by the SPAC to the SPAC sponsor, its affiliates, and promoters and the price paid or to be paid for such securities in connection with the de-SPAC transaction or any related financing transaction; and, outside of the table, the extent to which that compensation and securities issuance has resulted or may result in a material dilution of the equity interests of non-redeeming shareholders of the special purpose acquisition company.

In final Item 1604(b)(4), we revised to clarify that certain disclosure should appear outside of the table (rather than within it). It also makes the item consistent with Item 1602(b)(6) in requiring disclosure of the extent of the material dilution not merely whether or not there is such material dilution. Also, in the final rule, we have replaced the term “unaffiliated security holders” with “non-redeeming shareholders” to ensure consistency of usage throughout Item 1604. In addition, this change eliminates any ambiguity that might have caused some registrants to believe they need to subtract affiliated shares from the denominator of the net tangible book value per share calculation, which the proposal did not intend. We also made changes to final Item 1604(b)(4) as compared to the proposal with respect to SPAC sponsors, promoters, and securities issuances discussed above in section II.B.

Final Item 1604(b)(5) requires the prospectus summary to include a brief description in plain English of the material terms of any material financing transactions that have occurred or will occur in connection with the consummation of the de-SPAC transaction, the anticipated use of proceeds from these financing transactions and the dilutive impact, if any, of these financing transactions on non-redeeming shareholders. The sole change from the proposal is that, in final Item 1604(b)(5), we have revised the term “unaffiliated security holders” to “non-redeeming shareholders” for the same reasons as discussed above regarding Item 1604(b)(4).

Final Item 1604(b)(6) requires the prospectus summary to include a brief description in plain English of the rights of security holders to redeem the outstanding securities of the special purpose acquisition company and the potential dilutive impact of redemptions on non-redeeming shareholders. We made one change to final Item 1604(b)(6) compared to the proposal to clarify the disclosure required. Final 1604(b)(6) contains the phrase “potential dilutive impact of redemptions on non-redeeming shareholders” instead of the proposed phrase “impact of redemptions on the value of the securities owned by non-redeeming shareholders.” We believe this clarification will eliminate ambiguity and the potential that registrants could misinterpret the item to require undertaking valuations under different scenarios of the securities owned by non-redeeming shareholders.

3. Item 1604(c)

We received comments that indicated that we should provide a definition of net tangible book value or provide examples to enhance the comparability of the disclosures. In consideration of these comments, we have revised Item 1604(c) to more clearly set forth the dilution disclosures and calculations it requires and to align this dilution calculation with the dilution calculation under Item 1602(a)(4) and (c), although, as we discuss herein, there are technical differences between the adjustments under Item 1602(a)(4) and (c) versus adjustments under Item 1604(c).

Final Item 1604(c) requires disclosure in a tabular format that includes intervals representing selected potential redemption levels that may occur across a reasonably likely range of outcomes of: the offering price disclosed pursuant to Item 1602(a)(4) in the initial registered offering by the SPAC; as of the most recent balance sheet date filed, the net tangible book value per share, as adjusted, as if the selected redemption levels have occurred and to give effect to, while excluding the de-SPAC transaction itself, material probable or consummated transactions, and other material effects on the SPAC's net tangible book value per share from the de-SPAC transaction; and the difference between such offering price and such net tangible book value per share, as adjusted. Final Item 1604(c) also requires that the tabular disclosure must show: the nature and amounts of each source of dilution used to determine net tangible book value per share, as adjusted; the number of shares used to determine net tangible book value per share, as adjusted; and any adjustments to the number of shares used to determine the per share component of net tangible book value per share, as adjusted.

Final Item 1604(c) also requires, outside of the table, a description of each material potential source of future dilution that non-redeeming shareholders may experience by electing not to tender their shares in connection with the de-SPAC transaction, including sources not included in the table with respect to the determination of net tangible book value per share, as adjusted. Final Rule 1604(c)(1) requires, with respect to each redemption level, a statement of the company valuation at or above which the potential dilution results in the amount of the non-redeeming shareholders' interest per share being at least the IPO price per share of common stock. Final Item 1604(c)(2) requires the provision of a description of the model, methods, assumptions, estimates, and parameters necessary to understand the tabular disclosure.

Final Item 1604(c) introductory text and (c)(1) and (2) contain certain changes from the proposal. We believe the changes in the final rules will be simpler for registrants to follow and comply with because they provide clear steps regarding how the dilution disclosure should be determined. In addition, in clarifying how to calculate the required dilution, final Item 1604(c) also ensures that redeemable common stock is not treated as temporary equity for purpose of the calculation in a way that could undermine the meaningfulness of the dilution disclosure. As part of these clarifications, we have deleted the proposed provision in Item 1604(c)(1) that would have required “sensitivity analysis disclosure in tabular format that expresses the amount of potential dilution under a range of reasonably likely redemption levels.” We were concerned the meaning of that proposed provision could be unclear to registrants, particularly its references to “sensitivity analysis.” We believe there was potential for some registrants to interpret the proposed provision merely to mean a range of redemption levels must be analyzed, while other registrants could interpret the provision to mean that a range of redemption levels must be analyzed and also that a sensitivity analysis must be conducted that reflects a range of assumptions for the range of redemption levels.

We also have deleted the following language of proposed Item 1604(c)(1): “At each redemption level in the sensitivity analysis, quantify the dilutive impact on non-redeeming shareholders of each source of dilution, such as the amount of compensation paid or to be paid to the SPAC sponsor, the terms of outstanding warrants and convertible securities, and underwriting and other fees.” We were concerned that the references in that proposed provision to certain sources of potential dilution could confuse registrants about how to calculate dilution and could produce inconsistent interpretations across different registrants.

Final Item 1604(c) accomplishes the same goal as these deleted provisions in proposed Item 1604(c)(1) by requiring disclosure “in a tabular format that includes intervals representing selected potential redemption levels that may occur across a reasonably likely range of outcomes.” We believe the final rule will make it clear that the item does not prescribe the redemption levels for which dilution information must be provided (in contrast to Item 1602(a)(4) and (c)).

Under Item 1604(c), registrants should not select redemption levels that are not possible. For example, registrants should not select levels that, combined with any other funding (such as PIPEs) in connection with the de-SPAC transaction, would result in the SPAC having cash that is lower than any minimum cash condition in the agreements related to the de-SPAC transaction. Registrants are not required to select exactly four levels for Item 1604(c) (which they are required to do in Item 1602(a)(4) and (c)) but should ensure the redemption levels reasonably inform investors of a range of potential outcomes.

Furthermore, we have clarified that the table in final Item 1604(c) should show the nature and amounts of each source of dilution and the number of shares used in the calculation in order to eliminate any ambiguity and the potential that registrants could misinterpret the item to mean that the table needs to show only the final dilution information and not the line items that went into its calculation.

In addition, with respect to the proposed requirement to describe material potential sources of future dilution, the final rule specifies that the description should be located outside of the table. The final rule also states that each material potential source of future dilution outside of the table should include “sources not included in the table with respect to the determination of net tangible book value per share, as adjusted.” We are making this change to clarify that the disclosure outside of the table is not merely duplicative of the sources of dilution used for the calculation of the measure of dilution within the table. Without these changes, the item could have been misinterpreted by registrants to require disclosure of the same sources of dilution used in the tabular calculation of dilution, only in a non-tabular format. Depending on a SPAC's specific facts and circumstances, the non-tabular disclosure of “each material potential source of future dilution” under Item 1604(c) may need to discuss a broader set of items than “material probable or consummated transactions” that are included for purposes of calculating the tabular dilution measure.

Finally, to reflect the deletion discussed above of the proposed provision in Item 1604(c)(1) regarding “sensitivity analysis,” we have inserted in final Item 1604(c)(2) the words “necessary to understand the tabular disclosure” instead of the proposed words “necessary to understand the sensitivity analysis disclosure.”

ii. Value of SPAC Dilution Information to Investors as a General Matter and Under the Final Rules

In adopting the final rules, we agree with the commenters that expressed the view that the dilution disclosures will provide helpful information to investors. There are a number of potential sources of dilution in common SPAC structures, including: (a) shareholder redemptions, (b) SPAC sponsor compensation, (c) underwriting fees, (d) warrants, (e) convertible securities, and (f) PIPE financings. The enhanced dilution disclosure required by the final rules will enable investors in a SPAC IPO and subsequent purchasers of SPAC shares to better understand the potential impact upon them of the various dilutive events that may occur over the lifespan of the SPAC.

Dilution disclosure in Commission filings has evolved over time. Today, Commission dilution disclosure requirements remain important, including with respect to SPACs. The Commission disagrees with the views expressed by some commenters that dilution disclosure would not be meaningful for investors' investment decision-making or for valuation purposes at the IPO stage or de-SPAC transaction stage. Investors may use dilution information differently depending on the type of registrant, such as whether the issuer is an operating company or a shell company, such as a SPAC. For example, with an operating company some “value investors” may compare the offering price to net tangible book value. For a SPAC, however, this specific comparison may be less meaningful than with an operating company because SPACs typically have limited assets at the time of the IPO and the offering price is typically fixed at $10 per share. In addition, with an operating company, some “value investors” may compare the debt of the issuer to the net tangible book value. For a SPAC, however, this specific comparison may be less meaningful than with an operating company, because SPACs typically have limited debt at the time of the IPO and have limited assets. Furthermore, with an operating company, some investors may seek to determine a value for the issuer taking into account return on net tangible assets or by using a value calculated by multiplying a market average price-to-net-tangible-book-value-per-share ratio times the issuer's net tangible book value per share. For a SPAC, however, these specific methods may be less meaningful than with an operating company because of the limited assets of the SPAC and limited, if any, net income at the time of the IPO.

Dilution disclosure is important to SPAC investors for two reasons at both the IPO and de-SPAC transaction stages: (1) it provides investors a way of understanding the impact of the disparity in price paid by insiders and the price paid by investors for shares, and (2) it enables investor comparisons to other SPACs. Additionally, at the de-SPAC transaction stage, dilution disclosure is important to SPAC investors for a third reason: it helps investors evaluate the economics of the de-SPAC transaction, which can inform their investing and voting decisions. We discuss these three reasons in more detail as follows.

First, the difference in per share net tangible book value, as adjusted, as compared to the $10 offering price, demonstrates to investors how the typically lower-priced SPAC sponsor promote stake affects these investors' claims on the tangible assets of the company. Similarly, at the de-SPAC transaction stage, when certain other transactions may become probable, the net tangible book value per share, as adjusted, will convey to investors a better understanding of the dilution that these other transactions may produce. Relatedly, net tangible book value per share, as adjusted, provides information to investors on dilution (in the sense of diminution in percentage ownership) resulting from the SPAC sponsor promote, because an increase in common shares in the denominator reduces net tangible book value per share, as adjusted.

Second, investors may focus on the relative dilution in a particular SPAC offering as compared to other SPAC offerings. For example, some types of investors may be more focused on finding SPACs with the highest net tangible book values per share compared to the $10 offering price and less focused on other qualitative factors about the SPAC.

Third, as discussed above, SPAC shares can be redeemed at an agreed upon price. Some commentators have emphasized that it is important for investors to have information at the de-SPAC transaction stage that enables investors to value these shares on a basis other than the stated agreement price. The dilution information will help investors to evaluate the economics of the business combination transaction, assisting their investment and voting decision-making. Investors' redemption decisions are also likely informed by the market price of the SPAC shares, just as owners of stock options base their exercise decisions, in part, on the value of the underlying stock.

While dilution information is important to SPAC investors for the reasons discussed above, we acknowledge that SPAC investors may use dilution information differently than investors in an operating company. For example, with an operating company some “value investors” may compare the offering price to net tangible book value. For a SPAC, however, this specific comparison may be less meaningful than with an operating company because SPACs typically have limited assets at the time of the IPO and the offering price is typically fixed at $10 per share. In addition, with an operating company, some “value investors” may compare the debt of the issuer to the net tangible book value. For a SPAC, however, this specific comparison may be less meaningful than with an operating company, because SPACs typically have limited debt at the time of the IPO and have limited assets. Furthermore, with an operating company, some investors may seek to determine a value for the issuer that takes into account return on net tangible assets or by using a value calculated by multiplying a market average price-to-net-tangible-book-value-per-share ratio times the issuer's net tangible book value per share. For a SPAC, however, these specific methods may be less meaningful than with an operating company because of the limited assets of the SPAC and limited, if any, net income at the time of the IPO.

We disagree with comments that suggested market practice of disclosing dilution information obviates the need for the proposed rules regarding dilution. The final rules will help standardize dilution disclosures across registrants and provide a minimum transparent floor for disclosure, even if market practices change. To the extent potential future registrants may otherwise have provided these disclosures based on market convention or other reasons, such registrants are not likely to incur additional costs in preparing this disclosure.

Some commenters suggested current dilution disclosure under Item 506 produces—and the proposed dilution disclosure would produce—results that are flawed or are calculated using varying methods by registrants. We acknowledge the concerns expressed by these commenters that using a method of calculating Item 506's measure of net tangible book value that substantively excludes the redeemable common stock classified as temporary equity may result in dilution disclosure that is less meaningful to an investor. For example, in a SPAC IPO, this calculation could produce negative net tangible book value per share despite the proceeds raised in the offering.

iii. Discussion and Examples Regarding the Calculation of Net Tangible Book Value Per Share, As Adjusted, in SPAC IPOs (Item 1602(a)(4) and (c)) and in De-SPAC Transactions (Item 1604(c))

a. Dilution Disclosure Under Items 1602(a)(4) and (c) and 1604(c) Generally

After considering the comments, we have made changes (as described above) in the final rules to clarify the calculation of net tangible book value per share, as adjusted, as the measure of dilution in Items 1602(a)(4) and (c) and 1604(c). Without these revisions, there would be a risk that some disclosure, even under the new rules, could present results that are not meaningful to investors, such as negative net tangible book value per share in some transactions. In addition, we believe the changes in the final rules will be simpler for registrants to follow and comply with because they provide clear steps regarding how to determine dilution.

b. SPAC IPO Dilution Disclosure: Comparison of Item 1602(a)(4) and (c)

Final Item 1602(a)(4) and (c) are similar in that they require the disclosure of net tangible book value per share, as adjusted, shown in a tabular format. These items, however, have four key differences. First, Item 1602(a)(4) tabular disclosure must be provided on the prospectus cover, while Item 1602(c) disclosure must be provided in the prospectus body. Second, unlike Item 1602(c), registrants providing the Item 1602(a)(4) tabular disclosure do not need to show individual line-items for each source of dilution used to determine net tangible book value per share, as adjusted, in the table; for Item 1602(a)(4), they may simply show net tangible book value per share, as adjusted, in the table for the required quartiles. Third, Item 1602(c) also contains the following requirement that Item 1602(a)(4) does not contain—to describe, outside of the table, each material potential source of future dilution following the registered offering by the special purpose acquisition company, including sources not included in the table with respect to the determination of net tangible book value per share, as adjusted. Fourth, unlike Item 1602(a)(4), Item 1602(c) requires the provision of a description of the model, methods, assumptions, estimates, and parameters necessary to understand the tabular disclosure.

With respect to the requirement in final Item 1602(c) to describe each material potential source of future dilution (including those not shown in the table), these material potential sources of future dilution under final Item 1602(c) are to be disclosed outside of the table. These sources may not be the same as transactions that must be shown in the dilution table required by Item 1602(c). This non-tabular disclosure of “each material potential source of future dilution” in Item 1602(c) potentially may need to discuss a broader set of items than “material probable or consummated transactions,” although this would depend on a SPAC's specific facts and circumstances.

c. De-SPAC Dilution Disclosure Under Item 1604(c), Including Examples of Adjustments

Dilution disclosure is also required in final Item 1604(c) in connection with de-SPAC transactions. An objective of the dilution disclosure required by Item 1604(c) is to depict the amount of net assets that the SPAC will contribute to the post-combination entity, as also noted by some commenters. In order to accomplish this objective of depicting the amount of net assets that the SPAC will contribute to the post-combination entity, final Item 1604(c) requires three adjustments of the SPAC's net tangible book value per share as of the most recent balance sheet filed. The first adjustment is for the redemption of the SPAC's shares. This adjustment is important because both the amount of net tangible assets in the numerator (for example, cash or securities held through the trust account) and the number of shares in the denominator will vary, depending on the redemption level. The second adjustment is to give effect to material probable or consummated transactions other than consummation of the de-SPAC transaction itself. This adjustment is also important because these transactions may affect the amount of net tangible assets in the numerator and the number of shares in the denominator. Examples of transactions that could be material probable or consummated transactions include funding backstops, forward purchases, or PIPE financings. We generally expect the term “probable or consummated transactions” to be applied in the net tangible book value per share, as adjusted, calculation, similar to its application in 17 CFR 210.11–01 through 210.11–03 (“Article 11” of Regulation S–X), which requires pro forma financial information that incorporates the effects of “probable or consummated transactions.” The third adjustment is for inclusion of other material effects of the de-SPAC transaction on the SPAC's net tangible book value per share but not the de-SPAC transaction itself. A consummation of the de-SPAC transaction could have material effects on the amount of net tangible book value that the SPAC contributes to the post-combination entity that do not stem from the types of transactions identified in the second adjustment discussed above. Two examples of such other effects would be the issuance of shares contingent on consummation of the de-SPAC transaction as compensation to a SPAC sponsor and the expected incurrence of transaction expenses to consummate the de-SPAC transaction.

Further, to ensure “net tangible book value per share, as adjusted” depicts the amount of net assets that the SPAC will contribute to the post-combination entity, calculation of the measure excludes the effect of the consummation of the de-SPAC transaction itself. Thus, target company assets should not be included in net tangible book value per share, as adjusted and, in de-SPAC transactions where the consideration paid for the target company is securities of the SPAC, the SPAC should not include those securities paid as consideration in the denominator of the net tangible book value per share, as adjusted, calculation.

iv. Discussion of Comments

a. Warrants

We are not adopting one commenter's recommendation that dilution from warrants should be conveyed using the treasury share method. A treasury share method approach would involve calculating the difference between the strike price of a warrant and the trading price of the shares of the post-de-SPAC transaction combined company. At the time of the dilution disclosure, those trading prices are not known. The commenter suggested using “various hypothetical share increments above $10 per share,” which is the typical SPAC IPO offering price. We do not believe that conveying the dilutive effect of warrants using that approach would be appropriate in connection with the dilution disclosure requirements we are adopting, because the hypothetical prices used in the calculation may not be realistic. Further, we believe there is sufficient disclosure about the terms of the warrants that would enable an investor to conduct such analysis on the strike price of a warrant using assumptions of trading prices of shares.

The same commenter recommended that “sensitivity analyses should only be required for sources of dilution, such as warrants, where the dilutive impact varies based on changing equity values or other variables.” As discussed above, final Item 1604(c) does not include the proposed provisions related to sensitivity analysis that concerned the commenter. For Item 1602(a)(4) and (c) and 1604(c), with respect to classification of warrants on an unadjusted basis, as either a liability or equity, registrants should follow applicable GAAP. This classification may affect the calculation of net tangible book value per share, as adjusted, because a liability-classified warrant would increase liabilities thereby reducing net tangible book value, while an equity-classified warrant would not do so, unless the effect of its exercise is included in the calculation. Whether to adjust net tangible book value per share to give effect to the exercise of a warrant is a judgment based on facts and circumstances, including whether the effect of the exercise would be consistent with the objective of the disclosure—to depict the amount of net assets the SPAC will contribute to the post-combination entity. When the exercise of the warrant is not contingent on the consummation of the de-SPAC transaction, then adjustment that includes the effect of the warrant's exercise in net tangible book value per share, as adjusted, generally would not be appropriate because those warrants will remain outstanding after the de-SPAC transaction.

As discussed above, the non-tabular disclosure of “each material potential source of future dilution” under Item 1604(c) potentially may need to discuss a broader set of items than “material probable or consummated transactions,” although this would depend on a SPAC's specific facts and circumstances. Thus, whether or not a registrant has made an adjustment for warrants in net tangible book value per share, as adjusted, the registrant may need to describe how the warrants are a material potential source of future dilution.

b. Redemptions

We are not adopting a commenter's suggestion to include a redemption scenario that would reflect “100% of the public shares (regardless of any provisions in the SPAC's governing documents that might theoretically limit redemptions).” While we acknowledge that the suggested approach would permit an identical comparison across SPACs at the 100% redemption level, as the commenter noted, we believe that suggested approach would be less meaningful to investors than the maximum redemption level approach we are adopting in the final rules, because that suggested approach would not take into account the governing documents and so would present a scenario that may not in fact occur in practice. We agree that comparability is an important goal as there may be certain investors who focus on the relative dilution in a particular SPAC offering as compared to other SPAC offerings. However, that comparability across SPACs should be balanced with the need to disclose information tailored to the registrant. The requirement in Item 1602(a)(4) and (c) of the final rules to provide a maximum redemption level (instead of redemption based on 100% of securities sold) and other redemption levels as a percentage of this maximum will provide more issuer-specific information than absolute 25%, 50%, 75%, and 100% levels. While the rules we are adopting will not necessarily provide comparability at identical percentages across SPACs, we believe investors nevertheless may make valuable comparisons across SPACs when looking at the dilution information supplied at each of the prescribed intervals in the rule.

The same commenter expressed the view that current dilution disclosure under Item 506 of Regulation S–K is unhelpful for IPO-stage investors, as the output is driven by the maximum redemption scenario which can differ based on (i) different provisions of the SPAC's constituent documents and (ii) the interpretation of those constituent documents. We believe the dilution information requirements related to IPOs in Item 1602 that we are adopting will provide more helpful information to investors than current market practice under Item 506 with respect to SPACs, where, in the experience of the Commission staff, some registrants have focused solely on a maximum redemption scenario. Item 1602 as adopted will provide a greater range of redemption scenario dilution information to investors. Further, the Commission does not believe that different interpretations of a SPAC's governing documents will make a SPAC unable to provide the required dilution information at the maximum redemption level for two reasons. First, a SPAC will know how to interpret its own governance documents. In addition, in the experience of the Commission staff, many SPACs use similar, well-established governing document provisions that set their maximum redemption level at a level to avoid the SPAC being an issuer of penny stock. We do not anticipate these standardized provisions will involve difficult interpretive issues.

One commenter said that “a SPAC may actually become subject to a maximum redemption scenario that is lower than the quartile intervals required to be presented by proposed Item 1602(a)(4).” As discussed above in the description of the dilution rules we proposed, the redemption levels required by Item 1602(a)(4) are “25% of maximum redemption,” “50% of maximum redemption,” and “75% of maximum redemption” and thus are relative to the maximum redemption level and are not an absolute percentage. To clarify for investors the percentage used, registrants may add information to the table headers. For example, where the maximum redemption is 97.5%, a registrant could add “25% of Maximum Redemption (24.375%).” For greater clarity, in final Item 1602(a)(4), we have replaced the proposed terms “at quartile intervals up to the maximum redemption threshold” with the terms “at quartile intervals based on percentages of the maximum redemption threshold,” because we believe registrants could mistakenly interpret the proposed terms to require quartile intervals based on the total number of shares issued in the offering for the three redemption levels in the table other than the maximum redemption level.

One commenter recommended the Commission require dilution disclosure at a 90% redemption level. We do not believe it is necessary to make such changes to the final rules. We believe the four redemption thresholds proposed will give investors a reasonable picture of the potential range of dilution outcomes pursuant to Item 1602(a)(4) and (c). For Item 1604(c) in connection with de-SPAC transactions, we believe providing a prescriptive level of 90% would be inconsistent with the requirement to provide SPAC-specific reasonably likely redemption levels.

c. Assumptions

Commenters raised concerns that dilution disclosure would be characterized by uncertainty, be based on hypothetical assumptions, or depend on unknown variables. As discussed above, we have made changes to final Items 1602(a)(4) and (c) and 1604(c) to clarify how registrants should calculate dilution. Where registrants are making adjustments consistent with “net tangible book value per share, as adjusted” or are making assumptions in connection with other dilution disclosures required under the final rules, we believe registrants should be able to provide the required dilution information based on reasonable assumptions. We do not believe that dilution disclosure would mislead investors, as suggested by one commenter, or that such assumptions would need to be presented with lengthy and detailed caveats. On the contrary, we believe investors will understand that assumptions being made in connection with required dilution disclosure do not mean the dilution has occurred or is certain to occur. The final rules require a description of the assumptions necessary to understand the tabular disclosure, and, in providing that disclosure, registrants may highlight that these are assumptions in order to make that point clearer for investors. While we do not believe that the assumptions necessarily need lengthy and detailed caveats, if there are facts and circumstances in which a registrant believes a lengthy or detailed discussion is needed, we believe that would be appropriate to allow investors to understand the accompanying tabular disclosure.

d. Net Cash Per Share Disclosure

We are not adding an explicit net cash per share disclosure requirement as several commenters recommended that we require. One group of commenters said net cash per share disclosure should be provided on the cover page of the registration statement. These commenters expressed the view that the dilution concept included in the proposal reflects a concept of dilution that is focused on “ownership dilution,” not the kind of dilution (and dissipation of cash) that reduces the net cash underlying a SPAC share.

We do not agree with that group of commenters that the proposal was limited to dilution focused solely on reduction in the percentage ownership of a shareholder out of total shares deemed to be issued and outstanding. We agree this form of dilution described by commenters is an element of the denominator in the net tangible book value per share, as adjusted, calculation, but the numerator of the net tangible book value per share, as adjusted, calculation will capture and convey other information—such as existing cash (prior to the relevant transaction, e.g., IPO or de-SPAC transaction), cash raised in securities issuances, and cash paid out to holders of redeemable securities—of the same type that these commenters focus on in recommending disclosure of net cash per share.

Because we believe substantially all the information that would be conveyed to an investor by a net cash per share measure will be conveyed by the required “net tangible book value per share, as adjusted,” we are not adding an explicit net cash per share disclosure requirement. But shareholders who seek to calculate “net cash per share” at different levels of redemption should have the information to perform this calculation based on the disclosure provided in connection with net tangible book value per share, as adjusted.

e. Cover Page

Regarding comments that recommended that de-SPAC transaction dilution information be presented on the prospectus cover page, the Commission believes it is sufficient to require the tabular disclosure in the prospectus body in Item 1604(c). At the de-SPAC stage, there will be more registrant-specific information included in the dilution disclosure, as the registrant will have more information about potential causes of dilution (such as expected redemption levels and financings that will accompany the de-SPAC transaction). Due to this, these disclosures may not be as easily presentable in a straightforward way on the cover page. Item 1604(a)(3), however, will require the registrant to state on the prospectus cover page whether SPAC sponsor compensation and ownership may result in a material dilution of the equity interests of non-redeeming shareholders who hold the securities until the consummation of the de-SPAC transaction and to provide a cross-reference highlighted by prominent type to the location of related disclosures in the prospectus.

f. Interest Per Share Disclosure

We disagree in part with the commenter who suggested that the final sentence of proposed Item 1604(c)(1) required a determination of the enterprise valuation that will result in a shareholder's “interest per share” calculated by reference to a pro forma closing date balance sheet being at least equal to the $10 price per share paid in the IPO. The use of the term “valuation” in Item 1604(c)(1) would not require, as suggested by the commenter, an “enterprise valuation” (which typically values the sum of the equity and debt of a company minus cash). We agree, however, with the general point suggested by the commenter that a registrant's preparation of Item 1604(c)(1) disclosure could be assisted by reference to, among other potential sources, a pro forma balance sheet. But we believe this would be the case only where such pro forma balance sheet contains the number of total shares (calculated consistent with Item 1604(c)), because the amount of shares is a critical component of the calculation required to provide disclosure under this item. The pro forma balance sheet may not be capable of serving as the sole source of this information, because it may show total shares only for certain redemption levels, such as zero redemptions and maximum redemptions; hence, it may not provide the total share number “with respect to each redemption level” as required by Item 1604(c)(1).

To further clarify, we provide the following basic example of disclosure under Item 1604(c)(1). A hypothetical SPAC issued shares in an IPO at $10 per share. After giving effect to the IPO, the issued and outstanding shares of the SPAC are 20,000,000, for a total market capitalization of $200,000,000. In connection with the de-SPAC transaction, the SPAC issues 65,000,000 shares to the target company's shareholders and issues 15,000,000 shares in a private placement for a total of 100,000,000 outstanding shares. Two (out of several) redemption levels the SPAC has chosen to use for the disclosure required by Item 1604(c) are zero redemptions and 5,000,000 shares redeemed (5% of the total shares). Where redemptions are zero, for purposes of Item 1604(c)(1), the SPAC would have 100,000,000 total shares after giving effect to the de-SPAC transaction and related financing. Where redemptions are zero, the company valuation at or above which the non-redeeming shareholders' interest per share would be at least the IPO price per share ($10 in this example) would be calculated as: $10 (per share IPO price) times 100,000,000 shares, or $1,000,000,000. Where 5,000,000 shares are redeemed (5% of the total shares), the SPAC would have 95,000,000 total shares after giving effect to the de-SPAC transaction and related financing. At this redemption level, the company valuation at or above which the non-redeeming shareholders' interest per share would be at least the IPO price per share ($10 in this example) would be calculated as: $10 (per share IPO price) times 95,000,000 shares, or $950,000,000. For the remaining redemption levels, the registrant would provide the required disclosure in a similar manner.

With respect to the commenter's concern that some investors may misunderstand disclosure under the item and view it as a guarantee that the stock will not trade down in the aftermarket, we do not believe investors are likely to misunderstand disclosure under Item 1604(c)(1) in that manner. As discussed above, we believe it will be clear to investors that the various valuation figures provided at each of the redemption levels are not guarantees about movements in or levels of future market trading prices of the post-de-SPAC transaction combined company. In addition, to the extent a registrant has a concern about investor confusion regarding the disclosure required under Item 1604(c)(1), such a registrant could provide additional disclosure discussing this issue, such as, for example, explicitly stating that the required disclosure is not a guarantee that the trading price of the combined company will not be below the IPO price nor is the disclosure a guarantee the company valuation will attain one of the stated levels of valuation.

Another commenter recommended that the Commission consider requiring that intermediaries provide information about “the sponsor, actual and potential conflicts of interest, [and] how much a non-redeeming SPAC investor's interest will be diluted” in a separate “Key Risks and Conflicts form” that is detached from the prospectus, so that the disclosure receives more investor attention and focus. We believe that the disclosure we are requiring in this release will receive an appropriate level of investor attention and focus and that no further amendments are needed in this regard.

g. Lock-Up and Earnout Provisions

One commenter said that “any lock-up periods or earnout provisions for sponsors or underwriters would be of significant interest to investors and should be required if part of the SPAC offering.” We are not making any changes in response to this comment because the final rules already will require such disclosure. Where there are earnout provisions for SPAC sponsors, the registrant would need to disclose these pursuant to Items 1602 and 1604 regarding compensation of SPAC sponsors and ownership of SPAC securities by SPAC sponsors. Also, where there are lock-ups for SPAC sponsors, the registrant would need to disclose these pursuant to Item 1603(a)(9) regarding the material terms of any agreement, arrangement, or understanding regarding restrictions on whether and when the SPAC sponsor and its affiliates may sell securities of the SPAC. In connection with underwriters, plan of distribution information is required by Forms S–1 and F–1.

E. Prospectus Cover Page and Prospectus Summary Disclosure

1. Proposed Rules

i. Proposed Prospectus Cover Page Disclosure

For registered offerings (including IPOs) by SPACs other than de-SPAC transactions, the Commission proposed Item 1602(a) to require information on the prospectus outside front cover page in plain English about, among other things: (1) the time frame for the SPAC to consummate a de-SPAC transaction, (2) redemptions, (3) SPAC sponsor compensation, (4) dilution (including simplified tabular disclosure), and (5) conflicts of interest.

For de-SPAC transactions, the Commission proposed Item 1604(a) to require that SPACs include information on the prospectus outside front cover page in plain English about, among other things: (1) the fairness of the de-SPAC transaction, (2) material financing transactions, (3) SPAC sponsor compensation and dilution, and (4) conflicts of interest.

ii. Proposed Prospectus Summary Disclosure

For registered offerings (including IPOs) by SPACs other than de-SPAC transactions, the Commission proposed Item 1602(b) to require in the prospectus summary a brief description in plain English about, among other things: (1) how the SPAC will identify and evaluate potential business combination candidates and whether it will solicit shareholder approval for the de-SPAC transaction, (2) the material terms of the trust or escrow account and the amount or percentage of the gross offering proceeds that the special purpose acquisition company will place in the trust or escrow account, (3) the material terms of the securities being offered, including redemption rights, and whether the securities are the same class as those held by the SPAC sponsor and its affiliates, (4) the period of time in which the SPAC intends to consummate a de-SPAC transaction, (5) any plans to seek additional financings and how the terms of additional financings may impact unaffiliated security holders, (6) in a tabular format, compensation of the SPAC sponsor, its affiliates, and promoters, and the extent to which this compensation may result in a material dilution of the purchasers' equity interests, and (7) any material actual or potential conflicts of interest between the SPAC sponsor or its affiliates or promoters and purchasers in the offering, including those that may arise in determining whether to pursue a de-SPAC transaction.

For de-SPAC transactions, the Commission proposed Item 1604(b) to require in the prospectus summary a brief description in plain English about, among other things: (1) the background and material terms of the de-SPAC transaction, (2) whether the SPAC reasonably believes that the de-SPAC transaction is fair or unfair to unaffiliated security holders, the bases for such belief, and whether the SPAC or the SPAC sponsor has received any report, opinion, or appraisal from an outside party concerning the fairness of the de-SPAC transaction, (3) any material actual or potential conflicts of interest between the SPAC sponsor or its affiliates or promoters and unaffiliated security holders in connection with the de-SPAC transaction, (4) in a tabular format, the terms and amount of the compensation received or to be received by the SPAC sponsor and its affiliates in connection with the de-SPAC transaction or any related financing transaction, and whether that compensation has resulted or may result in a material dilution of the equity interests of unaffiliated security holders of the special purpose acquisition company, (5) the material terms of any financing transactions that have occurred or will occur in connection with the consummation of the de-SPAC transaction, the anticipated use of proceeds from these financing transactions and the dilutive impact, if any, of these financing transactions on unaffiliated security holders, and (6) the rights of security holders to redeem the outstanding securities of the SPAC and the potential impact of redemptions on the value of the securities owned by non-redeeming shareholders.

2. Comments

Several commenters generally supported the proposed prospectus cover page and prospectus summary disclosure requirements. One of these commenters expressed the view that these requirements would assist shareholders in understanding: (a) the compensation structures for SPAC sponsors, (b) conflicts in the relationship between SPAC sponsor, underwriter, and shareholder, (c) potential sources of dilution, and (d) whether or not any fairness opinions were obtained from third parties in connection with the de-SPAC transaction. The commenter suggested this understanding would better equip investors to evaluate the wisdom of placing their money at risk in a SPAC, would closely align the information provided in SPAC IPOs with the information provided to investors in traditional IPOs, and would help to narrow the information asymmetries in the SPAC IPO model.

Several commenters suggested the proposed prospectus cover page requirements would produce cover page disclosure that will be dense and longer than one page.

One commenter said “requiring disclosure to be included at least three times in the document ( e.g., on the cover page, in the summary, and in the body of the document where the same information often appears multiple times) seems excessive and potentially distracting to investors.” This commenter also expressed the view that the Commission should not require disclosure of “ `any plans to seek additional financing and how such additional financing might impact shareholders' in IPO registration statements.” The commenter said that, at the time of the IPO, this disclosure would be “purely hypothetical,” and would lead to “boilerplate” disclosures that would “distract” investors from other more useful and material information. The commenter, however, said that, “if the SPAC already has commitments for additional financing at the time of the IPO ( e.g., a forward purchase agreement or a backstop commitment), the material terms of such financings and potential impact on shareholders or on the de-SPAC transaction should be disclosed.”

3. Final Rules

After considering the comments received, we are adopting Items 1602(a) and (b) and 1604(a) and (b) as proposed with certain modifications discussed below.

We agree with the commenter who expressed the view that investors will benefit from these provisions, including by better understanding factors including compensation, conflicts of interest, and dilution. Under the final rules, the key disclosures concerning SPAC offerings and de-SPAC transactions will be highlighted on the cover page and in the prospectus summary in an easily readable and understandable form. The disclosure under these items also will enable investors to better parse complex aspects of SPAC transactions. As a result, we believe investors will be better able to identify and assess important aspects of the transactions that may affect their investment and voting decisions. Although in current market practice, many SPACs already disclose similar information on prospectus cover pages, the final rules we are adopting will standardize this information across all registration statements filed by SPACs for IPOs and for de-SPAC transactions. In addition, investors may benefit from comparing this information not only across other SPAC transactions but by comparing it to investments contemplated in securities of non-SPACs where those registrants provide similar disclosure under current market practice.

Several commenters suggested the proposed prospectus cover page requirements would produce cover page disclosure that will be dense and longer than one page. While we recognize that the new cover page requirements will increase the amount of information included on the prospectus outside front cover page, we believe these requirements will be a limited incremental increase compared to current prospectus outside front cover page disclosure and we do not believe that this incremental increase will undermine the overall clarity of the cover page disclosure. Also, we continue to believe outside front cover page prominence of the required information serves the key purpose of alerting investors to the importance of the information. We believe registrants will be able to fit the required dilution information in tabular form on the outside front cover page just as they currently fit required information on the securities offering price, underwriting fees, and net proceeds in tabular form on the outside front cover page. Based on Commission staff's experience with current outside front cover page disclosure and staff's consideration of how outside front cover page disclosure will appear under the final rules, we believe there will be space to add this additional table and other new disclosure required by the final rules without making the outside front cover page cramped or difficult to read. We also do not believe these requirements will compel registrants to abandon non-required elements that often appear on the outside front cover page such as company artwork and logos, use of large fonts for service provider names, and aesthetic use of empty space.

One commenter on the proposal said requiring cover page, prospectus summary, and body of the document disclosures seems excessive and potentially distracting to investors. We disagree and believe the enhanced disclosures in each of the three locations will serve a valuable purpose for investors. The cover page provides the first alerts to investors about information that is important for their investment and voting decisions. In the prospectus summary, we believe the additional disclosures will reduce information processing costs, including for less financially sophisticated investors or investors with limited time to analyze the prospectus, by providing information in plain English about important SPAC features in a concise format. Finally, the prospectus body contains the detailed information needed for more comprehensive investor understanding.

One commenter expressed the view that prospectus summary disclosure related to additional financings (other than committed financings) at the IPO stage would be hypothetical and boilerplate and would distract investors from more useful information. We agree that, if financing agreements have been entered into, then they must be disclosed. To this end, Item 1602(b)(5) requires disclosure of these agreements and how their terms may impact unaffiliated security holders. However, under final Item 1602(b)(5), as proposed, even if no such agreements have been entered at the time that Item 1602(b)(5) is applicable, registrants are required to generally describe any plans to seek additional financings and how the terms of additional financings may affect unaffiliated security holders even if the actual, specific terms of any financing agreements (should they ultimately be entered) may not be known. The disclosure of these plans will alert investors to the potential aspects of the overall de-SPAC transaction structure, including those that impact future dilution, which will help investors make informed investment and voting decisions. As with dilution disclosure in SPAC IPOs that we discuss in section II.D.3 above (where commenters raised similar concerns), even where a registrant has not committed to a transaction or will not have consummated a transaction, registrants should be able to use reasonable assumptions about potential financing needs to provide the required disclosure. We disagree with the view that this prospectus summary information would be a distraction to investors from other important information. On the contrary, as we discuss generally above, we believe the prospectus summary disclosure regarding additional financing plans will highlight key issues for investors and the summary format will help them process the information, particularly when comparing potential investments in different SPACs. We do not believe investors will misconstrue this information to mean the additional financing is certain to occur. Registrants may highlight this lack of certainty in their disclosure if they have concerns their investors will misconstrue the information. We do not expect the additional financing prospectus summary disclosures will be boilerplate, as the additional financing disclosure will need to be tailored to the plans of the SPAC.

In final Item 1602(a)(5), we replaced the proposed term “SPAC sponsor or its affiliates or promoters and purchasers in the offering” with the term “SPAC sponsor, its affiliates, or promoters; and purchasers in the offering.” We made the same changes to final Item 1602(b)(7). Both the changes to Item 1602(a)(5) and (b)(7) were made to clarify that the interests of each of the listed persons should be assessed against the interests of “purchasers in the offering.”

In final Item 1604(a)(1) and (b)(2), we made revisions to reflect changes we are making to Items 1606 and 1607 that are discussed in section II.G.

In final Item 1604(a)(4), following the phrase “State whether, in connection with the de-SPAC transaction, there may be any actual or potential material conflict of interest,” we added the phrase “including any material conflict of interest that may arise in determining whether to proceed with a de-SPAC transaction and any material conflict of interest arising from the manner in which the special purpose acquisition company compensates a SPAC sponsor, officers, and directors or the manner in which a SPAC sponsor compensates its officers and directors.” This change makes Item 1604(a)(4) required cover page disclosure congruent with Item 1603(b) (non-cover page) disclosure. In de-SPAC transactions, the cover page disclosure under Item 1604(a)(4) should provide a cross reference to, among other things, the description of these actual or potential material conflicts of interest under Item 1603(b).

We also made a number of other changes to the final rules related to prospectus cover page and prospectus summary disclosure that are discussed above in other sections of this release.

F. De-SPAC Transactions: Background, Reasons, Terms, and Effects

1. Proposed Item 1605

The Commission proposed Item 1605 of Regulation S–K to require disclosure of the background, material terms, and effects of the de-SPAC transaction, including:

• A summary of the background of the de-SPAC transaction, including, but not limited to, a description of any contacts, negotiations, or transactions that have occurred concerning the de-SPAC transaction;
• A brief description of any related financing transaction, including any payments from the SPAC sponsor to investors in connection with the financing transaction;
• The reasons for engaging in the particular de-SPAC transaction and for the structure and timing of the de-SPAC transaction and any related financing transaction;
• An explanation of any material differences in the rights of security holders of the post-business combination company as a result of the de-SPAC transaction;
• Disclosure regarding the accounting treatment and the Federal income tax consequences of the de-SPAC transaction, if material;
• Any material interests in the de-SPAC transaction or any related financing transaction held by the SPAC sponsor and the special purpose acquisition company's officers and directors, including fiduciary or contractual obligations to other entities as well as any interest in, or affiliation with, the target company; and
• A statement whether or not security holders are entitled to any redemption or appraisal rights, a summary of such redemption or appraisal rights, and, if there are no redemption or appraisal rights available for security holders who object to the de-SPAC transaction, a brief outline of any other rights that may be available to security holders.

2. Comments: Item 1605

One commenter stated that proposed Item 1605 would provide useful information to investors. Some commenters, however, opposed proposed Item 1605, stating it would be duplicative of existing disclosure requirements. One of these commenters said that, in lieu of adopting Item 1605, they “recommend a more uniform methodology to address conflicts of interest arising from business combinations in general by revising Items 1004(a)(2) and 1013(b) of Regulation M–A and Item 403 of Regulation S–K to incorporate the provisions of proposed Item 1605 taking into consideration that many issues addressed in proposed Item 1605 may arise and be applicable to business combinations that are not effected by a SPAC or a blind pool.”

One commenter recommended that we revise proposed Item 1605(b)(2), with respect to descriptions of related financings. The commenter said, “PIPE investors often buy into SPAC deals on discounted terms compared to the terms offered to public shareholders in a SPAC.” The commenter said “the discount that PIPE investors receive is in the form of additional derivative securities, guarantees, or other complex financial arrangements and it is difficult for public investors to know the effective price per share at which PIPE investors are buying.” The commenter recommended that we revise proposed Item 1605(b)(2) to state: “A brief description of related financing transactions, including the effective price per share at which investors are buying, after accounting for the value of any securities or guarantees they receive from the SPAC, SPAC sponsor or affiliate of either in connection with the financing transaction.”

3. Final Item 1605

After considering the comments received, we are adopting Item 1605 as proposed, with several modifications discussed below.

By providing a specialized disclosure rule tailored to de-SPAC transactions, the Item 1605 disclosure requirements will provide investors with information necessary to evaluate the reasons for a de-SPAC transaction and for choosing a particular structure and financing for the transaction. These requirements will also help promote consistent disclosure, allowing for greater comparability of these disclosures across de-SPAC transactions.

Given the unique qualities of de-SPAC transactions, we believe registrants will benefit from the centralization of the SPAC-related requirements in the Item 1600 series of Regulation S–K. If there are facts and circumstances that may result in required disclosure under a current rule being the same as under any of the rules we are adopting, registrants are not required to repeat disclosures, except where the applicable rule may so require (such as by calling for the disclosure in a specific location such as the prospectus cover page or prospectus summary). We are not adopting the recommendation that we adopt a more uniform methodology to address conflicts of interest arising from business combinations in general, because it is beyond the scope of our proposals concerning conflicts of interest and Item 1605, both of which are focused on SPACs.

We are not revising Item 1605(b)(2) to provide more specificity on the types of securities or guarantees received from the SPAC, as suggested by one commenter. We are adopting Item 1605(b)(2) as proposed to require the disclosure of material terms of the de-SPAC transaction, including a brief description of any related financing transaction, including any payments from the SPAC sponsor to investors in connection with the financing transaction. In most, if not all, cases, Item 1605(b)(2) will require the registrant to disclose the price paid by PIPE investors and other benefits such as derivative securities that are acquired by PIPE purchasers (in addition to SPAC shares), because these are likely to be material terms. One commenter recommended we require “A brief description of related financing transactions, including the effective price per share at which investors are buying, after accounting for the value of any securities or guarantees they receive from the SPAC, SPAC sponsor or affiliate of either in connection with the financing transaction.” We are not revising the item to adopt this recommendation because we believe it would be difficult for registrants to calculate accurately or would result in inconsistent methodologies among registrants, or both, with respect to how registrants would convert various features, rights, or contractual provisions attendant to related financing transactions into amounts used to adjust actual transaction values to achieve the suggested effective price; we believe the resulting disclosure characterized by these issues could mislead investors or undermine the ability of investors to make comparisons across SPACs or both.

We have made a number of modifications in final Item 1605 as compared to the proposal. First, in Item 1605(a), we have replaced the term “Furnish” with the term “Provide” in the sentence “Furnish a summary of the background of the de-SPAC transaction” to make it clear that we intend this disclosure to be filed. This change will also make Item 1605(a) consistent with the other items in Item 1605 in this respect.

Second, in Item 1605(b)(5) and (6), we have deleted the phrase “, if material” to align the phrasing with the existing disclosure requirements in Item 4 of Form S–4 as it was our intent to capture the same information at the same threshold and we did not intend for the phrasing to imply that the accounting treatment or Federal income tax consequences may not be material disclosure in a business combination transaction.

Third, as discussed above in section II.C of this release regarding conflicts of interest, we are revising Item 1605(d) to address interests of target company officers and directors. Thus, in final Item 1605(d), we have added the phrase “; or held by the target company's officers or directors that consist of any interest in, or affiliation with, the SPAC sponsor or the special purpose acquisition company.”

Fourth, in final Item 1605(d), we have revised the phrase “held by the SPAC sponsor and the special purpose acquisition company's officers and directors” by replacing the term “and” with “or” in each instance, because the requirements of Item 1605(d) should apply disjunctively where any of the named persons has a material interest in the de-SPAC transaction or any related financing (and not be limited to only those situations where every named person has such an interest).

Fifth, we revised Item 1605(b)(3), (4), and (6) to clarify that these requirements will require disclosure with respect to the SPAC, target company, and/or security holders of the SPAC or target company. These changes eliminate potential ambiguity that could have caused registrants to inappropriately interpret the items as not including disclosure with respect to those persons in connection with de-SPAC transactions. Accordingly, as adopted:

• final Item 1605(b)(3) requires: “A reasonably detailed discussion of the reasons of the SPAC and the target company for engaging in the de-SPAC transaction and reasons of the SPAC for the structure and timing of the de-SPAC transaction and any related financing transaction;”
• final Item 1605(b)(4) requires: “An explanation of any material differences in the rights of SPAC and target company security holders as compared with security holders of the combined company as a result of the de-SPAC transaction;” and
• final Item 1605(b)(6) requires: “The Federal income tax consequences of the de-SPAC transaction to the SPAC, the target company, and their respective security holders.”

G. Board Determination About the De-SPAC Transaction; Reports, Opinions, Appraisals, and Negotiations

1. Proposed Item 1606(a)

The Commission proposed Item 1606(a) to address concerns regarding potential conflicts of interest and misaligned incentives in connection with the SPAC's decision to proceed with a particular de-SPAC transaction and to assist investors in assessing the fairness of a particular de-SPAC transaction to unaffiliated investors. Specifically, the Commission proposed Item 1606(a) to require a statement from a SPAC as to whether it reasonably believes that the de-SPAC transaction and any related financing transactions are fair or unfair to the SPAC's unaffiliated security holders, as well as disclosures regarding whether any director voted against or abstained from voting on, approval of the de-SPAC transaction or any related financing transaction.

2. Comments: Item 1606(a)

Commenters expressed differing views on proposed Item 1606(a). Some commenters supported the proposed requirement.

Other commenters opposed proposed Item 1606(a). Some of these commenters expressed the view that modeling rules applicable to de-SPAC transactions after the going private rules is inappropriate because the underlying affiliate relationships present in a going private transaction are not present in a de-SPAC transaction. Some commenters observed that a fairness determination is not required or provided in an IPO and thus should not be required in a de-SPAC transaction.

One commenter said proposed Items 1606 and 1607 would represent a “dramatic shift to de-SPAC transactions processes and disclosures,” because, in part, SPAC boards have not historically made a recommendation to shareholders regarding whether or not to redeem shares at the time of the business combination and fairness opinions obtained in connection with de-SPAC transactions are typically limited to whether the transaction is fair to the SPAC, not whether the transaction is fair to any particular class of shareholders. This commenter observed, “By opining on whether the de-SPAC transaction and related financings are fair to unaffiliated stockholders, as opposed to the SPAC itself, the SPAC board and any fairness opinion provider would essentially be making a recommendation regarding whether or not to redeem shares.”

Several commenters expressed the view that requiring disclosure of a fairness determination would result in increased liability and litigation risk in de-SPAC transactions and in fewer de-SPAC transactions. A few commenters indicated that financial advisors may refuse to provide fairness opinions due to concerns about the potential liability related to delivery of a fairness opinion, in which case the SPAC board of directors would decide not to proceed with an otherwise favorable de-SPAC transaction due to the board's concerns about its own liability.

Other commenters expressed the view that proposed Items 1606 and 1607 would effectively require de-SPAC transactions to be “substantively fair,” which, in the view of these commenters, would exceed the Commission's authority. One of these commenters expressed that imposing a substantive obligation on the SPAC board of directors to undertake an analysis of the fairness of the de-SPAC transaction is an issue that is the exclusive province of State law.

One commenter stated that, while the disclosure in proposed Item 1606(a) would be new, “in light of the fiduciary duties applicable to SPACs and their directors and officers,” the disclosure in proposed Item 1606(a) and (b) “would likely be redundant with the standard disclosure of the SPAC board's reasons for approval of the de-SPAC transaction.”

Several commenters expressed concern that the proposed fairness determination disclosure requirement would likely or effectively require a SPAC to obtain a fairness opinion from a financial advisor and raised concern about the cost of obtaining a fairness opinion. One of those commenters also expressed concern that the perceived requirement, under proposed Items 1606(a) and 1607, to obtain a fairness opinion could increase the need to include projections in the de-SPAC transaction disclosure documents in support of a SPAC sponsor's fairness determination.

Another commenter indicated that proposed Item 1606 (and Item 1607) would be burdensome and, to address that burden, suggested that proposed Item 1606 should not apply to de-SPAC transactions generally but only to those de-SPAC transactions that raise risks of “severe conflicts of interest.”

Some commenters also said they prefer that any fairness determination be made as to the de-SPAC transaction as a whole (instead of the de-SPAC transaction and any related financing transaction separately) and with respect to all of a SPAC's shareholders (instead of to its unaffiliated shareholders). One of those commenters also suggested that a fairness determination should not include related financings because financial advisors providing a fairness opinion do not traditionally include such financing within the scope of the opinion.

3. Final Item 1606(a)

We continue to believe that SPACs and the hybrid nature of de-SPAC transactions present potential conflicts of interest and misaligned incentives that are not present in other types of business combination transactions. As a result, we believe that it is appropriate for shareholders to have more complete information regarding the SPAC's decision to proceed with a particular de-SPAC transaction. Many commenters that supported proposed Item 1606(a) expressed similar views. At the same time, we acknowledge that many commenters raised significant concerns with the proposed disclosure requirement. Some commenters expressed concerns that the proposed rule could be interpreted to require a fairness opinion, even if not explicitly required, and concerns about the cost to obtain such an opinion. Some commenters also expressed concerns about imposing requirements in connection with the de-SPAC transaction process of going public that do not exist in the traditional IPO process, such as requiring a fairness determination. Regarding these concerns, while we acknowledge that disclosures regarding the board's determination to proceed with a particular transaction are more typically associated with merger transactions, as discussed above, the de-SPAC transaction is a hybrid capital raising transaction that marks the introduction of the target company to the U.S. public securities markets (similar to an IPO), and such introduction is done by way of a business combination or similar transaction. As a result, while we believe that the similarity to an IPO is a reason that the de-SPAC transaction regulatory framework generally should be similar to the IPO regulatory framework, the business combination element of de-SPAC transactions makes certain differences in the final rules that apply to de-SPAC transactions appropriate.

In response to commenters' concerns, we are revising Item 1606(a) to focus on situations in which a determination as to the advisability of the de-SPAC transaction is required by the law of the jurisdiction in which the SPAC is organized. Doing so will make clear that Item 1606(a) does not require the de-SPAC transaction to be substantively fair or the SPAC to make a fairness determination when it is not otherwise required to do so under applicable State or foreign corporate law.

Instead, under final Item 1606(a), if the law of the jurisdiction of the SPAC's organization requires the SPAC's board of directors (or similar governing body) to determine whether the de-SPAC transaction is advisable and in the best interests of the SPAC and its shareholders, or otherwise make any comparable determination, the SPAC will be required to disclose that determination. Under Delaware General Corporation Law, a board of directors of a corporation that seeks to enter a merger or consolidation is required to adopt a resolution approving the transaction agreement and declaring its advisability. In the experience of the Commission staff, many SPACs governed by Delaware law provide a statement in registration statements or proxy statements filed for de-SPAC transactions that the transaction agreement the board approved is advisable and in the best interests of shareholders. Comparable requirements may apply to registrants organized under the laws of other jurisdictions. The final rule would codify existing disclosure practices in this regard and serve to standardize the disclosure across a variety of State or foreign law requirements.

We believe that the approach taken in final Item 1606(a) represents an appropriate balance between our goal of providing more transparency around the SPAC's decision to proceed with a particular de-SPAC transaction and the concerns raised by commenters that the proposed rule would create a new substantive corporate law requirement as well as other concerns raised by commenters, including increased liability and risks of litigation and decreased de-SPAC transactions. The new disclosure requirement will help achieve the same goal sought by the proposed fairness determination requirement—enhancing SPAC security holders' ability to assess the SPAC's decision to proceed with a particular de-SPAC transaction—without imposing new procedural obligations regarding how such a decision is made. While the final rule will not require a SPAC to make a determination regarding the fairness or suitability of the de-SPAC transaction, if such a determination is required by applicable corporate law, we believe investors should be informed of that fact and receive appropriate disclosure (as described below) regarding the considerations that went into such a determination. The fact that many registrants already provide such disclosure supports our view that the factual disclosures required by the final rule should not impose undue costs or create excessive exposure to new liability or litigation risk.

In addition, these changes from the proposal should avoid any misimpression that Item 1606(a) creates a requirement, implicit or explicit, or expectation that a fairness opinion must be obtained to comply with its requirements. We are mindful of commenters' concerns about increased liability and litigation risk associated with such opinions. We are also mindful of comments indicating that financial advisors may refuse to provide fairness opinions due to concerns about the potential liability related to delivery of a fairness opinion and that a SPAC's board of directors may decide not to proceed with an otherwise favorable de-SPAC transaction because it cannot obtain a fairness opinion. Cognizant of these concerns, we reiterate that nothing in the final rule requires a SPAC to obtain a fairness opinion in connection with a de-SPAC transaction.

The changes to Items 1606(a) and (b) and 1607 should also address one commenter's concern that the new requirements would represent “a dramatic shift to de-SPAC transactions processes and disclosures” by requiring more limited disclosure aligned with requirements already applicable to a SPAC by the law of its jurisdiction of incorporation.

We agree with commenters who stated that any rule addressing the board's decision to proceed with a de-SPAC transaction should focus on all of a SPAC's security holders rather than only its unaffiliated security holders. In response to these comments, we have revised the final rule to reference security holders of the SPAC generally, in contrast to the proposed rule, which addressed only unaffiliated security holders.

The changes to Item 1606(a) address one commenter's concern that the perceived requirement to obtain a fairness opinion could increase the need to include projections in the de-SPAC transaction disclosure documents in support of such fairness determination.

Finally, in response to commenters' recommendations that proposed Item 1606(a) be required with respect to the de-SPAC transaction and related financing as a whole, we are revising Item 1606(a) to remove any reference to related financing. While the proposed rule was intended to result in the disclosure of a fairness determination with respect to a de-SPAC transaction as a whole, we were persuaded by commenters' concerns that including “any related financing” in the rule could have signaled a separate determination should be made with respect to the related financing. We continue to believe that related financing is usually fundamental to the success of the de-SPAC transaction but have adopted a final rule that simplifies the disclosure about the determinations made by a SPAC's board of directors (or similar governing body) with respect to the de-SPAC transaction. On the other hand, given the continued importance to a SPAC's shareholders of the related financing, we are moving the reference to related financing to final Item 1606(b), which requires discussions of the factors considered by the SPAC board of directors (or similar governing body) in making the determination disclosed in response to Item 1606(a). This change is discussed further below.

4. Proposed Item 1606(b)

The Commission proposed Item 1606(b) to supplement the fairness determination disclosure required by proposed Item 1606(a). Specifically, proposed Item 1606(b) would require a SPAC to discuss the material factors upon which the reasonable belief regarding the fairness of a de-SPAC transaction and any related financing transaction is based and, to the extent practicable, the weight assigned to each factor.

5. Comments: Item 1606(b)

Commenters expressed differing views on proposed Item 1606(b). Some commenters supported the proposed requirement generally and some commenters specifically indicated the requirement would allow investors to conduct a better evaluation of the merits of a de-SPAC transaction and incentivize sponsors to avoid transactions that could potentially be viewed as unfair.

Other commenters stated that the inclusion of a mandatory list of factors to be addressed in disclosure under proposed Item 1606(b) may force the SPAC to disclose information not actually considered by the SPAC in making its fairness determination. Some commenters also stated that the mandatory list of factors in proposed Item 1606(b) is at odds with the Commission's history of implementing a principles-based disclosure regime and does not account for the fact that the factors relevant to making a fairness determination will vary from company to company and that different fairness assessors may also have different views on which factors are appropriate for the same company. These commenters proposed that the Commission modify proposed Item 1606(b) to provide that the factors should be discussed to the extent they were considered. One commenter said that it is “not within the Commission's authority to require SPAC boards of directors to conform their deliberative processes to the Commission's rules and that Item 1606(b) impermissibly encroaches upon the discretion of a board to evaluate whatever information it deems appropriate in deciding to proceed with a transaction.”

Some commenters stated that the factors the proposal required to be discussed should not be assigned weight because it would not be practical or workable to do so, such weighting could result in investors placing too much or not enough emphasis on the factors described by the SPAC, and various members of the SPAC board will likely assign differing weights to differing factors. Another commenter stated that a weighting of factors would require a high degree of professional subjectivity, which may expose boards and financial institutions to liability which would ultimately discourage them from pursuing de-SPAC transactions.

6. Final Item 1606(b)

We are adopting Item 1606(b) as proposed, with certain modifications discussed below. We continue to believe that disclosure of the factors considered by a SPAC's board of directors (or similar governing body) in making the decision to proceed with a de-SPAC transaction, to the extent they were considered, would provide shareholders with important information to allow those shareholders to make informed voting or investment decisions.

While several commenters supported proposed Item 1606(b), as discussed above, some commenters expressed the view that only factors actually considered should be required to be discussed. This was the intent of the language in the proposed rule requiring a discussion of “factors upon which the belief stated in paragraph (a) . . . is based.” In light of the comments received, however, to clarify our intent in the final rule, we have added the terms “To the extent considered” to qualify the factors and the analysis of those factors required to be discussed. This change will avoid any potential for ambiguity or misinterpretation that the rule requires a discussion of factors not considered or a more extensive analysis of any factor considered than would otherwise have taken place in the absence of the final rule. As a result, final Item 1606(b) requires a discussion of a non-exclusive list of factors the board of directors (or similar governing body) considered in making any determination disclosed in response to Item 1606(a) to the extent such factors were considered. These factors would include, but not be limited to, the valuation of the target company, financial projections relied upon by the board of directors (or similar governing body), the terms of financing materially related to the de-SPAC transaction, any report, opinion, or appraisal referred to in Item 1607(a), and the dilution described in Item 1604(c). We believe these factors are generally matters that a board of directors (or similar governing body) is likely to consider in determining whether a transaction is advisable and in the best interests of the SPAC and its security holders (or in making a comparable determination). At the same time, by revising the disclosure requirement to make clear that the listed factors must be disclosed to the extent considered, the final rule reflects our understanding that the fiduciary duties and discussions of boards of directors (or similar governing bodies) are not uniform across companies or jurisdictions. Moreover, this change makes clear that final Item 1606(b) does not require boards of directors (or similar governing bodies) to specifically consider the listed factors or, if considering them, dictate how thoroughly to consider them, when determining whether a transaction is advisable and in the best interests of the SPAC and its security holders (or in making a comparable determination).

Some commenters expressed concern with the practicability of assigning weight to factors, the possibility that shareholders would emphasize those weights too much or too little, and that a weighting of factors, which may require a high degree of professional subjectivity, may expose boards and financial institutions to liability which would ultimately discourage them from pursuing de-SPAC transactions. Although proposed Item 1606(b) was never intended to force disclosure of the weight of each factor where the SPAC board did not, or could not, conduct such a weighting (proposed Item 1606(b) required a discussion of such weighting only “to the extent practicable”), we nevertheless recognize commenters' concerns and the possibility that the proposed item requirement could be misunderstood. Based on commenters' suggestions, we have removed references to the weighting of factors from final Item 1606(b) to eliminate such potential misinterpretation and in recognition of the potential practical challenges to assigning a weight to various factors or discussing such weighting.

To reduce potential redundancy in the disclosure requirement, we have also removed the terms “in reasonable detail” from the first sentence of Item 1606(b). Any disclosure responsive to Item 1606(b) is already required to be complete, and the deleted terms are not necessary to confirm that such a principle applies here.

Further, as discussed above, we are revising Item 1606(b) to include any financing materially related to the de-SPAC transaction in the non-exclusive list of factors to be discussed because PIPE offerings and other financings are a common feature of a de-SPAC transaction and, in some instances, the success of the de-SPAC transaction and of the post-de-SPAC company is dependent on the existence of related financing. Given the importance of such financing, we have revised final Item 1606(b) to include financing materially related to the de-SPAC transaction in the non-exclusive list of factors that a board of directors (or similar governing body) would be required to discuss, to the extent the board of directors (or similar governing body) considered such financing. By moving the reference to related financing from Item 1606(a) to Item 1606(b), we are also eliminating any potential confusion that the board of directors (or similar governing body) would need to make a separate Item 1606(a) determination for financing materially related to the de-SPAC transaction.

7. Proposed Item 1606(c) Through (e)

The Commission proposed Item 1606(c) through (e) to provide additional information about the de-SPAC transaction and any related financing transaction, including whether a majority of unaffiliated security holders is required to approve the transaction(s), the involvement of any unaffiliated representative acting on behalf of unaffiliated security holders, and whether the transaction(s) were approved by a majority of directors of the SPAC who are not employees of the SPAC.

8. Comments: Item 1606(c) Through (e)

Commenters expressed differing views on proposed Item 1606(c) through (e). Some commenters supported the proposed requirements.

With respect to proposed Item 1606(c), one commenter indicated that disclosure about whether the de-SPAC or related financing transaction was structured to require approval of at least a majority of unaffiliated security holders would be redundant due to the requirement of Item 21 of Schedule 14A to disclose similar information.

With respect to proposed Item 1606(d), a few commenters expressed the view that retention of a representative to act solely on behalf of unaffiliated security holders in the negotiation of the de-SPAC transaction is rare and that, as a result, such a requirement will not result in meaningful additional disclosure. One of the commenters also indicated that the disclosure requirement would not result in a change in the use of unaffiliated representatives.

One commenter supported the proposed requirement to disclose whether any non-executive director voted against, or abstained from voting on, the approval of the de-SPAC transaction and said it is consistent with current market practice. Another commenter stated that a requirement to identify any director that voted against or abstained from voting on the approval of the de-SPAC transaction would “prejudice[ ] companies against de-SPAC transactions” and could inhibit board discussions. This commenter said that this proposed requirement would make it more difficult and less likely that individual directors would oppose a transaction if they know that their objection will be made public. This commenter also recommended that the proposed rule be more precise about its applicability being only to directors of the SPAC.

9. Final Item 1606(c) Through (e)

We continue to believe that the new disclosures under Item 1606(c) through (e) will provide investors with important information and a better understanding of the process by which a SPAC determined to proceed with a particular de-SPAC transaction. We are adopting Item 1606(c), (d), and (e) as proposed, with some modifications and minor technical changes discussed below. In the final rules, we moved the requirement to identify any director who voted against, or abstained from voting on, approval of the de-SPAC transaction from proposed Item 1606(a) to final Item 1606(e), because, as Item 1606(e) is generally related to issues involving approval of the de-SPAC transaction by the board of directors (or similar governing body), we considered this a more appropriate place for this requirement.

We disagree with the assertion made by a commenter that the disclosure required under proposed Item 1606(c) would be redundant given the existing requirement in Item 21 of Schedule 14A, which requires disclosure of the vote required for approval (among other things) of the matter by shareholders. Schedule 14A does not expressly differentiate among affiliated and unaffiliated security holders as with Item 1606(c). Also, a Schedule 14A may not be filed in connection with some de-SPAC transactions. Thus, we believe the information provided to investors under Item 1606(c) is not redundant and will benefit investors by improving their understanding of the SPAC's governance procedures followed in connection with approving the de-SPAC transaction. We expect this improved understanding will enhance investor voting, redemption, and other investment decisions. We have revised Item 1606(c) to clarify that the shareholder approval relates to shareholders of the SPAC.

A few commenters said the use of unaffiliated representatives in negotiations is rare. One of those commenters also said the disclosure requirement in proposed Item 1606(d) would not lead to a change in market practices. We note that the proposed rule was not intended and the final rule is not intended to change market practices relating to the retention of any such unaffiliated representative. As is the case with final Item 1606(c) and (e), final Item 1606(d) is a disclosure requirement intended to provide investors with important information and a better understanding of the process by which a SPAC determined to proceed with a particular de-SPAC transaction and does not require SPACs to change their processes in connection with de-SPAC transaction approval.

One commenter said directors will be more reluctant to vote against a de-SPAC transaction if they know that their objection will be made public. We decline to revise Item 1606(e) in response to the commenter's concern. Directors are generally subject to fiduciary duties imposed by State or foreign law. We expect that directors will generally seek to make voting decisions consistent with their duties to security holders or the company irrespective of whether that decision is publicly disclosed.

We have also made conforming changes to Item 1606(c) through (e) to be consistent with final Item 1606(a), as discussed above.

10. Proposed Item 1607

The Commission proposed Item 1607(a) to require disclosure about whether or not the SPAC or SPAC sponsor received any report, opinion, or appraisal from an outside party relating to the consideration or the fairness of the consideration to be offered to security holders or the fairness of the de-SPAC transaction or any related financing transaction to the SPAC, SPAC sponsor or unaffiliated security holders.

The Commission proposed Item 1607(b) to require disclosure of certain information about any such report, opinion, or appraisal from an outside party as well as any negotiation or report by an unaffiliated representative, including the identity of the outside party or unaffiliated representative, the qualifications of the outside party or unaffiliated representative, any material relationship between the outside party, its affiliates, or unaffiliated representative and the SPAC, SPAC sponsor, or their respective affiliates, whether the SPAC or SPAC sponsor determined the amount of consideration to be paid or the valuation of the target company, or whether the outside party recommended the amount of consideration to be paid or the valuation of the target company. Proposed Item 1607(b) would also require a summary of the negotiation, report, opinion, or appraisal, including a description of the procedures followed, the findings and recommendations, the bases for and methods used to arrive at such findings and recommendations, any instructions received from the SPAC or SPAC sponsor, and any limitation imposed by the SPAC or SPAC sponsor on the scope of the investigation.

The Commission proposed Item 1607(c) to require all such reports, opinions or appraisals to be filed as exhibits to the Form S–4, Form F–4, and Schedule TO for the de-SPAC transaction or included in the Schedule 14A or 14C for the transaction.

11. Comments: Item 1607

We received differing views from commenters. Some commenters generally supported proposed Item 1607. Other commenters generally opposed, or expressed concerns regarding specific aspects of, proposed Item 1607. We discuss these specific concerns in more detail below.

As discussed above in the comments on proposed Item 1606, several commenters stated that proposed Items 1606 and 1607 exceed the Commission's authority because they effectively require de-SPAC transactions to be “substantively fair.”

Some of these commenters suggested that the filing of board materials required under Item 1607(c) is inappropriate because it will “inevitably” result in a reduction of information presented to, and considered by, a SPAC's board of directors, which may affect the board's ability to fulfill its fiduciary duties. Given that board materials are typically not prepared with a view that they will be included in public filings and subject to liability, these commenters also expressed the view that filing such materials may expose their preparers to liability under the Securities Act and the Exchange Act and that the proposed requirement would be “impractical and unworkable” because the preparers are not trained to prepare any such materials to withstand scrutiny under the Federal securities laws. Also, the commenters indicated that some preparers will not consent to the use of their materials in a public filing. Finally, these commenters stated that some information included in such reports may be immaterial, speculative, or ultimately determined to be unreliable.

One commenter indicated that the requirement in proposed Item 1607(c) to file as an exhibit (or include) any such report, opinion, or appraisal related to the fairness determination in addition to the requirement in proposed Item 1607(b) to disclose a summary of the report, opinion, or appraisal could limit any incremental benefit an investor would receive from the filing of such reports, opinions, or appraisals. Another commenter stated that proposed Item 1607 should not apply to de-SPAC transactions generally but only to those de-SPAC transactions that raise risks of “severe conflicts of interest.” Yet another commenter suggested that the Commission consider whether the incremental cost and liabilities related to filing the reports would have the unintended consequence of discouraging SPACs from obtaining the reports because SPACs would not be required to obtain the reports as a basis for their fairness determination under proposed Item 1606(a). One commenter also proposed that we more narrowly tailor Item 1607(b)(6) to de-SPAC transactions and modify Item 4(b) of Forms S–4 and F–4 to direct filers to comply with the requirements of Item 1607(b)(6), rather than 17 CFR 229.1015(b) (“Item 1015(b)” of Regulation M–A), for de-SPAC transactions.

12. Final Item 1607

We are adopting Item 1607(a) as proposed with the modifications discussed below. Final Item 1607(a) only requires the disclosure specified in Item 1607(b) if the SPAC or SPAC sponsor received any report, opinion (other than an opinion of counsel), or appraisal from an outside party or unaffiliated representative materially relating to a determination disclosed in response to Item 1606(a), the approval of the de-SPAC transaction, the consideration or the fairness of the consideration to be offered to security holders of the target company in the de-SPAC transaction, or the fairness of the de-SPAC transaction to the SPAC, its security holders, or SPAC sponsor. Thus, if such a report, opinion, or appraisal from an outside party or unaffiliated representative was not received, then no disclosure will be required under Item 1607.

The final rule includes some clarifying revisions to Item 1607(a). We added a reference to an “unaffiliated representative” to avoid any confusion arising out of references to an “unaffiliated representative” in Item 1607(b) without a corresponding reference in Item 1607(a). We also added the parenthetical terms “other than an opinion of counsel” to clarify that an opinion of counsel is outside of the rule's scope. In addition, we included a reference to the target company in final Item 1607(a)(3) to specify which security holders are being offered the consideration. Finally, we reversed the order of “SPAC sponsor” and “security holders” in final Item 1607(a)(4) to avoid the implication that the rule also applies to security holders of SPAC sponsor.

To address commenters' concerns regarding the possible disclosure of immaterial, speculative, or unreliable materials, we are revising Item 1607(a) to limit the scope of the final rule to only reports, opinions, or appraisals that are materially related to any Item 1606(a) determination of the board of directors (or similar governing body) or the other matters listed in final Item 1607(a)(2) through (4). As they already do now in other filings relating to de-SPAC transactions, SPACs may continue to add any supplemental, explanatory discussion so that investors can properly understand the context and purpose of the disclosed reports, opinions, or appraisals and assess these reports, opinions, or appraisals appropriately.

In addition, by revising Item 1606 to remove the requirement to disclose a fairness determination in the context of a de-SPAC transaction and making corresponding revisions to Item 1607, the final rule should address commenters' concerns that proposed Item 1607 would exceed the Commission's authority.

We believe adopting final Item 1607 is more consistent with the remaining rules applicable to SPACs and de-SPAC transactions than the alternative suggested by a commenter to instead update similar existing requirements in Form S–4 and F–4. Item 1607(a) is limited to a specific set of events and determinations, unlike Item 4(b) in Form S–4 and F–4, which more generally refer to reports, opinions, or appraisals materially relating to the subject transaction. Also, under the alternative suggested by the commenter, the Item 1607(b) disclosure would not be required to the extent a de-SPAC transaction is not registered on Form S–4 or F–4. Finally, we believe registrants will benefit from the centralization of the SPAC-related requirements in the Item 1600 series of Regulation S–K, which are primarily applied to de-SPAC transactions through new general instructions in the relevant forms and schedules, rather than through revisions to specific item requirements within each relevant form or schedule as suggested.

Several commenters expressed concern that compliance with Item 1607(c) will result in a reduction of information presented to the SPAC's board of directors, which could negatively affect the ability of those directors to fulfill their fiduciary duties. Another commenter suggested that the incremental cost and liability of filing such materials would discourage a SPAC from obtaining those materials. While we recognize these concerns and acknowledge that the final rule could impact the information provided to the SPAC's board of directors, we believe there remain significant incentives ( e.g., conducting due diligence on the target company or receiving an independent evaluation of the proposed de-SPAC transaction) for boards to seek and use this information as part of their decision-making process so we do not find this a persuasive reason to withhold such disclosure from investors. Directors are generally subject to fiduciary duties imposed by State or foreign law. We expect directors to seek to fulfill those duties by continuing to inform themselves of the potential merits of a de-SPAC transaction with the assistance of outside parties despite the potential public nature, added cost, or risk of liability associated with the filing of any report, opinion, or appraisal.

Furthermore, we believe that it would be impractical to require disclosure under Item 1607 only in instances of “severe conflicts of interest” as one commenter suggested because quantifying or classifying the extent of a conflict of interest is difficult given the wide variety of facts and circumstances in each de-SPAC transaction.

We are adopting Item 1607(b) and (c) as proposed, with two technical modifications. We revised Item 1607(b)(5) to specify that the related disclosure is only required for reports, opinions, or appraisals related to the fairness of the consideration to be offered to security holders of the target company in the de-SPAC transaction. We also revised Item 1607(c) to specify that the reports, opinions, or appraisals required to be filed are those referred to in Items 1607(a) and (b).

We disagree with the comments that the filing of reports, opinions, or appraisals pursuant to Item 1607(c) would have limited incremental benefit to investors. Although the summary required by Item 1607(b)(6) provides investors with useful information regarding the preparation and findings or recommendations of the report, opinion, or appraisal, we believe that it is important for investors to be able to review the actual report, opinion, or appraisal being summarized and, in many cases, being relied upon by the board when considering the transaction.

We also disagree with the comments that the filing of reports, opinions, or appraisals pursuant to Item 1607(c) would present their preparers with an “impractical and unworkable” task or that the preparers would not consent to the public use of such materials. While the requirements of Item 1607(c) may affect how preparers price their services as well as the types of information included in their reports and opinions, such materials have historically and routinely been included with filings relating to transactions other than de-SPAC transactions, and in those cases, registrants and preparers have been able to navigate the preparation, filing, and evaluation of such materials. We are not aware of any reason (and commenters have not provided any specific reason) why materials used in de-SPAC transactions would be any different.

We are also amending Item 601 of Regulation S–K, Schedule 14A, and Schedule TO to implement the final Item 1607(c) exhibit filing requirement. For Forms S–1, S–4, F–1, and F–4, which refer to the exhibit requirements in Item 601 of Regulation S–K, the Item 1607(c) exhibit filing requirement will be incorporated through new 17 CFR 229.601(b)(98) (Item 601(b)(98) of Regulation S–K). Schedule 14A and Schedule TO will incorporate the Item 1607(c) exhibit filing requirement through new Item 25(b) of Schedule 14A and new Item 12(b) of Schedule TO, respectively. Because Item 1 of Schedule 14C generally requires compliance with the relevant items of Schedule 14A, the Item 1607(c) exhibit filing requirement will be incorporated into Schedule 14C through new Item 25(b) of Schedule 14A.

H. Tender Offer Filing Obligations

1. Proposed Item 1608

The Commission proposed Item 1608 to codify a staff position that a Schedule TO filed in connection with a de-SPAC transaction should contain substantially the same information about a target private operating company that is required under the proxy rules and that a SPAC must comply with the procedural requirements of the tender offer rules when conducting the transaction for which the Schedule TO is filed, such as a redemption of the SPAC securities. Redemption rights offered by a SPAC to its security holders in connection with the de-SPAC transaction or an extension of the timeframe to complete a de-SPAC transaction generally have indicia of being a tender offer, but the Commission staff has not objected if a SPAC does not comply with the tender offer rules when the SPAC files a Schedule 14A or 14C in connection with a de-SPAC transaction or an extension and complies with Regulation 14A or 14C, because the Federal proxy rules would generally mandate substantially similar disclosures and applicable procedural protections as required by the tender offer rules. Proposed Item 1608 would not affect the staff position for those SPACs that file Schedule 14A or 14C for their de-SPAC transactions or extensions. SPACs that do not file a Schedule 14A or 14C (such as FPIs) in connection with the de-SPAC transaction (or an extension of time to complete a de-SPAC transaction), however, would be subject to the requirements of proposed Item 1608.

2. Comments: Item 1608

A few commenters generally supported the proposed rule but suggested certain changes.

One of these commenters recommended the Commission codify and clarify that a SPAC filing a Schedule 14A or 14C in connection with a de-SPAC transaction (or seeking an extension of time to complete a de-SPAC transaction) would neither need to file a Schedule TO nor comply with the tender offer rules. While expressing support for proposed Item 1608, the same commenter stated that a SPAC stockholder's ability to redeem its shares at its option does not result in the existence of a tender offer. The same commenter stated that SPACs that are FPIs and that elect to report generally on domestic forms and whose de-SPAC transaction disclosure document is nearly “identical” to a proxy or information statement filed by a domestic filer pursuant to Regulation 14A or 14C should not have to file a Schedule TO. Finally, the commenter stated that such a SPAC's investors are confused when presented with a proxy statement and a tender offer document that proceed as parallel but different processes while not having any added protection.

Another commenter suggested that proposed Item 1608 is too broad because it would apply to tender offers conducted by SPACs but not related to a de-SPAC transaction. The same commenter stated that the adoption of proposed Securities Act Rule 145a would effectively require the use of Form S–4 or F–4 for all de-SPAC transactions, thus rendering Item 1608 unnecessary.

3. Final Item 1608

After considering the comments, we are adopting Item 1608 as proposed.

We decline to revise the final item to clarify that a SPAC filing a Schedule 14A or 14C in connection with a de-SPAC transaction (or seeking an extension of time to complete a de-SPAC transaction) would neither need to file a Schedule TO nor comply with the tender offer rules, as recommended by a commenter. We do not believe the codification of the commenter's view is necessary because Item 1608, as adopted, is a more precise way to address an exception to the standard de-SPAC transaction structures that have been used historically. We also note that Item 1608 applies only if a SPAC files a Schedule TO for the redemption of securities offered to security holders ( e.g., in connection with a de-SPAC transaction or an extension of the timeframe to complete a de-SPAC transaction). We have revised General Instruction K to Schedule TO to separately address the requirements for a filing that relates to a redemption of securities offered to security holders other than in connection with a de-SPAC transaction ( e.g., the redemption of securities in connection with an extension of the timeframe to complete a de-SPAC transaction).

With respect to the comment that the redemption of a SPAC's shares at the option of a stockholder is not a tender offer, as noted above, the Commission has expressed the view that SPAC redemptions conducted pursuant to a SPAC's organizational documents generally have indicia of being a tender offer. However, as discussed above, the Commission staff has not objected if a SPAC does not comply with the tender offer rules when the SPAC files a Schedule 14A or 14C in connection with a de-SPAC transaction or an extension and complies with Regulation 14A or 14C. Item 1608 does not affect this staff position for those SPACs that file a Schedule 14A or 14C for their de-SPAC transactions or extensions.

Regarding the comment that FPIs whose de-SPAC transaction disclosure document is “identical” to a proxy or information statement filed by a domestic filer pursuant to Regulation 14A or 14C should not have to file a Schedule TO, we note that an FPI is not required to comply with Regulations 14A or 14C and, thus, any filing the FPI considers to be a proxy or information statement would not be subject to compliance with those regulations and would not be subject to the liability provisions associated with filings required to comply with those regulations (although the filing would be subject to the liability provisions associated with the specific filing made).

Finally, with respect to the same commenter's statement that investors in a SPAC that is an FPI and which delivers both a disclosure document similar to a proxy statement and a tender offer document will be confused without any additional protection, we believe the SPAC should be able to provide enough clarity and investor support regarding the purposes of each such document to surmount these concerns.

We also received a suggestion to expressly state that Item 1608 is applicable only to tender offers conducted by SPACs related to a de-SPAC transaction. We decline to revise Item 1608 as suggested because Item 1608 is intended to apply to Schedule TO filings by SPACs for any redemption of securities offered to security holders, which would include the redemption of securities offered in connection with an extension of the timeframe to complete a de-SPAC transaction.

In response to a commenter's view that the adoption of proposed Rule 145a may result in the requirement to use Form S–4 or F–4 for all de-SPAC transactions, thus rendering Item 1608 unnecessary, we note that there are certain situations today, and there could be situations under future SPAC structures, in which Item 1608 would still be applicable and provide security holders with important disclosure to use in making their investment decision.

I. Structured Data Requirement

1. Proposed Item 1610

The Commission proposed Item 1610 to require SPACs to tag all information disclosed pursuant to subpart 1600 of Regulation S–K in Inline XBRL in accordance with Rule 405 of Regulation S–T and the EDGAR Filer Manual.

2. Comments

A number of commenters supported proposed Item 1610. One of those commenters said that tagging the quantitative and narrative disclosures would provide investors with searchable formats to access the information they would like to review, including potential conflicts of interests and potential risks. Another commenter said the provision of structured data will make subpart 1600 of Regulation S–K information more easily accessible for purposes of aggregation, comparison, filtering, and other analysis.

Some commenters addressed whether the Commission should provide exemptions or different requirements for FPIs, SRCs, or emerging growth companies (“EGCs”). One commenter said there was not a compelling reason to provide for such exemptions or different requirements. Another commenter said that “[u]ltimately requirements should be the same” across issuers “to ensure the availability of a complete dataset for investors,” but that “the Commission may wish to offer a phase-in period for smaller companies and [foreign private issuers] that have more limited resources.”

One commenter indicated they believe there is no need for structured data tagging for SPAC IPOs because SPAC IPOs are considerably simpler and easier to understand for investors than traditional IPOs and the redemption rights make an investment in a SPAC IPO considerably less risky. Another commenter recommended that the Commission evaluate responses from the issuer community regarding the costs of tagging this information.

One commenter said the Commission should provide detailed technical guidance prior to the rule implementation, taking account of all possible use cases for reporting, and an EDGAR Beta testing environment with voluntary early filing allowed 12 to 15 months prior to the first mandatory compliance date.

One commenter suggested the Commission consider use of Legal Entity Identifiers (LEIs) within the registration process and enhanced disclosures of IPOs by SPACs and in de-SPAC transactions.

3. Final Item 1610 and Tagging Compliance Date

After considering the comments received, we are adopting Item 1610 as proposed, but we are providing a one year phased-in compliance date for the tagging requirements.

We agree with the commenter who said that tagging the quantitative and narrative disclosures would provide investors with searchable formats to access the information they would like to review, including potential conflicts of interests and potential risks. We also agree with the commenter who said that the provision of structured data will make subpart 1600 of Regulation S–K information more easily accessible for purposes of aggregation, comparison, filtering, and other analysis.

We believe that the structured data requirements will enhance the usability of the SPAC disclosures. The requirements we are adopting include detail tagging of the quantitative disclosures and block text tagging of the narrative disclosures required under subpart 1600. These structured data requirements will make SPAC disclosures more readily available and easily accessible to investors and other market participants for aggregation, comparison, filtering, and other analysis.

One commenter suggested that the Commission may wish to “offer a phase-in period for smaller companies and [foreign private issuers] that have more limited resources.” To address these concerns, we have determined to provide a one-year phase in for the tagging requirements. We believe the additional one-year period for tagging compliance will help lessen burdens associated with the tagging requirements under the final rules for all registrants.

We disagree with one commenter's view that there is no need for structured data tagging for SPAC IPOs because SPAC IPOs are considerably simpler and easier to understand for investors than traditional IPOs and the redemption rights make an investment in a SPAC IPO considerably less risky. On the contrary, we believe structured data is useful to investors in the SPAC IPO setting (as well as the de-SPAC transaction setting), particularly by enabling comparison and the extraction and analysis of information, as discussed above. In addition, as discussed above, special risks such as conflicts of interest and dilution in SPAC IPOs and de-SPAC transactions may be complex and enhancing investor ability to use, compare, and analyze the data will help investors assess such risks.

We have not received any responses from the issuer community regarding the costs of the data tagging requirements, but we nonetheless do not believe the structured data requirements will unduly add to companies' burden in preparing their filings based on our extensive experience with existing tagging requirements. We believe such incremental costs are appropriate given the significant benefits to investors, as described above.

As a result of the requirement to tag SPAC IPO disclosures, SPACs will incur tagging compliance costs at an earlier stage of their lifecycle, because SPACs do not have to tag IPO registration statements under current Commission rules. While the tagging requirements for SPAC disclosures will impose additional compliance costs on registrants, we expect such costs will be modest and largely the final rules will simply shift the timing of such costs because under the current rules such registrants are subject to data tagging requirements in their first post-IPO periodic report on Form 10–Q, 20–F, or 40–F, as discussed in greater detail in section VIII (Economic Analysis) below.

One commenter recommended that the Commission provide an EDGAR beta-testing environment with voluntary early filing allowed 12 to 15 months prior to the first mandatory compliance date. In lieu of the suggested beta-testing environment, we have determined to provide a one year phased-in compliance date for the tagging requirements, as noted above. This approach will provide additional time for registrants to prepare for the new requirements. It will also provide sufficient time for the adoption of a final taxonomy that will take into consideration initial disclosures that will be provided in response to the final rules, which should help lessen the compliance burden for registrants and improve data quality for investors by reducing the need for extensive custom tagging. The commenter also said the Commission should provide detailed technical guidance prior to the rule implementation, “taking account of all possible use cases for reporting” to ensure consistency of reported data. Consistent with the Commission's common practice, a draft taxonomy will be made available for public comment, and the Commission will incorporate a final taxonomy into an updated version of the EDGAR system before the tagging requirements take effect.

One commenter suggested the Commission consider use of Legal Entity Identifiers (LEIs) within the registration process and enhanced disclosures of IPOs by SPACs and in de-SPAC transactions. The Commission is not adopting requirements regarding LEIs in this rulemaking but will take the comment under advisement.

III. Disclosures and Liability in De-SPAC Transactions

In light of the reliance on de-SPAC transactions as a vehicle for private operating companies to access the U.S. public securities markets with greater relative frequency than in the past, the Commission proposed a number of new rules and amendments to existing rules to more closely align the treatment of private operating companies entering the public markets through de-SPAC transactions with that of companies conducting traditional IPOs. In connection with these proposals, the Commission expressed the view in the Proposing Release that a private operating company's method of becoming a public company should not negatively impact investor protection.

A. Non-Financial Disclosures in De-SPAC Disclosure Documents

1. Proposed Rules

The Commission proposed to require certain non-financial statement disclosures in connection with de-SPAC transactions. The Commission proposed that, if the target company in a de-SPAC transaction is not subject to the reporting requirements of section 13(a) or 15(d) of the Exchange Act, disclosure with respect to the target company pursuant to the following items in Regulation S–K would be required in the registration statement or schedule filed in connection with the de-SPAC transaction: (1) §§ 229.101 (“Item 101”) (description of business); (2) 229.102 (“Item 102”) (description of property); (3) 229.103 (“Item 103”) (legal proceedings); (4) 229.304 (“Item 304”) (changes in and disagreements with accountants on accounting and financial disclosure); (5) 229.403 (“Item 403”) (security ownership of certain beneficial owners and management, assuming the completion of the de-SPAC transaction and any related financing transaction); and (6) 229.701 (“Item 701”) (recent sales of unregistered securities). Where the private operating company is an FPI, the proposed amended registration forms included the option of providing disclosure relating to the private operating company in accordance with Items 3.C, 4, 6.E, 7.A, 8.A.7, and 9.E of Form 20–F, consistent with disclosure provided by FPIs in IPOs.

Also, the Commission proposed amendments to Forms S–1 and F–1 to provide that where these forms are used to register securities in connection with a de-SPAC transaction, these forms must include the information required in Forms S–4 (in the case of Form S–1) and F–4 (in the case of Form F–1). Finally, the Commission proposed General Instruction K to Schedule TO and new Item 14(f)(1) to Schedule 14A to incorporate into each of those forms, if the filing relates to a de-SPAC transaction, the disclosure provisions of Items 1603 through 1609 of Regulation S–K, as well as the structured data provision of Item 1610 of Regulation S–K.

2. Comments

Commenters generally supported the Commission's proposal to align non-financial disclosures for de-SPAC transactions with the requirements in a traditional IPO. A few commenters suggested the proposed disclosure requirements are consistent with current practice. These commenters said the proposed disclosure requirements would otherwise be required in a Form 8–K filing following the closing of the de-SPAC transaction. One commenter said the proposed requirements reflect “current best practice” and would not create a “significant burden” for targets.

One commenter said that the proposed requirements, other than Item 701, would require information “already disclosed with respect to target companies.” In the commenter's view, the proposed disclosures, including Item 701, “would not provide meaningful information or benefits to investors.”

Regarding the proposed amendment to Form S–1 to require the information required by Form S–4, one commenter recommended “the final rule include explicit language that such Form S–1 should include all information for the private operating company that would have been required in a Form S–4.”

3. Final Rules

Except for the modifications we discuss below, we are adopting as proposed: (a) General Instruction L.2 to Form S–4, (b) General Instruction I.2 to Form F–4, (c) Item 14(f)(2) of Schedule 14A, (d) General Instruction K to Schedule TO, (e) General Instruction VIII to Form S–1, and (f) General Instruction VII to Form F–1. We believe there will be two main benefits to investors from these requirements. First, the inclusion of these disclosures in a Form S–4 or Form F–4 registration statement will mean that any material misstatements or omissions contained therein would subject the issuers and other parties to liability under sections 11 and 12 of the Securities Act, which would align with the protections afforded to investors under the Securities Act for disclosures provided in a Form S–1 or F–1 for an IPO.

Second, as a result of these new requirements, this information will be available to investors prior to the inception of trading of the post-business combination company's securities on a national securities exchange, rather than the earliest instance of such requirement being the requirement to set this information out in a Form 8–K due within four business days of the completion of the de-SPAC transaction. As a result, shareholders will be able to consider this information when they make voting, investment, or redemption decisions in connection with a de-SPAC transaction.

One commenter suggested that disclosure under the proposed requirements is already provided with respect to target companies and would not provide meaningful benefits to investors. We disagree with this view that the requirements would not provide meaningful benefits to investors. Also, we believe compliance with these requirements will be minimally burdensome where disclosure of this information is already market practice and codifying this practice will create a uniform, transparent, minimum floor standard of disclosure across transactions, even if market practice were to change in the future.

In response to the comment recommending that Form S–1 should include explicit language that Form S–1 should include all information for the private operating company that would have been required in a Form S–4, we have revised General Instruction VIII of Form S–1 to clarify that, if the securities to be registered on Form S–1 will be issued in a de-SPAC transaction, the requirements of Form S–4 apply to Form S–1, including, but not limited to, Item 17 and General Instruction L. Similarly, in the final rules, we have revised General Instruction VII of Form F–1 to clarify that, if the securities to be registered on Form F–1 will be issued in a de-SPAC transaction, the requirements of Form F–4 apply to Form F–1, including, but not limited to, Item 17 and General Instruction I.

With respect to instructions in both General Instruction L.2 to Form S–4 and General Instruction I.2 to Form F–4 that apply with respect to the target company “[i]f the target company is a foreign private issuer,” we made several corrections from the proposal. First, we deleted the requirement to provide target company information pursuant to Item 3.C of Form 20–F (reasons for the offer and use of proceeds), because there is not a similar analog in the list of disclosure items to be provided with respect to the target company when the target company is not an FPI in the same instructions. Second, we deleted the requirement to provide target company information pursuant to Item 9.E of Form 20–F (dilution) because dilution information will already be required through the application of Item 1604 in the forms in connection with a de-SPAC transaction. Third, we added a requirement to provide target company information pursuant to Item 16F of Form 20–F (change in registrant's certifying accountant), because the intent of the proposal was that there should be an analog for FPI target companies to Item 304 of Regulation S–K (changes in and disagreements with accountants on accounting and financial disclosure) in the list of disclosure items to be provided with respect to the target company when the target company is not an FPI in the same instructions and the reference to Item 16F of Form 20–F was inadvertently omitted from the proposal.

In the final rules, we have also revised Item 14(f)(2) of Schedule 14A to remove the additional disclosure required for any directors appointed without action by the security holders of the SPAC to align the disclosure required under Item 14(f)(2) of Schedule 14A with that required under General Instruction L.2 to Form S–4 and General Instruction I.2 to Form F–4.

B. Minimum Dissemination Period

1. Proposed Rules

Historically, in business combination transactions, there has been no requirement under Commission rules to provide security holders with a minimum amount of time to consider proxy statement or other disclosures. In view of the unique circumstances surrounding de-SPAC transactions, the Commission proposed to amend Exchange Act Rule 14a–6 and Rule 14c–2, as well as to add instructions to Forms S–4 (General Instruction L.3) and F–4 (General Instruction I.3), to require that prospectuses and proxy and information statements filed in connection with de-SPAC transactions be distributed to security holders at least 20 calendar days in advance of a security holder meeting or the earliest date of action by consent, or the maximum period for disseminating such disclosure documents permitted under the applicable laws of the SPAC's jurisdiction of incorporation or organization if such period is less than 20 calendar days.

2. Comments

A number of commenters generally supported the proposed minimum dissemination periods for disclosure documents in de-SPAC transactions.

One commenter on the proposal supported “as much lead time as possible for dissemination” and suggested the Commission “consider whether federal securities laws should override the laws of the jurisdiction of incorporation or organization if such jurisdictions allow less than 20 calendar days advance dissemination for de-SPAC merger/proxy vote documentation where such de-SPAC will be trading on SEC regulated markets.”

Another commenter said that the period of 20 calendar days “is consistent with current market practice for the solicitation period in de-SPAC transactions.” The commenter said that, if the safe harbor from the Investment Company Act is adopted as proposed, the Commission should “consider an exception to the minimum dissemination period in the event necessary to stay within the safe harbor.”

Another commenter said, “The SEC's proposed solution does not align with the treatment of IPOs. An IPO prospectus is substantially final at launch of the IPO roadshow; however, since there is no required length for a roadshow, investors in an IPO may only have access to a substantially final version of the prospectus for a few days prior to making their investment decision.” The commenter said that stockholder meeting notices required to be provided certain numbers of days prior to a stockholder meeting are typically included in proxy statements and stated that, “Under the current framework, the final registration statement or proxy statement in a de-SPAC transaction is available for at least 10 days and a preliminary version is typically publicly available for up to several months longer than in an IPO.” This commenter also stated, “The SEC justifies this differential treatment by citing the complexity of the SPAC structure, the conflicts of interest that are often present in this structure and the effects of dilution on non-redeeming shareholders, but it fails to appreciate that many of these same considerations can be present in IPO transactions and that this proposed rule is decidedly contrary to the SEC's stated intention of aligning de-SPAC transactions with IPOs.”

Another commenter appeared to suggest that the minimum dissemination period for purposes of proposed General Instruction L.3 to Form S–4 should be the same as the IPO “48 hour” rule of 17 CFR 240.15c2–8 (“Rule 15c2–8”).

3. Final Rules

We are adopting the amendments to Rules 14a–6 and 14c–2 and Forms S–4 (General Instruction L.3) and F–4 (General Instruction I.3) as proposed, except for clarifying changes discussed below. In addition to the need for enhanced disclosure in de-SPAC transactions, we continue to believe that it is important to ensure that SPAC security holders have adequate time to analyze the information presented in these transactions.

Although the laws of a SPAC's jurisdiction of incorporation or organization may require the SPAC to send a notice to its security holders at least a specified number of days before the security holder meeting to approve a proposed business combination transaction, the information in such notices is often limited. These laws do not generally require a minimum period of time for dissemination of other information about the transaction (including any proxy statements or other materials required by the Federal securities laws) to security holders. Exchange listing standards also do not impose such requirements. Without a minimum period for dissemination of prospectuses, proxy statements, and other materials before a security holder meeting (or action by consent), SPACs and SPAC sponsors may provide prospectuses or proxy or information statements for a de-SPAC transaction to the SPAC's security holders within an abbreviated time frame, leaving the security holders with relatively little time to review what are often complex disclosure documents for these transactions.

We recognize that SPACs are often required under their governing instruments and applicable exchange listing rules to complete de-SPAC transactions within a certain time frame. Nevertheless, given the complexity of the structure of SPACs, the conflicts of interest that are often present in this structure and the effects of dilution on non-redeeming shareholders, the 20-calendar day minimum dissemination periods we are adopting will provide an important investor protection by establishing a minimum time period for security holders to review prospectuses and proxy and information statements in de-SPAC transactions.

In order to account for the prospect that the laws of a SPAC's jurisdiction of incorporation or organization may have a maximum advance time period provision applicable to the dissemination of materials to security holders, the rules we are adopting include provisions that would require a registrant to satisfy the maximum dissemination period permitted under the applicable law of such jurisdiction when this period is less than 20 calendar days to avoid conflicting with such a requirement. One commenter suggested that the Commission should override the laws of the jurisdiction of incorporation or organization of the SPAC where such jurisdictions provide a maximum period for dissemination of less than 20 days. We are not adopting such suggestion because we believe the instances where there is a maximum period of less than 20 days will be limited.

Another commenter said that the Commission should consider an exception to the minimum dissemination period where necessary to stay within the Investment Company Act safe harbor. As discussed below in section VI, we are not adopting the proposed Investment Company Act safe harbor.

One commenter suggested that the proposed minimum dissemination period is contrary to the Commission's stated purpose of aligning de-SPAC transactions with IPOs because investors in IPOs typically have only short periods of time to review prospectuses. While we acknowledge that, under the final rules, investors may have more time to review prospectuses in a de-SPAC transaction than in an IPO, we believe this is appropriate because in the Commission staff's experience, due to the hybrid nature of SPAC transactions, registration statements in de-SPAC transactions in some cases are substantially lengthier than both the earlier IPO registration statement for the specific SPAC (that is involved in the de-SPAC transaction) and registration statements for IPOs of traditional operating companies, as the registration statements contain both IPO-like information about the target company and M&A-like information about the de-SPAC (and other related) transactions. Further, as noted by a different commenter and as observed by Commission staff, current market practice appears to be that many SPACs deliver these disclosures to investors earlier than 20 calendar days prior to the meeting date, meaning the final rules we are adopting should impose minimal burdens in such instances and would provide a uniform and transparent minimum floor standard for the dissemination of such disclosure should market practices change.

One commenter also said that a preliminary version of the final registration statement may be available for months prior to the security holder meeting date related to the de-SPAC transaction. We do not believe this fact provides a basis for not adopting the proposed rules regarding minimum dissemination periods. These preliminary filings may be amended prior to their becoming effective and, in the case of a combined registration and proxy statement that has not yet become effective, this disclosure would not yet have been delivered to security holders.

To the extent one commenter appeared to suggest that the minimum dissemination period should be the same as the IPO “48 hour” rule of Exchange Act Rule 15c2–8, we do not believe a 48-hour period would provide investors sufficient time to review the disclosure, particularly given the complex hybrid nature of de-SPAC transactions. Moreover, providing only 48 hours before the shareholder meeting will not provide enough time for certain shareholders' votes to be considered as a practical matter, given that many shares are held through securities intermediaries such as broker-dealers and such intermediaries often require voting instruction forms to be submitted to them at least 48 hours prior to the shareholder meeting.

We are making minor changes in the final rules compared to the proposals for purposes of clarity and to make the registration forms congruent with the amendments to Rules 14a–6 and 14c–2 that we are adopting. The final rules provide that each of Rules 14a–6 and 14c–2 and Forms S–4 and F–4 will contain the language “must be distributed to security holders no later than the lesser of 20 calendar days prior to the date on which the meeting of security holders is to be held or action is to be taken in connection with the de-SPAC transaction.” Where the proposed amendments to Forms S–4 and F–4 referred to the “date on which action is to be taken,” these revisions eliminate any potential for misinterpretation that the proposed language only referred to action by consent and not at a meeting of security holders. In addition, the terms “to be held” and “to be taken” are intended to clarify these rules since these events are in the future when viewed from the point in time at which the security holder materials are distributed.

C. Private Operating Company as Co-Registrant

1. Proposed Rules

Under section 6(a) of the Securities Act, each “issuer” must sign a Securities Act registration statement. In the Proposing Release, the Commission stated that a de-SPAC transaction marks the introduction of a private operating company to the U.S. public securities markets, and investors look to the business and prospects of the private operating company in evaluating an investment in the combined company. The Commission stated that, accordingly, it is the private operating company that, in substance, issues or proposes to issue its securities, as securities of the newly combined public company.

Given that the target company therefore is, in substance, an “issuer” of securities in a de-SPAC transaction regardless of transaction structure, the Commission proposed to amend Instruction 1 to the signatures section of both Form S–4 and Form F–4 to require that, when the SPAC would be the issuer filing the registration statement for a de-SPAC transaction, the term “registrant” would mean not only the SPAC but also the target company. The Commission also proposed to amend the general instructions to Forms S–4 and F–4 to provide that, if the securities to be registered on the form will be issued by a SPAC in a de-SPAC transaction, the term “registrant” for purposes of the disclosure requirements of the form means the SPAC.

2. Comments

A number of commenters generally supported the proposal. These commenters indicated that the co-registration proposal would better align liability and disclosure in de-SPAC transactions with IPOs. One stated that “the proposed changes that would treat a target operating company as a co- registrant at the time a Form S–4 or F–4 is filed would contribute to the Commission achieving its objective to better align de-SPAC transactions with traditional IPOs and afford investors with consistent protections.” Another stated that, “By making target companies co-registrants, the Proposed Rules ensure that target operating companies and their directors and officers have strong incentives under section 11 to deter disclosure errors and other misconduct, even in conventionally structured de-SPACs.” Yet another stated, “We believe that treating both the SPAC and the target as an issuer under Section 6(a) of the Securities Act would help to align investor protections with those of a traditional IPO.”

Several of these commenters also indicated that the rule proposal would benefit investors by increasing the quality and reliability of the disclosure provided in de-SPAC transaction registration statements. One argued that the disclosures provided in de-SPAC registration statements should be “enhanced” due to the fact that “both parties to the de-SPAC transaction [would be] liable for material misstatements and omissions to investors and shareholders,” while another stated “the proposed co-registrant requirements, and attendant liabilities for misstatements or omissions, would ensure that target company directors, boards and managements make accurate representations regarding the status of the pre-merger entity.”

Other commenters generally opposed or had concerns regarding the proposal, generally characterizing the proposal as “not necessary” or “inappropriate.” Several commenters stated that the rule proposal would not benefit investors or that the benefit would be uncertain. A number of commenters indicated that there are already strong incentives under the existing framework to ensure that disclosures in registration statements for de-SPAC transactions are accurate and complete, pointing to the existing liability frameworks that they state apply to de-SPAC transactions, such as sections 11 and 17(a) of the Securities Act, sections 10(b) and 14(a) of the Exchange Act, and 17 CFR 240.10b–5 (“Rule 10b–5”), and the Commission's ability to bring enforcement actions. A few of these commenters suggested it is unnecessary to impose additional liability because target company officers and directors, by virtue of their roles in the combined company, will effectively “own” any Exchange Act liabilities related to the disclosure in the de-SPAC transaction registration statement inherited by the combined company.

Several commenters suggested the co-registrant proposal would create a disparity compared to traditional M&A business combination transactions where a target is not a co-registrant. In contrast, another commenter stated that de-SPAC transactions involve “clearly different facts and circumstances than a non-SPAC merger because the SPAC board is not making a decision about the benefits of changing its operating business model via merger but rather is offering its shareholders the alternative of investing in the surviving company if they prefer that to $10 in cash.”

Other commenters suggested the co-registration proposal is inconsistent with existing definitions of registrant and issuer because, they asserted, the target in a de-SPAC transaction is not issuing or proposing to issue any securities pursuant to the de-SPAC registration statement.

One commenter opposed the co-registration proposal and expressed the view that: “[i]n most de-SPAC transactions the shares being registered on the SPAC's registration statement are being issued only to the target's shareholders and are not being issued or sold by the target company. Adding the target company as a co-registrant means that, in most cases, the target company will have potential Section 11 liability with respect to its own shareholders, but this is not logical or intuitive and is not consistent with the structure of a traditional IPO. In a traditional IPO, a company's existing shareholders at the time of the IPO do not receive registered shares and would not have potential Section 11 claims against the company due to the disclosures in the IPO registration statement.”

Another commenter suggested the co-registration proposal is inconsistent with 17 CFR 230.140 (“Rule 140”). The commenter said the purpose of Rule 140—to “ensure[ ] that the requisite information about the underlying issuer is adequately disclosed so new investors are fully informed of the attendant risks and returns relating to a potential investment”—is “not a concern in de-SPAC transactions,” because “full Form 10-type information” is already provided under current rules about the SPAC and the target company. This commenter also said that in a de-SPAC transaction “no new proceeds are being received by the Combined Company,” which is a “notable difference” from Rule 140.

Other commenters on the co-registration proposal requested certain clarifications. One commenter supported the co-registration requirement but suggested the Commission clarify whether “liability correctly or mistakenly extends to anyone other than unaffiliated, non-redeeming SPAC shareholder[s].” A different commenter asked the Commission to clarify “which entities would be considered co-registrants in these types of transactions and therefore subject to the applicable requirements under the securities laws.”

Several commenters addressed issues related to the scope of section 11 liability that may stem from the co-registration proposal. One commenter suggested that, as drafted, the proposal would make the target company a signer but not a co-registrant. Specifically, this commenter said that the proposed change to Instruction 1 to the Signatures section of the forms purports to make the target company a registrant “for purposes of this instruction” but that “the change would solely require that the target company, along with its specified officers and directors, sign the registration statement,” citing for purposes of comparison “existing Instruction 3 to the Signatures section of the forms, which the commenter said is not limited solely to the Signatures section.” The commenter opposed the proposed co-registration requirements and said that, “if the regulatory goal is exposing the target company and its officers and directors, as signatories, to Section 11 liability for material misstatements or omissions in the registration statement, the proposed amendment to Instruction 1 of the forms accomplishes that.”

Other commenters expressed views on which entity and which officers and directors should be required to sign the de-SPAC transaction registration statement. One commenter said that the Commission should “clarify that directors and executive officers of the target company, who will not be directors or executive officers of the target company following the consummation of the de-SPAC transaction, are not required to sign the registration statement used for the de-SPAC transaction and are not deemed to be directors or executive officers of the target company for purposes of the liability provisions of the securities laws.” Another commenter stated that the “required signatories should be the surviving company, which might be a new registrant and the directors and officers of that entity.” In contrast, another commenter expressed the view that “[t]arget company managers and directors are responsible for providing the information necessary for investor approval of a de-SPAC merger, and must provide accounting information as well as current operations and forecasts,” because they “also profit significantly from selling private shares and/or receiving significant ownership positions in the post-SPAC entity.” A different commenter suggested that liability under the co-registration proposal would be both over-inclusive and under-inclusive, because new officers or directors may be appointed and because target company officers or directors may resign. Finally, one commenter pointed out that in a de-SPAC transaction structured as an acquisition of assets, the assets acquired could not sign a registration statement.

A number of commenters addressed Exchange Act reporting company obligations of the target company as a result of proposed co-registration requirements. Several commenters raised concerns that if the target company is a co-registrant on a de-SPAC registration statement, the target company would become an Exchange Act reporting company at the time of effectiveness. Specifically, commenters raised concerns about the target company being required to file Exchange Act reports during the interim period between when the registration statement for the de-SPAC transaction becomes effective and the closing of the de-SPAC transaction.

A different commenter said “the proposed rules should clarify that a target company that will ultimately not be the public company parent following the de-SPAC transaction does not become subject to the periodic reporting requirements of Section 13 of the Exchange Act as a result of being a co-registrant in the registration statement for the de-SPAC transaction.” If a target company that does not become the public company parent does become subject to periodic reporting, the commenter said that “upon effectiveness of such registration statement, the target company would, as a result of Section 15(d) of the Exchange Act, automatically be required to begin filing 10–Ks, 10–Qs and other periodic reports required by the Exchange Act, and this would be an Exchange Act reporting obligation that is separate from the public company Exchange Act reporting obligation. These reports would be essentially the same reports as filed by its public parent company and would create significant additional compliance costs while resulting in no substantive additional public disclosure.” The commenter expressed the view that this was not an intended consequence of the rule proposal and said the Commission should clarify this aspect of the co-registration proposal.

Some commenters suggested the Commission should clarify in any final rules whether, in a situation where the de-SPAC transaction is not ultimately consummated, a target company that is a co-registrant for a de-SPAC registration statement that has been declared effective may suspend its periodic reporting obligations under procedures similar to those set out in Staff Legal Bulletin 18 regarding abandoned IPOs and acquired issuers. A number of commenters raised concerns about costs for target companies as co-registrants, particularly with respect to the cost of directors and officers insurance. One commenter stated, “Targets will be forced to substantially enhance their D&O [directors and officers] liability insurance coverage . . . [and], if the De-SPAC Transaction is never completed for some reason, Targets would likely not be able to `ratchet down' their coverage to more typical private company levels until the next policy renewal date.” One commenter stated that co-registration would result in disclosure requirements that are inconsistent with the proposed revisions to Regulation S–X, raising the issue of whether, if there were multiple target companies, if each company would be required to provide financials audited in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), rather than solely the predecessor pursuant to proposed Rule 15–01(a) of Regulation S–X. This commenter indicated that co-registration would result in inconsistencies with IPOs where there are multiple target companies and queried whether all target companies “should be required to sign the registration statement or just the accounting predecessor or acquiror, the one whose shareholders own the largest amount of the surviving company, etc.” A different commenter asked for guidance regarding a target company's section 15(d) reporting obligation in the case where there are multiple targets.

One commenter suggested the Commission create a new form for de-SPAC transactions. The commenter, who supported “the SEC's stance that SPAC business combinations should be treated as de facto IPOs,” suggested the Commission align SPAC disclosures with Form S–1 by creating a SPAC-specific form that would “closely resemble a traditional IPO S–1, rather than the traditional S–4 used for merger transactions.” The commenter proposed that, in this new SPAC-specific form, “management projections should not be disclosed to public SPAC shareholders . . . even if management projections have been reviewed by the SPAC board of directors in their role as shareholder fiduciaries.”

3. Final Rules

After considering the comments received, we are adopting the co-registration proposal substantially as proposed, with some modifications.

Under existing rules, when a SPAC or a holding company offers and sells its securities in a registered de-SPAC transaction, staff observed a majority of the relevant disclosure in the de-SPAC transaction registration statement is about the target company, but only the SPAC or holding company, its principal executive officer or officers, its principal financial officer, its controller or principal accounting officer, and at least a majority of its board of directors (or persons performing similar functions) are required to sign the registration statement for the de-SPAC transaction. These signers are subject to liability under section 11 of the Securities Act (along with other persons who have liability under section 11). In these situations, the private operating company and its officers and directors may therefore not incur liability as signatories to the registration statement under section 11 of the Securities Act, even though information about the target company is highly significant to investors and this result is unlike if the target company had conducted a traditional IPO registered on Form S–1 or Form F–1. As discussed in more detail below, it is our view that in a de-SPAC transaction the target company is an issuer of securities under section 2(a)(4) of the Securities Act, and, therefore, the target company along with its required officers and directors must sign a registration statement filed by a SPAC or another shell company for the de-SPAC transaction, because both in substance and by operation of new Securities Act Rule 145a, the target company is issuing or proposing to issue securities in a de-SPAC transaction, regardless of the transaction structure. In addition, the business operations of the target company will be those that are carried on by the combined company going forward. The co-registration requirements will therefore enhance investor protection by aligning Federal securities law liability with the entity that is the primary source of the information disclosed about the new public operating company.

Section 2(a)(4) of the Securities Act broadly defines the term “issuer” to include every person who issues or proposes to issue securities. The legislative history of this broad definition suggests that the identification of the “issuer” of a security should be based on the economic reality of a transaction to ensure that, in service of the disclosure purpose of the Securities Act, the person(s) that have access to the information most relevant to investors are responsible as an “issuer” for providing such information. However, certain commenters asserted that a target company cannot fall within the definition of issuer in a de-SPAC transaction because “[t]he [t]arget in a De-SPAC Transaction ordinarily is not issuing or proposing to issue any securities pursuant to the Merger Registration Statement—it is the SPAC's securities to be issued.” We disagree. As explained below, even in transaction structures where a target company does not issue its own securities in the course of the de-SPAC transaction, it will always be proposing to issue the securities of the combined company in connection with the Rule 145a transaction that is occurring when the SPAC conducts a business combination that changes it from a shell company to an operating company.

The final rules will ensure that, when a registration statement is filed for a de-SPAC transaction, a target company, its principal executive officer or officers, its principal financial officer, its comptroller or principal accounting officer, and a majority of its board of directors or persons performing similar functions sign the registration statement. These signatories, among others, will be liable under section 11, for any material misstatements or omissions in the registration statement (subject to a due diligence defense for all parties other than an issuer) and will thereby be held accountable to investors for the accuracy of the disclosures in the registration statement that previously would have been signed only by the SPAC or a holding company and its officers and directors. We continue to believe such liability, and the corresponding accountability to investors, is appropriate given that it is the private operating company that, in substance, issues or proposes to issue its securities, as securities of the newly combined public company. We expect that this requirement will improve the reliability of the disclosure provided to investors in connection with de-SPAC transactions by creating strong incentives for such additional signing persons (among others who would have liability under section 11 as a result of these requirements, such as non-signing directors) to conduct thorough diligence in connection with the de-SPAC transaction and review more closely the disclosure about the target company.

As noted above, the final rules reflect certain modifications to the proposed rules. First, we are requiring that the names of all co-registrants appear on the cover page. Second, we are clarifying that the target company is a registrant and not merely a signatory to the registration statement, as suggested by some commenters. Third, we are addressing scenarios where the target company is a business or assets. Finally, we are expanding the instructions to Forms S–4 and F–4 to also require that the target company and its related section 6(a) signatories sign a registration statement for a de-SPAC transaction filed by a holding company. This change is intended to ensure that the target company signs the registration statement in a transaction structure involving a holding company given that, as noted above, the target company is an “issuer” of the securities in any registered de-SPAC transaction. We have also added the same requirements to Form S–1 and Form F–1. We discuss these changes to the final rules and the comments received on the proposal in more detail below.

Several commenters suggested that there are already strong incentives under the existing framework to ensure that disclosures in registration statements for de-SPAC transactions are accurate and complete. A few of these commenters suggested it is unnecessary to impose additional liability because target company officers and directors, by virtue of their roles in the combined company, will effectively “own” any Exchange Act liabilities related to the disclosure in the de-SPAC transaction registration statement inherited by the combined company.

As commenters noted, currently when a SPAC files a registration statement in connection with a de-SPAC transaction that becomes effective, the SPAC is exposed to strict liability for material misstatements regarding all disclosures in the registration statement, including the disclosures related to the target company. In addition, the SPAC and/or target company may be exposed to liability from Commission enforcement actions or potentially to investors under anti-fraud statutory provisions and rules that require scienter or negligence.

We disagree with the commenters who suggested that existing liability protections make it unnecessary for the target company to have strict liability for statements in the de-SPAC registration statement. In the Securities Act, Congress determined that an issuer that offers and sells its securities to the public using a registration statement should be strictly liable to investors for any material misstatements and omissions in the effective registration statement. Furthermore, strong private liability in registered transactions is one of the central tenets of the Securities Act. As discussed throughout this release, in a de-SPAC transaction, the target company is an issuer because it, in substance, issues or proposes to issue its securities, as securities of the newly combined public company. As an issuer and the primary source of information disclosed about the combined operating company in registered de-SPAC transactions, the target company and its officers and directors are best situated to ensure the accuracy and completeness of such disclosures. Accordingly, investors in de-SPAC transactions are entitled to the protections arising from having the target company and other issuers sign the de-SPAC registration statement, including strict liability for statements in the effective registration statement, regardless of any other liabilities that may apply.

With respect to commenters' argument that the target company, and its officers and directors, will “own” liability for statements made in the de-SPAC registration statement going forward, we acknowledge that, under the existing framework, in specific situations where the target company survives and/or the officers and directors of the target company are officers and directors of the surviving company, they would potentially have liability, including strict liability, for statements in the de-SPAC registration statement. However, that assumption of liability under current regulations does not change the fact that in other transaction structures, the target company and its officers and directors may not be strictly liable for the statements made in any registration statement filed in connection with the de-SPAC transaction, notwithstanding that the target company is, in substance, an issuer in these transaction structures for the reasons discussed above. So that target company liability is consistent across de-SPAC transaction structures, we are adopting the co-registration proposal as proposed, subject to the changes discussed herein.

A few commenters suggested the co-registrant proposal would create a disparity compared to traditional business combination transactions, because the target company is not a co-registrant in those transactions. In contrast, another commenter said, “These are clearly different facts and circumstances than a non-SPAC merger” because the SPAC board is not deciding whether to change its operating business model via merger but rather is offering its shareholders the opportunity to invest in the surviving company. One commenter suggested that requiring the target company to sign a registration statement for a de-SPAC transaction would be inconsistent with how section 11 liability applies in a traditional IPO because, under the co-registrant proposal, the target company could be liable to its existing shareholders for information about the target company included in the de-SPAC registration statement. As discussed above, the hybrid nature of de-SPAC transactions makes them distinguishable from other business combinations or traditional IPOs, because the transaction simultaneously: (i) functions as a form of public capital raising for the target company, (ii) transforms a shell company, that is not a business combination related shell company, into an operating company, and (iii) commonly represents the introduction of a formerly private company to the public markets for the first time. In a de-SPAC transaction, the target company is, in substance, acting as issuer of securities and therefore should incur section 11 liability for the disclosures about its business and its financial results and condition, which constitute critical information for investors making investment, redemption, and voting decisions.

As noted above, the de-SPAC transaction commonly marks the introduction of the target company to the U.S. public securities markets, and investors look to the business and prospects of the target company in evaluating an investment in the combined company. Moreover, new Rule 145a recognizes that a de-SPAC transaction involves a sale of the securities of the combined company to the SPAC's shareholders. Information relating to the target company is the most significant factor in investor decisions to participate in the de-SPAC transaction because the target company will become the operating business of the combined company upon consummation of the de-SPAC transaction. In addition, the target company is the principal beneficiary of the capital that the SPAC has previously raised and is contributing to the combined company. Co-registration is necessary in these circumstances so that appropriate levels of liability for the related disclosures attaches to the entity that is the primary source of the information disclosed—information that relates to and ultimately benefits the target company itself. Requiring the target company and its officers and directors to sign the registration statement will help to ensure that the information provided to investors in connection with a de-SPAC transaction is accurate, complete, and reliable by incentivizing such parties to exercise more care in the preparation of that information.

One commenter suggested the co-registration proposal is inconsistent with Securities Act Rule 140, which according to the commenter “ensures that the requisite information about the underlying issuer is adequately disclosed,” and does not apply to de-SPAC transactions, because de-SPAC registration statements already provide registrants with disclosures about the target company, and the target company already may be subject to some liability for disclosures contained therein. While Rule 140 and these new co-registration requirements both expose parties to liability, they do so in different factual situations and for different purposes, and therefore are not inconsistent. As discussed above, we acknowledge that disclosure about target companies is already included in de-SPAC registration statements and target companies may have liability under de-SPAC registration statements in some situations. However, target companies do not have liability as issuers in all transaction structures, notwithstanding the fact that a de-SPAC transaction marks the introduction of the target company to the U.S. public securities markets and investors look to the business and prospects of the target company in evaluating an investment in the combined company.

One commenter supported the proposal but suggested that the Commission clarify whether “liability correctly or mistakenly extends to anyone other than unaffiliated, non-redeeming SPAC shareholder[s].” Under the final rules, the target company, its section 6(a) signing persons, and its directors will be subject to the same liability as any other issuer (including to affiliated shareholders).

A different commenter recommended that the Commission clarify “which entities would be considered co-registrants in these types of transactions and therefore subject to the applicable requirements under the securities laws.” We have provided additional clarification regarding which entities would be a co-registrant in connection with changes to the instructions to registration forms compared to the proposed instructions that we discuss below.

As noted above, one commenter suggested the proposal would make the target company a signer but not a co- registrant on Forms S–4 and F–4. We do not agree with this assessment because, as an “issuer” of the securities in a registered de-SPAC transaction, the target company is both a required signatory of the registration statement pursuant to section 6(a) and a “registrant” under Rule 405. To that end, Rule 405 states that a “registrant” is a type of “issuer”— i.e., “the issuer of the securities for which the registration statement is filed.”

The proposed instruction that the term “registrant” means the SPAC for purposes of the disclosure obligations of the form was not intended to mean that a target company would not also be considered a registrant. The purpose of that instruction was to make clear that the defined term “registrant” on the form refers to the “SPAC” and to allow for a different defined term to be used on the form when specialized disclosure with respect to the “target company” is required. The proposed instruction to the Signatures section was intended to clarify that both the SPAC and target company and their required officers and directors must sign the form but would not have made the target company a “signer not a registrant.”

Nevertheless, to clarify this point, in the final rules, we are making technical changes to the instructions to the forms. In connection with the request by a commenter to compare the proposed instructions to current Instruction 3 to the Signatures section, we are revising the instructions to Forms S–4 and F–4 to require that the names of each co-registrant appear on the cover page consistent with current Instruction 3. We are also revising the instructions to require that the target company and its related section 6(a) signatories sign a registration statement for a de-SPAC transaction filed by a holding company, to account for the fact that the target company is an “issuer” of the securities in any registered de-SPAC transaction. As a result, in the final rules, the last sentence of General Instruction L.1 of Form S–4 provides: “If the securities to be registered on this Form will be issued by a special purpose acquisition company (as such term is defined in Item 1601 of Regulation S–K) or another shell company in connection with a de-SPAC transaction, the registrants also include the target company (as such term is defined in Item 1601 of Regulation S–K), and it must be so designated on the cover page of this Form. In such a de-SPAC transaction, where the target company consists of a business or assets, the seller of the business or assets is deemed to be a registrant instead of the business or assets and must be so designated on the cover page of this Form. Further, in such a de-SPAC transaction, the term `registrant' for purposes of the disclosure requirements of this Form means the special purpose acquisition company, and the term `company being acquired' for the purposes of the disclosure requirements of this Form means the target company.” Similarly, we are revising the last sentence of Instruction 1 of the Signatures section and revising proposed General Instruction I.1 to Form F–4 and the last sentence of Instruction 1 of the Signatures section of Form F–4 in the same manner as with Form S–4.

Also with respect to changes in the forms to implement the co-registration requirements, in the Proposing Release, the Commission solicited comment on whether Form S–1 and Form F–1 should be amended to include instructions as to signatures which, when used for a de-SPAC transaction, would align the signature requirements of these forms to Form S–4 and Form F–4. Because Form S–1 and, where issuers are eligible, Form F–1, remain available for de-SPAC transactions, it is consistent with the protection of investors to include equivalent instructions as to signatures to ensure consistent liability for de-SPAC transactions regardless of which Securities Act form is used for registration. Accordingly, we are adopting amendments to the instructions to signatures in Form S–1 and Form F–1 that correspond to those in Form S–4 and Form F–4.

A number of commenters stated that liability under the co-registration proposal would be over and/or under-inclusive with respect to the target company's officers and directors. As discussed above, the final rules make clear that the target company is a co-registrant (and not merely a signer) with respect to the de-SPAC transaction. Therefore, as with any registrant, the target company will be required to have its principal executive officer or officers, principal financial officer and controller or principal accounting officer, and at least a majority of its board of directors or persons performing similar functions sign the registration statement.

With respect to commenter suggestions that only continuing target company officers and directors should sign the registration statement, we do not believe it would be necessary or appropriate to adopt such a requirement for several reasons. First, to require signatures only from continuing target company officers and directors would be inconsistent with the statutory signature requirements under Securities Act section 6(a), which requires each issuer's “principal executive officer or officers, its principal financial officer, its comptroller or principal accounting officer, and the majority of its board of directors or persons performing similar functions” to sign the registration statement. Moreover, non-continuing directors who did not sign the registration statement nonetheless may be liable under section 11, because section 11(a)(2) provides that the persons with liability to persons who acquired securities include “[e]very person who was a director of (or person performing similar functions) or partner in the issuer at the time of the filing of the part of the registration statement with respect to which his liability is asserted.” Second, if a target company officer or director will not be a continuing officer or director in the combined company, it is within the control of the target company officer or director to resign prior to the effectiveness of the de-SPAC registration statement. Finally, we note that Securities Act section 6 requires only the issuer's “principal executive officer or officers, its principal financial officer, [and] its comptroller or principal accounting officer,” but not other officers, to sign the registration statement. Accordingly, if the non-continuing target company officers are not one of these officers, they are not required to sign the registration statement.

The proposed definition of target company included a “business” or “assets” and the proposed definition of “de-SPAC transaction” included an “acquisition of assets.” One commenter pointed out that in a de-SPAC transaction structured as an acquisition of assets, the assets acquired could not sign a registration statement. We are not making any changes in the final definitions of those terms. However, to align the signature requirements for the acquisition of a business or assets as closely as possible to the signature requirements being adopted for all other target companies, we are revising the instructions to Forms S–4 and F–4 to provide that, in de-SPAC transactions involving the purchase of assets or a business, the term “registrant” includes the seller of the business or assets. As with target companies in non-asset deals, the signatories of the asset purchase agreement (or similar transaction agreement) would be the sellers required to sign the registration statement. When a de-SPAC transaction involves the sale of assets that meet the definition of a business in Article 11 of Regulation S–X, the seller of the assets must provide the historical financial information regarding the acquisition in the registration statement. Thus, such seller of assets and its officers and directors are similarly situated to the target company and its officers and directors ( i.e., the seller of a business that will continue as the combined company) in a de-SPAC transaction not structured as an asset sale.

Several commenters raised concerns that, if the target company is a co-registrant on a de-SPAC registration statement, then the target company would become an Exchange Act reporting company at the time of effectiveness and would be required to file reports during the interim period between when the registration statement for the de-SPAC transaction becomes effective and the closing of the de-SPAC transaction. Relatedly, several commenters noted that the target company would incur this reporting obligation even if the de-SPAC transaction does not ultimately close. In response to these concerns, some commenters suggested the final rules should either clarify that a target company that is a co-registrant on a de-SPAC registration statement does not become subject to periodic reporting requirements, or, in a situation where the de-SPAC transaction is not ultimately consummated, a target company that is a co-registrant for a de-SPAC registration statement may suspend its periodic reporting obligations under procedures similar to those set out in Staff Legal Bulletin 18 regarding abandoned IPOs and acquired issuers.

As “registrants” and “issuers,” target companies will be required by applicable Exchange Act provisions to file periodic reports after the effectiveness of the de-SPAC registration statement and until the target company terminates and/or suspends its Exchange Act report obligations. We do not believe an exemption from the Exchange Act's reporting requirements is necessary or appropriate in the public interest or consistent with the protection of investors because, during the pendency of the de-SPAC transaction, SPAC investors will benefit from receiving updated information about the target company that, in substance and as reflected in Rule 145a, proposes to issue securities of the newly combined public company, through which the formerly private company will operate its business. In the event that a target company that is not the predecessor to the shell company is required to file a periodic report such as a Form 10–K or 10–Q as a standalone issuer, the periodic report would be required to comply with the form requirements and doing so could require the disclosure of updated information about the target company that is not the predecessor that would not have been required in the registration statement.

We agree with commenters, however, that a target company (that became a reporting company by virtue of being a co-registrant for a de-SPAC transaction registration statement that has been declared effective) may look to 17 CFR 240.12h–3 (Exchange Act Rule 12h–3) and Staff Legal Bulletin 18 for guidance regarding how it can suspend its reporting obligations under section 15(d) of the Exchange Act in situations in which: (1) the de-SPAC transaction does not close, or (2) at the closing of the de-SPAC transaction, the target company is acquired and another company has become a public reporting company with respect to the combined business created by the de-SPAC transaction.

A number of commenters raised concerns about costs for target companies as co-registrants, particularly with respect to the cost of directors and officers insurance. We recognize that the final rules, in particular the co-registration requirements, could result in increased costs for target companies. Based on Commission staff's experience, target companies that enter de-SPAC transactions may have directors and officers insurance, and business combination agreements in connection with de-SPAC transactions may contain provisions regarding the provision of directors and officers insurance to target company officials. As a result, any increased costs incurred by target companies in connection with de-SPAC transactions with respect to directors and officers insurance under the final rules will be incremental to those already incurred. Furthermore, we believe these incremental costs are justified by the enhanced investor protections that will be realized by the co-registration requirements. We discuss our analysis of the costs and benefits of the final rules in more detail in section VIII below.

One commenter said that co-registration would result in disclosure requirements that are inconsistent with the proposed revisions to Regulation S–X, raising the issue of whether, if there were multiple target companies, each company would be required to provide financial statements audited in accordance with PCAOB standards in the de-SPAC registration statement, rather than solely the predecessor pursuant to proposed Rule 15–01(a) of Regulation S–X. This commenter indicated that co-registration would result in inconsistencies with IPOs where there are multiple target companies.

As the commenter notes, in the case of multiple companies being acquired by the SPAC, if each of those companies meets the definition of “target company” being adopted, then each would be required to be a co-registrant on the de-SPAC registration statement. Under the final rules all target companies are issuers, as defined by section 2(a)(7) of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), and therefore, under current 17 CFR 210.1–02(d) (“Rule 1–02(d)” of Regulation S–X), any audit of the target's financial statements would be required to be performed in accordance with PCAOB standards by a PCAOB-registered audit firm. However, also as noted by the commenter, proposed Rule 15–01(a) provided that only target companies that would constitute the predecessor for financial reporting purposes would be required to comply with Rule 15–01 of Regulation S–X in connection with a de-SPAC transaction and provide financial statements audited in accordance with PCAOB standards. We continue to believe this is the appropriate outcome given the hybrid nature of de-SPAC transactions, as it aligns the de-SPAC transaction financial reporting to that of an IPO that includes multiple companies. All target companies provide information that is included in the registration statement and therefore should face Securities Act liability as co-registrants and issuers on the de-SPAC registration statement.

In order to address the tension identified by the commenter, and to clarify that all target companies are co-registrants and issuers but only target companies that are predecessors must provide financial statements audited in accordance with PCAOB standards, we are modifying the proposed revisions to the definition of “audit (or examination)” in Rule 1–02(d) to clarify that Rule 15–01(a) governs the audit requirements for all issuers (both predecessors and non-predecessors) that combine with a shell company. We have also added language to Rule 15–01(a) to clarify that for non-predecessor issuers—in the context of a registration statement or proxy statement filed for the combination with an issuer that is a shell company ( e.g., in a de-SPAC transaction, non-predecessor co-registrant target companies)—the term “audit (or examination)” is defined as “an examination of the financial statements by an independent accountant in accordance with either the standards of the PCAOB or U.S. generally accepted auditing standards (“U.S. GAAS”) as specified or permitted in the regulations and forms applicable to those entities for the purpose of expressing an opinion thereon.” In addition to adopting the proposed changes to Item 17 of Form S–4 or Form F–4 that direct companies to Article 15 for the financial statements required in a de-SPAC transaction, we have revised the proposed Instruction L to Form S–4 and Instruction I to Form F–4 to clarify that for purposes of the disclosure requirements in those forms, the target company is the “company being acquired.”

As stated in the proposal, the proposed financial reporting requirements were intended to more closely align the de-SPAC transaction disclosures to the disclosures made where a shell company acquires multiple businesses in a “put together” transaction before an IPO. This approach recognizes the hybrid nature of the de-SPAC transaction and the fact that the historical financial statements of the predecessor(s), and in some circumstances the SPAC, would be the historical financial information that would be presented in the combined company's Exchange Act reporting. The Commission proposed Article 15 of Regulation S–X instead of proposing a requirement that all target companies provide audited financial statements under the registrant disclosure requirements of Item 14 of Form S–4 and Form F–4, which apply to the information required to be provided by registrants other than Form S–3 and Form F–3 eligible registrants, respectively.

To illustrate application of the final rules, assume a SPAC files a Form S–4 to register the issuance of shares to acquire two unrelated businesses and only one of the businesses will be the predecessor for financial reporting purposes. Under the final rules, each “issuer” (the SPAC and the two unrelated businesses) must sign the registration statement. The pro forma financial statements included in the Form S–4 depict a reverse recapitalization with the predecessor and an acquisition of the other business. Subsequent Exchange Act reports, such as the next Form 10–K, will include the historical financial statements of the predecessor. In this scenario, the Form S–4 would require two to three years of historical financial statements for the business that will be the predecessor audited in accordance with PCAOB standards. By contrast, the non-predecessor business will be a company being acquired under Item 17 of Form S–4 and its financial statements may be audited in accordance with either PCAOB standards or U.S. GAAS standards, despite it being an issuer.

We recognize that predecessor determinations in de-SPAC transactions may include scenarios that differ from the above illustrative example. For example, a transaction with two target companies could instead result in a determination that there are two predecessors. In that example, the financial statements of both target companies must be audited in accordance with PCAOB standards.

Section 102 of the Sarbanes-Oxley Act makes it “unlawful for any person that is not a registered public accounting firm to prepare or issue . . . any audit report with respect to any issuer.” The final rules do not change this requirement for issuers to engage PCAOB-registered accounting firms, and therefore all issuers, including non-predecessor target companies, will need to engage a PCAOB-registered audit firm when the de-SPAC transaction requires audited historical financial statements (but, as discussed above, the PCAOB-registered firm could audit the financial statements of non-predecessor target companies either under the standards of the PCAOB or U.S. GAAS). We acknowledge commenter concerns that, because PCAOB Rule 3211 requires a registered audit firm to file a Form AP with the PCAOB when its audit report for an issuer is included in a filing with the Commission, multiple Forms AP may be required for a single transaction where the related registration statement requires audit reports for multiple issuers and when more than one registered audit firm was involved. To the extent that the PCAOB deems it necessary to provide guidance or take other action in response to the final rules, the Commission and its staff will work with the PCAOB, as appropriate.

Regarding a commenter's suggestion that the Commission create a new S–1-like form for de-SPAC transactions, which should not include management projections, we do not believe that is necessary. The amendments to existing registration statement forms that we are adopting in this release accomplish our enhanced disclosure goals, including addressing similarities between IPOs and de-SPAC transactions, and appropriately take into account the business combination context of de-SPAC transactions. With respect to projections in registration statements, as we discuss in detail below, our final definitions of “blank check company” should address the commenter's concerns regarding the use of projections in de-SPAC transaction registration statements. In addition, as noted below, there is no prohibition under current rules on including projections in registration statements on Form S–1 or F–1.

D. Re-Determination of Smaller Reporting Company (SRC) Status

1. Proposed Rules

SRCs constitute a category of registrants that are eligible for scaled disclosure requirements in Regulation S–K and Regulation S–X and in various forms under the Securities Act and the Exchange Act. For example, SRCs are not required to provide quantitative and qualitative information about market risk pursuant to 17 CFR 229.305 (Item 305 of Regulation S–K). In general, an SRC is a company that is not an investment company, an asset-backed issuer or a majority-owned subsidiary of a parent that is not an SRC and (1) had a public float of less than $250 million, or (2) had annual revenues of less than $100 million during the most recently completed fiscal year for which audited financial statements are available and either had no public float or a public float of less than $700 million. SRC status is determined at the time of filing an initial registration statement under the Securities Act or Exchange Act for shares of common equity and is re-determined on an annual basis. Once a company determines that it is not an SRC, it will retain this non-SRC status unless it determines, when making its annual determination, that its public float was less than $200 million or, alternatively, that its public float and annual revenues fell under certain thresholds.

The Commission proposed to require a re-determination of SRC status following the consummation of a de-SPAC transaction through proposed amendments to the definition of “smaller reporting company” in each of Securities Act Rule 405, Exchange Act Rule 12b–2, and Item 10(f) of Regulation S–K. Specifically, the Commission proposed that the post-de-SPAC transaction registrant must re-determine its SRC status prior to the time it makes its first Commission filing, other than the Form 8–K filed with Form 10 information, and reflect this re-determination in the issuer's next periodic report.

The Commission also proposed, in connection with this re-determination: (a) that public float be measured as of a date within four business days after the consummation of the de-SPAC transaction; and (b) that annual revenues be measured using the annual revenues of the target company as of the most recently completed fiscal year reported in the Form 8–K filed with Form 10 information. The Commission did not propose any changes to the float and revenue thresholds in the current definitions of “smaller reporting company.”

2. Comments

Broadly categorized, commenters on the SRC re-determination proposal focused on four areas: (1) general comments, including those with general expressions of support for or opposition to the proposals, (2) timing and re-determination of public float, (3) ramifications of loss of SRC status, and (4) requests for guidance. In addition, in response to a request for comment from the Commission in the Proposing Release, several commenters addressed issues of re-determination of the following: accelerated filer and large accelerated filer status, EGC status, and FPI status.

A few commenters generally supported the proposed re-determination of SRC status following a de-SPAC transaction. One commenter noted that such re-determination would “generally align that determination with that of an IPO.” Another commenter noted that such re-determination was a signal that “the Commission appears to be forestalling a situation in which a company that would not have been eligible to use the scaled disclosures and other accommodations available to a smaller reporting company if it had become public through a traditional initial public offering would, nonetheless, be eligible to take advantage of those accommodations based on the smaller reporting company status of the pre-merger SPAC.”

Others opposed, or raised concerns regarding, the proposed re-determination of SRC status following a de-SPAC transaction. One commenter stated that such a re-determination immediately after the de-SPAC transaction is inconsistent with the Commission's objective of aligning the requirements with those of IPOs. Another commenter indicated that the change could be problematic for certain transactions, such as “where (1) the SPAC is an SRC and the legal acquirer, (2) the target company was an SRC prior to the closing of the de-SPAC transaction and filed two years of audited financial statements and (3) the post-closing public float exceeds $700 million.”

One commenter stated they did not object to re-determination based on public float within a short time following closing of the de-SPAC transaction.

Another commenter recommended an alternative approach to re-determining SRC status similar to the determination of SRC status used by an IPO company filing its initial registration statement under Item 10(f)(2)(ii) of Regulation S–K but based on “the revenues and public float of the target company that will be the predecessor for financial reporting purposes.” This commenter proposed the public float should be calculated “as the agreed value of the equity consideration payable to the owners of the target company, plus the total outstanding shares of the SPAC (valued at $10 per share, or whatever the agreed per-share valuation of the equity consideration is), plus any common equity to be issued to finance the de-SPAC transaction.” The commenter further stated, “The surviving company should have the option to redetermine its status based on the number of shares outstanding after the closing of the de-SPAC transaction ( i.e., reflecting redemptions and any equity not issued in the financing transaction or as equity consideration), consistent with the last sentence of S–K Item 10(f)(2)(ii)(C).”

Several commenters addressed the ramifications of the loss of SRC status. Commenters observed that one such ramification is that a registration statement filed after the point at which non-SRC status must be reflected could require incremental disclosure for a non-SRC, such as an additional year of financial statements beyond what was provided in the Form S–4 in connection with a de-SPAC transaction. One of these commenters suggested, “An alternative approach would be for a company, upon completion of a de-SPAC transaction, to transition into or out of SRC status in conjunction with the annual report to be filed for the year of the transaction based upon the public float as of the later of four business days after the merger transactions or the end of the second fiscal quarter.” The commenter also added, “Such a revision could still result in an SRC merging with a public shell exiting SRC status more quickly than under current rules while mitigating the burden and inconsistency of providing incremental information not previously required for companies accessing the public market shortly after the de-SPAC transaction.”

Another commenter recommended that the Commission consider whether “accommodations may be warranted to the post-combination entity regarding presentation of audited financial statements and related information (such as MD&A or separate financial statements of significant equity method investees) for periods prior to those presented in the Form S–4 or F–4 for the private operating company.”

One commenter recommended that the Commission clarify whether an amendment to a Form 8–K with Form 10 information (often referred to as a “super 8–K”) to include pre-acquisition annual financial statements of the private operating company “will be deemed to be the first periodic report for the purposes of effectiveness of the SRC status in connection with a de-SPAC transaction” in circumstances where a de-SPAC transaction is consummated shortly after the fiscal year-end of the private operating company but before its financial statements for that annual period are required in a Form 10 registration statement.

Another commenter recommended, for purposes of determining whether the post-de-SPAC registrant may exclude management's assessment of internal control over financial reporting in the Form 10–K covering the fiscal year in which the transaction was consummated, that the Commission codify the staff's view that a SPAC's need to file an amended super 8–K to update the target company's financial statements for its most recent year‐end is the equivalent to the first annual report.

Another commenter stated that the Commission “should revisit and revise its guidance in 5230.1 of the Division of Corporation Finance's Financial Reporting Manual, which could result in more information being required in a Super 8–K . . . than would be required in a Form S–1 for the target company.”

In response to a request for comment in the Commission in the Proposing Release, several commenters addressed issues of re-determination of filer status, EGC status, and FPI status.

Some commenters recommended that the Commission should put post-de-SPAC transaction registrants on the same footing with respect to filer status as a company that has recently undertaken an IPO, because, otherwise, where a post-de-SPAC transaction registrant inherits the SPAC's reporting history, this could impact the timing of when the post-de-SPAC transaction registrant becomes subject to accelerated filing obligations. Other commenters suggested the Commission should further analyze or consider the issue.

A few commenters recommended that the EGC status of the combined company following a de-SPAC transaction should be re-determined upon consummation of the de-SPAC transaction.

Several commenters, including some who made recommendations regarding EGC status, recommended that the Commission provide for re-determination of FPI status in connection with the de-SPAC transaction.

One commenter noted that they have “observed an evolution in the structuring of SPAC transactions ( e.g., use of a double-dummy structure) that can achieve certain financial reporting results ( e.g., filer status and foreign private issuer status)” and expressed support for “aligning the redetermination requirements so that the transaction structure would not result in financial reporting differences.”

Another commenter stated: “Allowing redetermination of foreign private issuer status would result in disclosure requirements and filer status determinations that are consistent with what would apply if the target company went public via an IPO, without regard to the de-SPAC transaction structure. A de-SPAC transaction may be structured so that an entity other than the SPAC is the acquiror for tax reasons, due to the domicile of the surviving company, or due to required consents and approvals applicable to the target company. Aligning the disclosure requirements so that, for example, a target company that would have qualified as a foreign private issuer could be acquired by a domestic SPAC and then the surviving company could be immediately eligible for foreign private issuer status would allow de-SPAC transactions to be structured in the best interests of shareholders.” Similar views were expressed by another commenter.

3. Final Rules and Guidance

After considering the comments received, we are adopting amendments regarding SRC re-determination as proposed with certain modifications discussed below. We are not adopting requirements, as suggested by several commenters, to re-determine filer status, EGC status, or FPI status upon the completion of a de-SPAC transaction. We are providing guidance, however, concerning FPI status, as discussed further below.

Currently, most SPACs qualify as SRCs, and Commission rules permit a post-business combination company after a de-SPAC transaction to retain this status until its next annual determination date in cases where the legal entity that was the SPAC is the legal entity that is the combined company in connection with the de-SPAC transaction. Under current rules, the absence of a re-determination of SRC status upon the completion of these de-SPAC transactions has permitted certain post-business combination companies to avail themselves of scaled disclosure and other accommodations when they otherwise would not have qualified as a SRC had they become public companies through a traditional IPO. The final rules will help level the playing field with a traditional IPO in this respect and reduce information asymmetries that result when a target company chooses to go public through a de-SPAC transaction.

As adopted, a post-de-SPAC transaction registrant must re-determine its SRC status prior to the time it makes its first Commission filing, other than the Form 8–K filed with Form 10 information, with public float measured as of a date within four business days after the consummation of the de-SPAC transaction and annual revenues measured using the annual revenues of the target company as of the most recently completed fiscal year reported in such Form 8–K.

We disagree with the commenter who recommended an alternative approach similar to the SRC determination for IPO companies under Item 10(f)(2)(ii) of Regulation S–K but based on the revenues and public float of the target company that will be the predecessor for financial reporting purposes. In an IPO, with respect to public float, Item 10(f)(2)(ii) looks to: the estimated offering price per share at the time of filing of the registration statement; the number of shares of common stock outstanding that are held by non-affiliates before the offering; and the number of shares of common stock to be sold at the estimated offering price. Item 10(f)(2) of Regulation S–K also gives the registrant the option to recalculate its public float at the time the company completes the IPO. As described above, under the commenter's suggested approach, the SRC determination would be made prior to the filing of the de-SPAC registration statement or proxy statement using an “agreed value” method. Although Item 10(f)(2)(ii) does allow for the use of estimations in the IPO context, we believe that the approach we are adopting, which focuses on a determination of SRC status based on actual post-transaction public float, is a more effective measure of the registrant's size in the context of a de-SPAC transaction. While in many cases the commenter's suggested recalculation after closing to capture the actual number of shares outstanding would result in the same determination of SRC status post-transaction, the adopted approach helps to ensure the appropriate level of disclosures to investors both before and after the closing of the transaction.

Pursuant to the final rules, the four-business-day window to calculate the public float threshold following a de-SPAC transaction would begin the first business day after the day of closing of the de-SPAC transaction and end four business days later (on the due date for the Form 8–K with Form 10 information that the post-de-SPAC transaction combined company registrant is required to file after the completion of a de-SPAC transaction). Each of the number of shares outstanding that are held by non-affiliates and the price per share would be determined on the same day within the four-business-day window. This window will provide some flexibility for issuers to measure public float compared to the annual re-determination of SRC status (which is determined based on a single business day, the last business day of the most recently completed second fiscal quarter). This four-business-day window will allow for a more accurate reflection of a post-business combination company's public float in view of the limited trading history of the common equity securities of the post-business combination company following a de-SPAC transaction.

Under the proposed rule, a post-de-SPAC transaction registrant would be required to reflect its re-determined SRC status in its next periodic report after the filing of the Form 8–K with Form 10 information (often referred to as a “super 8–K”). We are aware that, if a registrant loses SRC status upon re-determination, there may be certain ramifications. Several commenters observed that one such ramification is that a registration statement filed after the point at which non-SRC status must be reflected could require incremental disclosure for a non-SRC, such as an additional year of financial statements beyond what was provided in the Form S–4 in connection with a de-SPAC transaction. Inclusion of such incremental disclosure as a result of losing SRC status might present challenges for some registrants in situations where a periodic report becomes due shortly after the closing of the de-SPAC transaction.

In response to these comments, in a change from the proposal, the final rules provide that a registrant does not need to reflect non-SRC status in any filing that is due in the 45-day period following the consummation of the de-SPAC transaction; the registrant would begin to reflect non-SRC status in filings made no later than after the end of this 45-day period. In contrast, under the proposal, a registrant would have needed to reflect non-SRC status in its next periodic report that could be due as soon as one day after the filing of the “super 8–K,” which is due a maximum of four days after the consummation of the de-SPAC transaction. We believe the final rule represents a reasonable compromise between the proposed rule's transition period (until the next periodic report, which could be as soon as one day after the de-SPAC transaction) and a commenter's recommended transition period (until filing of the next Form 10–K, which could be as long as nearly 15 months). Another benefit of affording this additional time to registrants that lose SRC status upon re-determination is that, where the registrant intends to file a resale registration statement shortly after the de-SPAC transaction, the registrant will retain its SRC status for purposes of any such resale registration statement filed during this additional time period.

We are not adopting the commenter's recommendation to exclude, in post-de-SPAC transaction filings, any financial statements that predate the financial statements presented in the Form S–4. In our view a registrant that is re-determined to be a non-SRC should not be able to avail itself of the scaled-down requirements applicable to SRCs. Furthermore, we believe the adopted approach will provide registrants with sufficient time to prepare the additional incremental information that may be required in a situation where the registrant has lost its SRC status. We further note that a registrant that loses SRC eligibility may continue to be an EGC, which includes certain scaled reporting accommodations. In light of new Rule 15–01(b), which requires a business combining with a shell company to comply with Regulation S–X as if the transaction were an IPO of common equity securities, we believe that if the registrant retained its EGC status after the transaction, then the registrant would not be required to present audited financial statements for any period prior to the earliest audited period presented in connection with the de-SPAC transaction. We evaluated whether a minimum transition period should be longer or shorter than 45 days. We concluded that 45 days provided an appropriate balance between providing investors with the scaled-up information as soon as reasonably possible and providing registrants with time to prepare for compliance and the ability, in a limited number of instances, to avoid the costs of preparing an additional year of audited financial statements beyond what was required in the Form S–4.

Commenters also requested guidance on certain issues. One commenter recommended that the Commission clarify whether an amendment to a “super 8–K” could be the first periodic report for the purposes of effectiveness of the SRC status. Under the final rules, any filing made 45 days after the consummation of the de-SPAC transaction must reflect re-determined SRC status, including a filing to amend a “super 8–K.”

Unrelated to SRC re-determination, other commenters recommended codification of, or revisions to, staff guidance relating to the position that a SPAC's need to file an amended Form 8–K to update the target company's financial statements for its most recent year‐end is the equivalent to the first annual report and, separately, the guidance in FRM 5230.1, which summarizes the Commission's basis for requiring Form 10 information under Item 2.01(f) of Form 8–K and how the staff looks to the accounting acquirer's SRC-eligibility at the time of the transaction for purposes of the disclosure in the Form 8–K. We do not believe that such codification or revisiting of the referenced staff guidance is necessary in connection with the final amendments. We believe the guidance in FRM 5230.1 is consistent with the final rules because the final rules look to the target company's SRC-eligibility in all shell company transactions, including where the target company is the accounting acquirer.

Rule 12b–2 provides the definitions of accelerated filer and large accelerated filer, including requisite conditions. Accelerated filer and large accelerated filer status are re-determined annually as of the end of the issuer's fiscal year. For a new registrant that just completed an IPO, however, a period of at least twelve months would need to elapse before it would be required to comply with rules as an accelerated filer or a large accelerated filer. In contrast, after consummation of the de-SPAC transaction, depending on the timing of the SPAC IPO and the de-SPAC transaction, because of the SPAC's reporting history, where the legal entity that was the SPAC is the same legal entity that is the post-de-SPAC transaction combined company, the post-de SPAC transaction combined company may not have the same period until it must make filings pursuant to accelerated filer or large accelerated filer status as compared to a registrant that just completed an IPO. By virtue of being an accelerated or large accelerated filer, among other differences compared to a non-accelerated or non-large accelerated filer, the post-de-SPAC transaction combined registrant would be required to: (a) file its periodic reports sooner than otherwise required; and (b) subject its management's assessment of internal controls over financial reporting to auditor attestation. As noted above, several commenters recommended that the Commission put post-de-SPAC transaction registrants on the same footing with respect to filer status as a company that has recently undertaken an IPO.

One of the main consequences of the approach suggested by these comments—that the reporting history of the SPAC should be disregarded such that the post-de-SPAC transaction combined company could recommence the 12-month period that must elapse (pursuant to paragraphs (1)(ii) and (2)(ii) in the definition of “accelerated filer and large accelerated filer” in Rule 12b–2) before it is possible to acquire accelerated or large accelerated filer status—would be to delay management's assessment of internal control over financial reporting and outside auditor attestation of management's assessment for companies that are not EGCs. We do not believe it is necessary or appropriate to amend the filer status requirements for this reason; however, we note that the Commission staff has taken the position that under certain conditions, the Commission staff would not object if the post-combination registrant were to exclude management's assessment of internal control over financial reporting in the Form 10–K covering the fiscal year in which the transaction was consummated. Since the staff position about management's assessment of internal control over financial reporting is broader than the transactions covered by this rulemaking, as it applies to reverse acquisitions between an issuer and a private operating company, we did not codify it as part of this rulemaking.

In 2012, the Jumpstart Our Business Startups Act amended the Securities Act and Exchange Act to add provisions regarding and to define an “emerging growth company.” Commission rules also define an “emerging growth company.” The Commission has amended the definition of “emerging growth company” in the past to adjust the total annual revenue threshold in these rules for inflation.

A SPAC typically qualifies as an EGC. A post-de-SPAC transaction combined company would lose EGC status on the last day of its fiscal year following the fifth anniversary of the first sale of its common equity securities pursuant to an effective Securities Act registration statement. A post-de-SPAC transaction combined company may also lose EGC status on the last day of a fiscal year during which it had total annual gross revenues of $1.235 billion or on the date on which it has issued more than $1 billion in nonconvertible debt during the previous three-year period. Finally, a post-de-SPAC transaction combined company may also lose EGC status on the date on which it is deemed to be a “large accelerated filer” (as defined in Exchange Act Rule 12b–2).

Several commenters recommended that the EGC status of the combined company following a de-SPAC transaction should be re-determined upon consummation of the de-SPAC transaction. As with filer status, we are not adopting any amendments concerning EGC status at this time but will consider whether future adjustments are appropriate.

Several commenters addressed determination of FPI status issues raised in a request for comment.

A new registrant, such as a SPAC in an IPO, makes the determination of its FPI status as of a date within 30 days prior to filing its initial registration statement. A reporting registrant that seeks to file as an FPI is required to determine its FPI status once a year on the last business day of its second fiscal quarter. A registrant that qualifies as an FPI upon such determination is immediately able to use the forms and rules designated for FPIs.

A domestic SPAC ( e.g., incorporated in a U.S. State) that intends to enter a de-SPAC transaction with a foreign target company would be required to file a Form S–4 (and not a Form F–4), because a domestic issuer cannot qualify as an FPI. Accordingly, where a domestic SPAC combines with a target company that is an FPI, the financial statements of the foreign target company would have to be presented in accordance with U.S. GAAP in Form S–4, among other differences that exist between the requirements of Form S–4 and Form F–4.

If such a domestic SPAC registrant were to reincorporate under the laws of a foreign country prior to the filing of the registration statement in connection with a de-SPAC transaction, that reincorporation may require the foreign SPAC, as a new entity, to file an initial registration statement. The new entity's FPI status would be determined as of a date within 30 days prior to the filing of the initial registration statement, as described above. If the new foreign entity were to qualify as an FPI, it may be eligible to file a Form F–4 registration statement in connection with the de-SPAC transaction. Currently, the FPI status of the post-de-SPAC transaction combined company would not affect the registration form to be filed in connection with the de-SPAC transaction, regardless of whether the SPAC was an existing registrant or a new foreign entity. Also, currently, where the legal entity that was the SPAC is not an FPI and is the legal entity that is the combined company following the de-SPAC transaction, even where the combined company may meet the definition of an FPI after the de-SPAC transaction, the combined company would need to wait until the end of the next second fiscal quarter to re-determine its status as an FPI.

Several commenters recommended that we should provide for re-determination of FPI status in connection with a de-SPAC transaction.

We have considered these comments and recognize that, depending on the structure of a specific de-SPAC transaction, there may be some fact-specific circumstances in which an FPI registration statement may be used. For example, a SPAC's use of an FPI registration statement ( e.g., Form F–4) and compliance with FPI rules in connection with the de-SPAC transaction may be appropriate when, as of a date within 30 days prior to the filing of the de-SPAC transaction registration statement, the SPAC is a foreign issuer that is entering a de-SPAC transaction with a target company that is an FPI but is not a shell company, the legal entity that is the SPAC will be the legal entity that is the combined company registrant following the de-SPAC transaction, and the combined company registrant created in connection with the de-SPAC transaction is expected to be an FPI at the time of consummation of the de-SPAC transaction.

Contrary to the suggestion of some commenters, we believe that earlier re-determination of FPI status would be inappropriate when a SPAC is a domestic SPAC (and therefore not a foreign issuer) prior to the de-SPAC transaction but enters a de-SPAC transaction with an FPI target company. If the legal entity that is the SPAC is a domestic entity, the combined company following the de-SPAC transaction would also be a domestic entity, in which case use of FPI forms would not be appropriate.

E. PSLRA Safe Harbor

1. Proposed Rules

The PSLRA provides a safe harbor for forward-looking statements under the Securities Act and the Exchange Act, under which a company is protected from liability for forward-looking statements in any private right of action under the Securities Act or Exchange Act when, among other conditions, the forward-looking statement is identified as such and is accompanied by meaningful cautionary statements. Under the PSLRA, the safe harbor is not available, however, when a forward-looking statement is made in connection with, among other things, an offering by a blank check company, an offering by an issuer of penny stock, or an IPO.

The Proposing Release discussed the Commission's concerns about the use of forward-looking statements, such as projections, in connection with de-SPAC transactions. The Commission stated that some market participants in de-SPAC transactions may not exercise the same level of care in preparing forward-looking statements, such as projections, as in a traditional IPO. The Commission also noted that a number of commentators had raised concerns about the use of projections that they believe to be unreasonable in de-SPAC transactions. In addition, the Commission stated that it saw no reason to treat blank check companies differently for purposes of the PSLRA safe harbor depending on whether they raise more than $5 million in a firm commitment underwritten IPO and thus are not selling penny stock.

To address these concerns, the Commission proposed using its statutory authority under the PSLRA to amend the definition of “blank check company” to include companies that would otherwise meet the Securities Act Rule 419 definition of “blank check company,” except that they are not issuers of penny stock (such as a SPAC in a de-SPAC transaction). Specifically, the Commission proposed a revised definition of “blank check company” to be located in Securities Act Rule 405 that would, for purposes of the PSLRA, remove the “penny stock” condition from the rule and define the term as “a company that has no specific business plan or purpose or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies, or other entity or person.”

The Commission proposed corresponding technical changes to Rule 419, the rule the Commission adopted to implement provisions of the Penny Stock Reform Act relating to registration statements filed by blank check companies offering penny stock, that were intended to maintain consistency with that rule's historic scope which is limited to blank check companies that issue penny stock. Similarly, the Commission proposed a new definition in Rule 405, “Blank check company issuing penny stock,” and proposed conforming amendments to existing references to “blank check company” as defined in Rule 419 in various Securities Act rules in order to maintain the scope of those rules.

2. Comments

A number of commenters expressed general support for the proposal. One of these commenters said, “Both the regular IPO and de-SPAC approaches for taking a new, emerging company public should be treated similarly in this critical area for market integrity—the legitimacy of forward-looking projections.” Other commenters said they did not see a reason SPACs should be treated differently than traditional IPO participants or companies that issue penny stock with respect to forward-looking statements. One commenter focused on the benefits of mitigating the risk of harm to investors, stating that the proposal “would significantly curb SPAC sponsors' abilities to make overblown and false projections, and increase their liability when this fraud occurs.” Another commenter said that “[t]his safe harbor enables SPAC sponsors and underwriters to make future projections of the performance of the SPAC to investors with relative impunity. This legal loophole enables SPAC sponsors to sell investors on bold projections that have little basis in reality. These legal loopholes, including the PSLRA safe harbor, among others, have created a regulatory arbitraged race-to-the-bottom IPO model. . . .” This commenter further said, “It is clear that far too many SPAC sponsors have utilized the PSLRA safe harbor to paint bold and enticing pictures of the financial outlook of their post-merger companies that were divorced from reality. . . . The safe harbor from the PSLRA for forward-looking statements in de-SPAC transactions has fueled this trend, undermined public confidence in our capital markets, and harmed investors by enabling SPAC sponsors to make reckless projections about future financial performance. In any final rule, the Proposal must retain the clarification that the PSLRA safe harbor does not apply in connection with de-SPAC transactions.” A separate commenter similarly said that “amending the definition of a `blank check' company in The Private Securities Litigation Reform Act of 1995 would prevent SPACs from exploiting the safe harbor provision to make overblown and fraudulent projections.” Another commenter said the proposal “would resolve ambiguities about how the law applies in this context and promote accountability for SPAC market participants.”

A number of commenters suggested that unreasonably optimistic or inflated projections are prevalent in de-SPAC transactions. One of these commenters said that SPACs sometimes make “utterly absurd forward-looking projections.” This commenter also said, “Post-merger investors in SPACs, who are predominantly retail investors, are often lured by ambitious projections of growth—made with the protection of the safe harbor—and unfortunately have already lost significant amounts of money as a result.” A different commenter said, “In fact, it is nearly impossible to ignore the research and findings of the wild and indiscriminate use of projections in de-SPAC transactions by sponsors with seemingly little care given to the accuracy or reality of those projections.” Another of these commenters said that “too many of these de-SPAC forward-looking statements are an exercise in creative writing, baseless hype and embellishment.” Another commenter said, “We believe historical uncertainty surrounding the availability of the safe harbor may have contributed to the proliferation of unreasonably optimistic forward projections that would not have been made if liability had more clearly paralleled the traditional IPO regime.” Finally, one commenter said that “SPACs are rife with disclosures that border on or cross into outright fraud” and that “there have been multiple cases where companies used inflated information about their financials, their future business, or even their underlying technology.”

Several commenters expressed support for the proposal because they believed it would curb the use of unrealistic and potentially misleading projections that harm investors. One of these commenters said, “We support the proposal's revision to the definition of `blank check company' to ensure that the safe harbor against a private right of action for forward-looking statements under the PSLRA is not available. We believe this clarification may reduce the inclusion of unreasonably optimistic forward projections in SEC filings, which may in turn help SPAC investors avoid overestimating future revenues and other measures of future company performance.” Another of these commenters said that “the proposal's approach to amend the definition of blank check company for purposes of the PSLRA safe harbor for forward-looking statements” would “strengthen incentives for SPACs to avoid potentially unrealistic and potentially misleading forward-looking statements and to expend more effort or care in the preparation and review of forward-looking statements.” Another commenter said, “The Commission's proposal to amend the definition of `blank check company' to remove the safe harbor in the Private Securities Litigation Reform Act of 1995 for forward-looking statements would significantly curb SPAC sponsors' abilities to make overblown and false projections, and increase their liability when this fraud occurs.”

Other commenters were generally opposed to the proposal. Some commenters who expressed general opposition to the proposal discussed the value of forward-looking information to investors. One of these commenters said, “This safe harbor incentivizes the disclosure of potentially valuable information as to a company's future outlook.” Another of these commenters said, “By removing the safe harbor provisions from SPAC mergers, the proposed rules would replicate the biggest flaw of IPOs, hindering investor visibility toward management expectations and related future prospects.” A number of commenters focused on comparing de-SPAC transactions to other kinds of transactions in their comments. One of the commenters who expressed general opposition to the proposal said, “We believe there are important distinctions between a De-SPAC Transaction and a traditional IPO that justify maintaining the PSLRA safe harbor in the form enacted by Congress.” This commenter said, “The PSLRA safe harbor . . . does not cover all forward-looking statements. It contains a number of exclusions. . . . [One] category of exclusions cover[s] situations—like tender offers, roll-up and going-private transactions—where companies are compelled by law to share projections with investors. In such situations, there is less risk that liability will chill disclosure and the safe harbor exclusion can be understood as an effort to increase the accuracy of disclosures.” Further, this commenter said, “Projections disclosure in De-SPAC Transactions fall under this . . . category.” Another commenter who generally opposed the proposal questioned whether it would benefit investors, stating that “the Commission's proposal to remove the PSLRA safe-harbor for de-SPAC transactions is unnecessarily broad with no real benefit to investors.”

A number of commenters on the proposal provided views related to the statutory authority of the Commission to amend the definition of blank check company as proposed. These comments fell into two main categories. First, some of these commenters suggested the Commission does not have discretion to adopt or amend a definition of blank check company for purposes of the PSLRA that differs from the current Rule 419 definition (which includes the qualification the relevant company is issuing penny stock). One of these commenters said, “The elimination of the safe harbor for forward-looking statements under the Private Securities Litigation Reform Act (PSLRA) is unlawful. The Proposal would—without any authorization by Congress—amend the definition of a `blank check' company under the PSLRA to prevent SPACs from utilizing the PSLRA safe harbor for forward-looking statements. Given that de-SPAC transactions necessarily involve making a good deal of projections, there has been an underlying assumption that the PSLRA safe harbor applies to such projections. . . . The SEC should drop this idea and recognize that it has no legal authority under law to change Congressional statutes on its own.” Another of these commenters said that “this change alters the scope and effect of the PSLRA by substantially revising the definition that Congress relied on when it wrote the statute. Such an alteration to the statute's scope should be made by Congress, not the Commission.” Another of these commenters said, “I believe the SEC would be overreaching its authority in eliminating the availability of the PSLRA safe harbor for forward-looking statements in de-SPAC transactions. The Projection Proposal would change the existing definition of `blank check company' for purposes of the PSLRA by removing the `penny stock' condition. That was the definition Congress specifically relied upon when it wrote the PSLRA. I believe it would be improper for the SEC to willfully ignore statutory language in this manner.” Another commenter said that “de-SPAC transactions were not within the scope of issuers and transactions excluded from the PSLRA by Congress. The PSLRA excludes from the safe harbor, among other things, forward-looking statements made in connection with an IPO, and an offering of securities by a blank check company or by an issuer that issues penny stock.” This commenter also said that SPACs are not blank check companies subject to Rule 419 nor do SPACs issue penny stock. This commenter also stated, “In transactions where the de-SPAC transaction is structured with the SPAC as the surviving company, the transaction is not an IPO of the SPAC. As a result, we believe the proposed expansion of the exclusions from the PSLRA that were legislated by Congress are not merely clarifying or interpretive in nature; rather, they go beyond the Commission's rulemaking authority and should be addressed by statute.” Finally, one commenter said the proposed changes regarding the definition of blank check company “appears inconsistent with the exemptive authority found in Section 27A(g) and (h), which makes clear the Commission's ability to extend the scope of the safe harbor protections rather than narrow them.”

Second, some commenters suggested that the Commission's proposed definition of blank check company is inconsistent with the Penny Stock Reform Act's statutory definition of blank check company, which includes the qualification that the relevant company is issuing penny stock and which predated the PSLRA. One of these commenters stated, “As the Commission noted, the current definition of `blank check company' predates the enactment of the PSLRA in 1995 and evidences a clear intent to exclude from that definition SPACs that raise more than $5 million in a firm commitment underwritten IPO for not selling `penny stock.' ” Another of these commenters said that “the SPAC Proposal's proposed elimination of the PSLRA safe harbor . . . is illegal for [the] reason [that]: it proposes an unreasonable definition of `blank check company.' The PSLRA generally provides a safe harbor for forward-looking statements, but the safe harbor is not available for `blank check companies.' The PSLRA states that the term `blank check company' has `the meaning[ ] given . . . by rule or regulation of the Commission,' but of course the SEC does not have carte blanche to define the term however it wants—its proposal must be `reasonable.' ” The commenter also said, “The SEC's discretion in defining blank check company is accordingly cabined and informed by other relevant statutory provisions.” This commenter also said, “In particular, Congress has already defined a blank check company in the Securities Act, and the only absolute requirement in that definition is that the company issue `penny stocks.' ” This commenter further stated that “the SPAC Proposal would eliminate the penny stock requirement, even though Congress has made clear that that requirement is the core aspect that defines a blank check company. The SPAC Proposal's definition of blank check company is hardly `reasonable' when it eliminates the core of Congress's definition of that term within the same statutory regime, nor is it `consistent with the statute's purpose' to allow the SEC to relabel any entity it chooses as a blank check company by disregarding the core aspect of what makes a blank check company.” Another of these commenters said, “The Proposal to redefine `blank check company' is not a clarification of existing law. We disagree with the Commission that the proposed amendment to the definition of `blank check company' is a clarification that the statutory safe harbor of the PSLRA is not available for forward-looking statements made in connection with offerings by SPACs. As noted by the Commission, the current definition of a `blank check company' predates the enactment of the PSLRA and this amendment changes the applicability of the PSLRA safe harbor.”

Finally, in addition to these two main groups of comments related to statutory authority issues, one commenter expressed the view that the proposed changes to the definition of “blank check company” are contrary to the Administrative Procedure Act of 1946 because “the SEC is seeking to amend the PSLRA on its own without any explicit statutory authority or directive from Congress.” A different commenter argued that the proposal was “unlawful, arbitrary, and capricious” because Congress already defined blank check company in the Securities Act and “the only absolute requirement in that definition is that the company issue “ `penny stocks.' ”

A number of commenters focused on comparing de-SPAC transactions to two categories of other kinds of transactions: (1) traditional IPOs and (2) other business combinations. Some commenters supported the proposal with respect to rules related to the PSLRA safe harbor on the basis that it would level the playing field with IPOs. Other commenters, however, expressed concerns regarding how the playing field for traditional IPOs operates with respect to the interaction of issuers who provide projections, research analysts, and investors. These commenters generally observed that, in traditional IPOs, issuers often provide projections to securities analysts who often share these projections with certain institutional investors (on a private and informal basis, i.e., not in the form of published research reports) but these issuers do not make this information available to other investors, particularly retail investors. One commenter said, “The [PSLRA] Safe Harbor, and subsequently Regulation FD, . . . had the desirable effect of leveling the playing field so that certain investors with access to management meetings and sell-side research analysts do not have an information advantage over less well-resourced retail investors.” But the commenter indicated that, because “IPOs . . . are expressly excluded from the [PSLRA] Safe Harbor and Regulation FD is only applicable to companies that are already public, . . . companies do not provide any projections or forward-looking statements in the S–1s relating to their IPOs but generally do hold private meetings with qualified institutional investors.” Some commenters suggested that, instead of the proposed rule changes, IPO regulation should be put on a level playing field with de-SPAC transactions by Commission rule amendments or through statutory amendment to extend the PSLRA safe harbor to IPOs.

Other commenters, however, suggested de-SPAC transactions should be treated differently than IPOs because de-SPAC transactions involve business combinations, which may be subject to disclosure obligations under State law. One of these commenters said that “unlike companies undertaking a traditional IPO, SPACs are compelled by a combination of federal securities regulation and state corporate law to share Target projections with stockholders.” This commenter also said, “To truly place De-SPAC Transactions on a `level playing field' with traditional IPOs in connection with forward-looking statements, the Commission would have to change its disclosure requirements in connection with De-SPAC Transactions and somehow override the state fiduciary obligations that compel disclosure of projections.” Another of these commenters said that “SPACs will not be able to avoid liability by refraining from speaking, as many traditional IPOs do. SPAC sponsors generally must provide forward-looking information in connection with the de-SPAC transaction to satisfy state fiduciary requirements in connection with mergers.” Another of these commenters said, “With respect to forward looking statements, the SEC's `de-SPAC transactions are merely IPOs of the target company' theory has flaws. Specifically, the SPAC is a publicly traded company . . . and the directors and officers of the SPAC have fiduciary duties. They are required to conduct substantial diligence (arguably more than underwriters in an IPO), and are required to disclose the material reasons for approving and proposing the de-SPAC transactions to the SPAC's shareholders, which frequently include projections provided to the directors in connection with their evaluation of the de-SPAC transaction.” Another of these commenters said that “traditional IPOs and de-SPAC transactions are fundamentally different transactions. Financial projections are not required to be included, and are rarely included, in IPO registration statements. On the other hand, both Delaware jurisprudence and the Commission's staff now require inclusion of management projections in proxy statements and registration statements on Form S–4/F–4 where such projections were relied upon by a board of directors in approving a transaction.” This commenter also said, “The projections included in the de-SPAC transaction registration statement or proxy statement are not included in order to promote capital formation. In fact, such projections are generally only current as of the date a board of directors approved the execution of the acquisition agreement. Such projections are not typically updated because they are being provided to SPAC shareholders to evaluate the board of directors' recommendation to approve the de-SPAC transaction, rather than to solicit a new investment. As such, projections are often out of date, or `stale', by the time the SPAC's shareholders receive them. Issuers generally include disclosure to the effect that investors should not consider projections to be financial guidance, and investors are generally cautioned not to place undue reliance on such projections.” Another commenter said, “Under Delaware case law, the Board has a fiduciary duty to disclose to investors in a merger proxy (often in an S–4 registration statement) the projections it utilized in making its decision. Moreover, if the SPAC receives a fairness opinion from a financial advisor (as the proposing release suggests will be required) that fairness opinion will be based on projections, which will have to be disclosed to investors. Therefore, unlike a typical IPO, in the vast majority of de-SPAC transactions, projections will have to be disclosed, which further underscores the reasonableness of giving such statements PSLRA safe harbor protection, just as they would have in a typical M&A transaction that was not a de-SPAC.”

Furthermore, other commenters suggested de-SPAC transactions should be treated differently than IPOs, because of concerns about the interaction of the proposed changes regarding availability of the PSLRA safe harbor with other proposals in the Proposing Release. One of these commenters said, “This aspect of the Proposal is in direct opposition to the provisions of the Proposal that require the SPAC to disclose the material reasons for which the SPAC believes its proposed de-SPAC transaction is fair to its public shareholders.” Another of these commenters said, “The combination of removing the safe harbor while adding amendments to Item 10(b) of Regulation S–K and Item 1609 of Regulation [S–K] essentially mandating some level of [forward-looking statement] projections, goes beyond leveling de-SPACs with IPOs.”

Some commenters suggested the proposal would create inconsistency by making the PSLRA safe harbor unavailable for one kind of business combination transaction (de-SPAC transactions) but not for other kinds of business combination transactions. One of these commenters said, “The Commission stated that the proposed change to the PSLRA definition is necessary to align traditional IPOs more closely with de-SPAC transactions. However, the Commission's position is inconsistent with the provisions of Regulation M–A, which actually require disclosure of target company projections if the SPAC's board relied on such projections when approving the de-SPAC transaction. There is no similar requirement in the IPO context. We can see no justification for treating a de-SPAC transaction differently from any other stock-for-stock merger for this purpose.”

A number of commenters suggested the proposal would have a chilling effect on the use of projections that investors find useful. One of the commenters said that “we believe the removal of the PSLRA safe harbor would have a significant chilling effect on De-SPAC Transactions” and that this “chilling effect is also demonstrated by the fact that IPO issuers rarely publicly include projections in the registration statement.” One of these commenters said the proposal “undoubtedly will” reduce “the amount of potentially relevant information presented to investors” and suggested this would negatively affect investor ability to accurately value combined companies in de-SPAC transactions. Another of the commenters said that “the proposed amendment may discourage the disclosure of projections—especially given the Commission's broad statements on potential underwriter liability.” A different commenter referred to an article that said, “Offering [mandated forward-looking] disclosures safe harbor protection may decrease their accuracy relative to a world in which safe harbor protection were not available, if companies emboldened by the liability shield approach the preparation of such disclosures with less care or honesty than they otherwise would. But it could also increase the quality of the disclosures by reducing an incentive that might otherwise exist to negatively bias projections or obfuscate them, which has the twin effects of making them less vulnerable to attack in litigation and less useful to investors.” The same article also said allowing a safe harbor to apply to forward-looking statements in de-SPAC transactions “might also work to lower liability insurance premiums.”

Commenters also expressed concerns about the combined effect of the proposed change in PSLRA safe harbor availability and proposed 17 CFR 230.140a (“Rule 140a”) concerning underwriters. One of these commenters said, “In particular, when coupled with other proposed amendments that would require disclosure of a fairness determination (effectively mandating the provision of projections) as well as impose underwriter liability in a De-SPAC Transaction, we believe removal of the PSLRA safe harbor protections would have a chilling effect on De-SPAC Transactions and significantly disadvantage a De-SPAC Transaction compared to a traditional IPO.” Another of these commenters said, “We do have a concern that the proposed amendment may discourage the disclosure of projections—especially given the Commission's broad statements on potential underwriter liability.” Another of these commenters said, “The elimination of the PSLRA safe harbor, combined with the Commission's proposed Rule 140a, may have a chilling effect on the use of projections in de-SPAC transactions, which may preclude investors from receiving information that sponsors and boards of directors rely in part on in connection with valuation determination.”

Other commenters, however, expressed the view that PSLRA safe harbor availability does not meaningfully affect existing disclosure practices. One of these commenters said that “the availability of the PSLRA safe harbor may not be a significant factor in determining the use of forward-looking statements in de-SPACs.” Another of these commenters said that “the safe harbor has never provided a meaningful shield from liability” and that “we do not expect that the absence of the safe harbor will have a substantial impact on current market disclosure practices and we do not object to the disapplication of the safe harbor to de-SPAC transactions.” Another of these commenters said, “In our experience, the availability of the PSLRA safe harbor for forward-looking statements in certain de-SPAC transactions does not alter the decision on the presentation of projections. Conversely, where the safe harbor is clearly available, such as for follow-on offerings by existing public companies, it remains rare to see the inclusion of projections in the actual offering documents.”

Several commenters observed that other safe harbors in Commission rules and legal doctrines protecting against liability under common law would continue to be available with respect to forward-looking statements notwithstanding the proposed changes regarding the availability of the PSLRA safe harbor. One of these commenters said, “An issuer's ability to rely on the judicial `bespeaks caution' doctrine may mitigate to some extent liability concerns associated with providing projections.” Another of these commenters said that 17 CFR 230.175 (“Rule 175” under the Securities Act) and 17 CFR 240.3b–6 (“Rule 3b–6” under the Exchange Act), which were “adopted . . . prior to the PSLRA . . . provide safe harbor protection similar to that of the PSLRA safe harbor.” This commenter also said that under the “judicially-created `bespeaks caution' doctrine . . . now accepted in 11 federal judicial circuits . . . forward-looking statements accompanied by sufficient cautionary language” are rendered “non-actionable under securities laws if such statements are proved incorrect in the future.” Under the bespeaks caution doctrine, this commenter said, “Essentially, the same requirements apply as would under the PSLRA to obtain protection—that the forward-looking statements be accompanied by `meaningful cautionary language.' ” Another of these commenters said that “even if the proposed amendment is adopted, under the so-called `bespeaks caution' doctrine, SPACs should still be able to make forward-looking statements in the absence of the PSLRA safe harbor.” A different commenter stated that the main difference between the PSLRA and the other safe harbors is that “the PSLRA safe harbor provides a stay of discovery while a motion to dismiss based upon the safe harbor protections is under review by the court,” and that “[t]he Commission's proposal, in stripping away the protection of the PSLRA safe harbor for projections in de-SPAC transactions, has in actuality not increased anyone's exposure for the projections—it has simply increased the cost of defense.” Another of these commenters expressed the view that the proposal “would only increase transaction costs and administrative burdens on de-SPAC transactions.”

Some commenters questioned the need for the amendments, expressing the view that investors are well-capable of assessing the reasonableness of projections used by SPACs. One of these commenters said, “The Commission is concerned that investors are misled by forward-looking statements, but some researchers have found that hype, if present, does not sway investors and that forecasts are often related to positive outcomes. These types of findings should lead the Commission to question whether an effective prohibition on forward-looking disclosure in traditional IPOs is itself a good policy idea where it may inhibit price discovery and capital formation.” Another commenter said that “the proposed amendment with respect to the PSLRA will not meaningfully affect the quality of projections made available for the review of the SPAC's board of directors and PIPE investors, if any” and that, “the proposed revisions to Item 10(b) and Item 1609(a) will assist in the comparability of projections included in the disclosure of materials reviewed by the board of directors of a SPAC. In this way, investors will be able to assess for themselves whether underlying assumptions are reasonable rather than rely on the assertions of commentators in the market.” Another of these commenters said, “It is also already standard practice to disclose key underlying risks and assumptions regarding projections and I find it hard to believe that investors are incapable of thoughtfully weighing projections together with a company's other disclosures in their decision-making processes.”

Some commenters suggested that the need to alter the availability of the PSLRA safe harbor is overstated. One of these commenters said that, because target companies may register securities in a de-SPAC transaction, in that situation, the PSLRA safe harbor is already not available to them. This commenter also suggested the need to alter the availability of the PSLRA is overstated because boards of directors of SPACs review projections, including related assumptions and cautionary language, consistent with their fiduciary duty of care. A different commenter suggested the need to alter the availability of the PSLRA safe harbor is overstated because the PSLRA safe harbor only affects private litigation and does not prevent the Commission from pursuing claims for misleading disclosure.

Several commenters suggested that the proposal would invite litigation against SPACs. One commenter said, “The intent of removing the safe harbor for de-SPAC transactions is undeniable—it would open SPACs to a flood of private litigation that, when added to other provisions of the Proposal, would effectively kill the existing SPAC market.”

Other commenters suggested alternative policy approaches and other recommendations in connection with projection disclosure. One commenter suggested the Commission should restrict the use of projections because “[a]s written, the Proposal would leave the door open for projections for which there are little to no reasonable basis, when an issuer has no historical operations, and when the company or asset acquisition is speculative in nature without any disclosure” and because “[s]ponsors, target companies and underwriters that would become liable under the Proposal may attempt to evade liability by combining boilerplate risk factors with forward looking cautionary information that prefaces claims of unreasonable upside potential to investors.” Other commenters suggested the Commission should mandate qualifying language or additional disclosure around the use of projections. One of these commenters said, “Rather than barring forward-looking projections entirely, we recommend that the Commission instead consider requiring any such projections to include appropriate qualifying language, including the background and assumptions underlying such projections, along with any downside case analysis that was done in preparation of such projections.” This commenter said, “We believe that such an approach would be consistent with the disclosure-based approach the Commission has used in similar circumstances, including in the case of Regulation G [12 CFR part 244] with respect to the regulation of the use of financial measures that vary from those included within generally accepted accounting principles.” Another of these commenters said that “rather than barring such young growth firms from providing forward looking information, we feel that additional disclosure should be provided around these forecasts.”

One commenter suggested that, instead of adopting the PSLRA proposal, the Commission should require that earnings statements include a comparison of past projections in earning statements to actual results in order to enhance issuer accountability. Other commenters suggested that market forces would hold accountable issuers with unmet projections by preventing future capital access.

Two other alternative policy approaches suggested by commenters were that: (a) the safe harbor should be made unavailable only to the “maker” of the statement but that others such as “underwriters (or sellers) could continue to enjoy the full protection of the PSLRA;” and (b) the safe harbor should be unavailable for longer-term projections (where the commenter provided the example of a statement “we will penetrate 50% of [total addressable market] in 10 years”) but available for short-term projections (where the commenter provided the example of a statement “we expect to make revenue in 1 year or have positive [free cash flow] in 2 years”).

One commenter said the Commission should “monitor the effects of the safe harbor removal for de-SPACs on the availability and quality of forward-looking information critical for SPAC investor decisions on merger approval votes and exercising redemption rights.” Finally, one commenter said, “While some de-SPAC transactions are in form `initial public offering[s]' ( e.g., where the target or a new company is formed to acquire the SPAC), it is inappropriate to deem a de-SPAC transaction where an existing public company stays public ( e.g., where the SPAC survives the de-SPAC transaction as the publicly traded company) as an `initial public offering.' ” This commenter suggested the Commission should provide an interpretation that de-SPAC transactions are “tender offers” which would make the PSLRA safe harbor unavailable.

3. Final Rules

After considering the comments received, we are adopting a new definition of “blank check company” in Securities Act Rule 405 and Exchange Act Rule 12b–2 under the PSLRA. The new definition of “blank check company” in Rule 405 provides that for purposes of section 27A of the Securities Act of 1933 (15 U.S.C. 77z–2), the term blank check company means a company that has no specific business plan or purpose or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies, or other entity or person. The new definition of “blank check company” in Rule 12b–2 provides that for purposes of section 21E of the Securities and Exchange Act of 1934 (15 U.S.C. 78u–5), the term blank check company means a company that has no specific business plan or purpose or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies, or other entity or person.

We are not amending Securities Act Rule 419 as proposed. Instead, as discussed in detail below, we are adopting a definition of “blank check company” under the PSLRA in Securities Act Rule 405 and Exchange Act Rule 12b–2 to clarify that such definitions are solely for purposes of the PSLRA and not for purposes of any other rules (including rules the Commission adopted pursuant to mandates under the Penny Stock Reform Act, such as Securities Act Rule 419). The final rules have the same substantive effect as the proposal, notwithstanding the different approach taken.

We also are not adopting any amendments as proposed to Securities Act Rules 137, 138, 139, 163A, 164, 174, 405, 430B, and 437a, because the definition of blank check company in Rule 419 that these rules cross-reference will not be changed as a result of the final rules. In addition, we also are not adopting a definition of “blank check company issuing penny stock” in Securities Act Rule 405 as proposed. This proposed amendment is also unnecessary since the definition of “blank check company” in Rule 419 will not change.

Having considered the comments received, we continue to believe that it is appropriate that forward-looking statements made in connection with de-SPAC transactions should be treated similarly with forward-looking statements made in traditional IPOs, because the de-SPAC transaction results in public shareholders acquiring a formerly private company, similar to an IPO. In both IPOs and de-SPAC transactions, similar informational asymmetries exist between issuers (and their insiders and early investors) and public investors and there are similar risks of generating unfounded interest on the part of investors. In both IPOs and de-SPAC transactions, there is no track record of public disclosure to help investors evaluate projections. Moreover, these risks do not disappear merely because a blank check company raised more than $5 million in a firm commitment underwritten IPO (and therefore may not be issuing penny stock). The definitions of “blank check company” we are adopting and the concomitant changes to the availability of the PSLRA will help protect investors because blank check companies may take more care in avoiding the use of forward-looking statements that are unreasonable. As we discuss in detail below, we are not barring the use of forward-looking statements and recognize that forward-looking statements can provide useful and necessary disclosure.

We disagree, based on the text of the PSLRA, with the commenters who expressed the view that the PSLRA does not give the Commission authority to amend the Commission's definition of “blank check company” that existed at the time the PSLRA was adopted. On the contrary, in providing in the PSLRA that definitions, including blank check company, “have the meanings given those terms by rule or regulation of the Commission,” Congress expressly provided the Commission the authority to define these terms and to amend those definitions, consistent with the text, structure, and purpose of the PSLRA.

The text of the PSLRA demonstrates in other ways as well that the Commission has the authority to define, and amend its definition of, “blank check company.” For example, Congress did not use tracking language in the PSLRA to define blank check companies, such as by a statutory definition of blank check company that closely resembles or mirrors the definition in the rules of the Commission at the time of the legislation. In contrast, with respect to other defined terms in the PSLRA, Congress did provide long-form definitions (rather than cross-referencing by citation an existing Commission rule) that closely resemble the content of definitions in Commission rules. Congress also did not define the term blank check company in the PSLRA by referencing the statutory definition in section 7(b)(3) of the Securities Act, as Congress did elsewhere in the PSLRA where it defined terms related to forward-looking statement safe harbors by cross-referencing to those terms. The absence in the PSLRA of such a statutory cross-reference to define the term blank check company is consistent with Congress's express grant of authority to the Commission, as discussed above, to define these terms and amend them consistent with the text, structure, and purpose of the PSLRA.

In addition, the PSLRA safe harbors provide that they are unavailable to issuers that issue “penny stock.” The 1995 version of the definition of blank check company in Securities Act Rule 419 contained (and still contains) a restriction that it applies only to companies issuing penny stock. This suggests that Congress did not intend to permanently fix the Commission's definition of “blank check company” to the 1995 version of that definition in Securities Act Rule 419, because it would have been redundant for Congress to include a carve-out for blank check companies that are penny stock issuers and also carve out penny stock issuers.

Furthermore, we also do not agree, based on the legislative history of the PSLRA, with commenters that asserted that Congress fixed the definition of “blank check company” to the Commission's rules as they existed in 1995, when the PSLRA was enacted. Commission staff reviewed the complete legislative history of the PSLRA and found no evidence of any intent on the part of Congress to fix the definition of “blank check company” as the term was defined in Securities Act Rule 419 at the time of the adoption of the PSLRA in 1995. The staff also found no evidence in the legislative history of the PSLRA of any intent on the part of Congress to restrict the authority of the Commission to amend the definition of this term.

One commenter said the proposed change regarding the definition of blank check company “appears inconsistent with the exemptive authority found in section 27A(g) and (h), which makes clear the Commission's ability to extend the scope of the safe harbor protections rather than narrow them.” We disagree. While Securities Act sections 27A(g) and 27A(h) and Exchange Act sections 21E(g) and 21E(h) provide the Commission with authority to create new exemptions, subject to the conditions that they are in the public interest and protect investors, and clarify that the PSLRA did not limit the ability of the Commission to create new safe harbors for forward-looking statements, there is no limitation in these provisions on the express authority provided under Securities Act section 27A(i)(7) and Exchange Act section 21E(i)(5) to define “blank check company.”

With respect to the commenters who expressed the view that the Commission's definition of “blank check company” under the PSLRA may not be broader than the statutory definition of this term in the Penny Stock Reform Act, nothing in the text of either statute limits the Commission's definition for the term “blank check company” for purposes of the PSLRA to be no broader ( i.e., not contain a qualification that the issuer issue penny stock) than how this term is defined in the Penny Stock Reform Act ( i.e., containing a qualification that the issuer issue penny stock).

Congress did not define “blank check company” in the PSLRA with language that tracks the definition of “blank check company” under the Penny Stock Reform Act. In contrast, with respect to other defined terms in the PSLRA, Congress did define terms using language that closely tracks existing definitions in other sources, such as the definition of “forward-looking statement” in the PSLRA which is similar to Securities Act Rule 175 and Exchange Act Rule 3b–6 (which both pre-dated the PSLRA).

Also, Congress did not define “blank check company” in the PSLRA by cross-referencing the definition of “blank check company” in Securities Act section 7(b)(3) that was added by the Penny Stock Reform Act, but, instead, Congress defined “blank check company” and other defined terms in the PSLRA as having “the meanings given those terms by rule or regulation of the Commission.” In contrast, with respect to other defined terms in the PSLRA, Congress did cross-reference existing statutes as a means of supplying definitions for those terms.

Furthermore, the PSLRA legislative history does not evidence an intent by Congress to require the Commission's PSLRA “blank check company” definition to be fixed to a specific definition ( e.g., to be no broader than the Penny Stock Reform Act definition). In contrast, Congress did fix the definition in the Penny Stock Reform Act. The legislative history of the Penny Stock Reform Act documents Congress's concerns that overbroad restrictions on “blank check company” issuances, with respect to penny stock abuses, could interfere with legitimate capital raising in connection with that statute. The legislative history of the Penny Stock Reform Act—which mandated the Commission to adopt restrictions on blank check companies and ultimately led the Commission to adopt Rule 419 —documents that Congress was concerned about blank check companies in connection with penny stock abuses (the focus of the legislation) because blank check companies were viewed as providing a large inventory of securities that fed into the market for penny stocks. The legislative history of the Penny Stock Reform Act indicates that members of Congress were aware of concerns expressed by hearing witnesses that, if regulation of blank check companies were unduly restrictive, this could disrupt funding for investment vehicles such as private equity investment entities, particularly in real estate, hydrocarbons and technology sectors.

Some commenters suggested that the proposed changes to the definition of “blank check company” are contrary to the Administrative Procedure Act of 1946, because the Commission does not have explicit statutory authority to make the changes. The final rules are consistent with the express statutory authority of the Commission as discussed above.

Notwithstanding the foregoing, the final rules include technical changes from the proposal to clarify that the definitions of “blank check company” that we are adopting are solely for purposes of the PSLRA and not for purposes of any rules the Commission adopted pursuant to mandates under the Penny Stock Reform Act, such as Rule 419. In the Proposing Release, the Commission proposed moving the definition of blank check company out of Rule 419 (into Rule 405) and amending Rule 419 to use the proposed blank check company definition with a qualification in Rule 419 (that would be outside of that definition) limiting the applicability of Rule 419 to issuers of penny stocks. We are adopting a definition of “blank check company” that will be located in Securities Act Rule 405, as proposed, but that includes revised language stating that the definition is “For purposes of section 27A of the Securities Act of 1933 (15 U.S.C. 77z–2).” As a result, we are not amending Rule 419 as the Commission proposed; thus, the existing definition of “blank check company” in Rule 419 will remain unchanged. We are also adding to Exchange Act Rule 12b–2 a nearly identical definition of “blank check company” as with the final Securities Act Rule 405 definition, except that it provides that the definition is “For purposes of section 21E of the Securities and Exchange Act of 1934 (15 U.S.C. 78u–5).”

As discussed above, some commenters did not support the proposal or expressed a view it is inappropriate to adopt the proposal because of concerns related to the definition of “blank check company” in the Penny Stock Reform Act. We do not agree with the commenters that suggested we could not adopt the proposed definition of blank check company on these grounds. However, in order to make clear that we are using our authority to define terms under the PSLRA and not under the Penny Stock Reform Act, we are not amending Rule 419 as proposed. Rather, we are amending Securities Act Rule 405 and Exchange Act Rule 12b–2, as discussed above. The final rules have the same substantive effect as the proposal notwithstanding the different approach taken.

As discussed above, some commenters suggested that projections are rarely used in traditional IPOs. Traditional IPOs, however, may include projections. IPO issuers commonly provide certain disclosures about the future in their registration statements, including estimates in historical financial statements and disclosure provided pursuant to 17 CFR 229.303 (“Item 303” of Regulation S–K) (Management's Discussion and Analysis of Financial Condition and Results of Operations) and Items 5 and 9 of Form 20–F. In an IPO, disclosures under Item 303 of Regulation S–K (for example, which may include statements about the effects of changing prices and future economic performance) are outside the bounds of the PSLRA safe harbor (which is not applicable to IPOs pursuant to Securities Act section 27A(b)(2)(D)). In any offering, including an IPO, estimates in financial statements prepared in accordance with generally accepted accounting principles are outside the bounds of the PSLRA safe harbor pursuant to Securities Act section 27A(b)(2)(A).

Issuers in certain types of IPOs also often include industry- or offering-specific projections. For example, Commission staff has observed that real estate investment trusts may disclose dividend distribution plans and anticipated cash available for distribution (sometimes referred to by industry participants as the “Magic Page”). One commenter also noted that “while it may not be common in certain industries, many types of IPO issuers ( e.g., REITs [real estate investment trusts], yieldcos, and master limited partnerships) do regularly disclose projections in their IPO registration statements and those projections are expected, and relied upon, by underwriters and institutional and retail investors.” Furthermore, the fact that registrants in traditional IPOs (where there is no PSLRA safe harbor available) provide projections voluntarily and provide them to comply with applicable requirements reinforces our view that blank check companies will be able to provide projections where they may be required to disclose projections they have relied upon under Commission rules or may be required to disclose projections under State law.

Some commenters expressed concern with the proposal because State law may require disclosure of certain projections or because of the interaction of the proposed change in safe harbor availability with other aspects of the proposal, such as Item 1609. We do not believe, under the final rules, that registrants will be unable to provide a fair summary of any projections considered material and reliable that the registrant considers to be required to be disclosed under State law or will be unable to provide the disclosure required by Item 1609. As discussed in detail below, the final rules we are adopting do not bar SPACs from making forward-looking statements or any required disclosures. The changes to the availability of the PSLRA safe harbor in connection with the definition of blank check company we are adopting will help protect investors by incentivizing SPACs to take more care in avoiding the use of forward-looking statements that are unreasonable.

In addition, investors are likely to understand the difference between: (i) on one hand, third-party projections provided to the management of a SPAC about a target company prior to the business combination agreement with the target company; and (ii) on the other hand, disclosure by registrants in registration statements in connection with de-SPAC transactions that include SPAC or target company management projections regarding certain financial statement line items or financial measures in future years with respect to the target company that is intended to guide investors in connection with the de-SPAC transaction. To the extent a SPAC is concerned that security holders may rely on a summary of third-party projections that the SPAC believes it is required to disclose under State law in instances where the SPAC believes the projections are no longer reliable, a SPAC could provide supplemental disclosure advising and alerting security holders of this fact.

Some commenters suggested that the proposal potentially would have a chilling effect on the use of projections in de-SPAC transactions and give rise to one of the perceived downsides of an IPO, where a limited group of institutional investors may receive issuer projections indirectly ( i.e., from securities analysts who have received projections directly from the issuer). While we acknowledge that there may be increased liability for projections disclosed in connection with de-SPAC transactions, we believe the rules we are adopting are necessary to protect investors receiving such projections. As we discuss in connection with other comments expressing concerns there may be a chilling effect on projection use, the final rules do not prohibit the use of projections in connection with blank check company business combinations. As in an IPO and as SPACs have done in the past, SPACs will continue to be able to disclose projections in connection with de-SPAC transactions after the effective date of the final rules, and securities analysts may elect to use such forward-looking statements as appropriate. In some cases, a SPAC may decide to qualify its disclosure to put it in the proper context.

Some commenters suggested the proposal would create inconsistency by making the PSLRA safe harbor unavailable for one kind of business combination transaction (de-SPAC transactions) but not for other kinds of business combination transactions. In contrast, another commenter said that “[t]he rationale for treating SPAC business combinations differently from other mergers with respect to the disclosure of projections is exactly that the SPAC is a shell company designed exclusively to merge with a private company seeking public listing and SPAC shareholders have an unconditional right to redeem for the initial price per share paid (typically $10 per share).”

As discussed above, there are certain differences between SPACs and other business combination transactions due to the hybrid nature of de-SPAC transactions. In light of these differences, we believe it is appropriate to take a different regulatory approach with respect to de-SPAC transactions—including in connection with the final definitions of “blank check company” we are adopting—in order to ensure that investors in these hybrid transactions are adequately protected.

As discussed above, several commenters addressed protections from liability in Commission rules and in common law other than the PSLRA safe harbor. We agree with commenters that these protections for defendants remain potentially applicable, depending upon specific facts and circumstances. We disagree, however, with the commenters who stated that adopting a new definition of blank check company under the PSLRA will merely increase costs such as by eliminating the stay of discovery during the pendency of a motion for summary judgment. Rather, we believe that removal of the procedural protections under the PSLRA will incentivize SPACs and other blank check companies to take greater care to avoid the use of forward-looking statements that are unreasonable. We analyze the impact of costs related to the final definition of blank check company in section VII (Economic Analysis).

With respect to commenters that expressed the view that the PSLRA safe harbor availability does not meaningfully affect existing disclosure practices, we do not agree that the PSLRA safe harbor has no effect on the accuracy and reliability of disclosure. For example, with respect to knowingly misleading statements, courts are split on whether knowingly false or even fraudulent forward-looking statements are protected by the PSLRA safe harbor; whereas removing any doubt about the applicability of the safe harbor would incentivize parties to take care to avoid the use of unreasonable forward-looking statements. We do agree, however, as discussed above, that the removal of the PSLRA safe harbor will not eliminate forward-looking statements.

Some commenters suggested the need to alter the availability of the PSLRA safe harbor is overstated. One of these commenters said that, because target companies may register securities in a de-SPAC transaction, in that situation, the PSLRA safe harbor is already not available to them. We agree that, since the PSLRA safe harbor is not applicable to non-reporting companies and is not applicable to IPOs, in certain deal structures where a non-publicly traded target company is registering securities that it is offering in the de-SPAC transaction, the PSLRA safe harbor is already unavailable. There are, however, a number of de-SPAC transactions that are not structured in this manner.

This commenter also suggested the need to alter the availability of the PSLRA is overstated because boards of directors of SPACs review projections, including related assumptions and cautionary language, consistent with their fiduciary duty of care. Despite these existing fiduciary duties, as discussed by commentators cited in the Proposing Release and by several commenters on the Proposing Release, there have been uses of projections in de-SPAC transactions that appear to be unreasonable, unfounded, or potentially misleading, particularly where the target company is an early stage company with no or limited sales, products, or operations. Therefore, we believe that the final rules will supplement such State legal or equitable doctrines imposing fiduciary duties and help ensure blank check companies take more care to avoid the use of unreasonable forward-looking statements.

A different commenter suggested the need to alter the availability of the PSLRA safe harbor is overstated because the PSLRA safe harbor only affects private litigation and does not prevent the Commission from pursuing claims for misleading disclosure. We disagree with this view to the extent that it implies there is no need for investor private rights of action under the Federal securities laws when Commission enforcement actions are available. We consider that view to be inconsistent with the Federal securities law statutory scheme, which provides for several private rights of action.

Several commenters suggested that the proposal regarding the change in availability of the PSLRA safe harbor would invite litigation against SPACs. While it is possible that litigation may increase as a result of the removal of the PSLRA safe harbor protections, it is also possible litigation may not increase or may decrease if some issuers who otherwise would have provided unreasonable projections instead provide reasonable projections as a result of the final rules.

Several commenters provided a range of views on how the proposal could or should change the current use of forward-looking statements, such as projections. Some commenters expressed concerns that the proposal would bar issuers from using projections. These commenters suggested that, rather than barring the use of projections, the Commission should mandate qualifying language or additional disclosure around the use of projections. Other commenters expressed concerns that the proposal would have a chilling effect on the use of projections. Another commenter suggested the Commission should restrict the use of projections. Other commenters asked the Commission to expand the PSLRA safe harbor to cover IPOs.

The final definition of “blank check company” we are adopting would not prohibit the use of projections in SPAC registration statements. In this respect, the final rules are not a departure from the Commission's general policies towards projections held since 1973 when the Commission moved away from its previous “long standing policy generally not to permit projections to be included in prospectuses and reports filed with the Commission.” That the final definition of “blank check company” does not prohibit projections is also consistent with existing 17 CFR 229.10(b) (“Item 10(b)” of Regulation S–K), which we are amending in this release, and new Regulation S–K Item 1609. These rules both relate to the use of projections, including those of SPACs—rules which would be unnecessary if projections were barred in registration statements of blank check companies.

We recognize that forward-looking statements can provide useful and necessary disclosure to investors, and that such statements may be mandated by State and/or fiduciary legal obligations. We also recognize that removing certain liability protections for these forward-looking statements could lead some blank check companies to provide fewer forward-looking statements or no forward-looking statements compared with what they might have provided in the absence of the final rules. However, we believe the definition of “blank check company” that we are adopting and the concomitant impact on the availability of the PSLRA safe harbors are necessary and appropriate to help address concerns over the misuse of forward-looking statements in de-SPAC transactions and other business combinations involving blank check companies. These risks to investors are present in de-SPAC transactions just as in IPOs; in both transactions, there is no track record of public disclosure for a target company to help investors evaluate forward-looking statements. The final definition of “blank check company” we are adopting will better protect these investors by incentivizing blank check companies to take more care in avoiding the use of unreasonable forward-looking statements. In addition, we note that the final rules require a discussion of qualifying information, such as assumptions, in connection with the use of projections in de-SPAC transactions as recommended by one of the commenters, which will further enhance investor protections in connection with such forward-looking statements.

Some commenters suggested that market forces would hold issuers with unmet projections accountable by preventing future capital access. While accountability-imposing market reactions potentially could limit future capital-raising ability of some SPACs that provide unreasonable projections, relying solely on such market-based protections would not provide investors with any recourse at the time the projections are made. In addition, some companies may not return to the capital markets in the future to raise additional cash. In such cases, to the extent that market accountability mechanisms may operate in the manner suggested by these commenters, we believe that the passage of time creates risks that such accountability mechanisms may be less likely to operate as theorized.

One commenter suggested allowing the PSLRA safe-harbor to apply to de-SPAC transactions might lower liability insurance premiums. We recognize that removal of PSLRA safe-harbor protection from SPACs could result in increased insurance costs for target companies. Based on Commission staff's experience, companies that enter business combination agreements with blank check companies may have directors and officers insurance, and such business combination agreements may contain provisions regarding the provision of directors and officers insurance to company officials. As a result, any increased costs incurred by companies in connection with business combinations with blank check companies with respect to directors and officers insurance under the final rules will be incremental to those already incurred. Furthermore, we believe these incremental costs are justified by the enhanced investor protections that will be realized by the incentives created by the final rules for blank check companies to take care to avoid the use of forward-looking statements that are unreasonable. We discuss our analysis of the costs and benefits of the final rules in more detail in section VIII below.

One commenter suggested the Commission should require that earnings statements include a comparison of past projections to actual results in order to enhance issuer accountability. While we recognize the potential benefits of such disclosure, in order to achieve our goals of incentivizing SPACs and other blank check companies to take more care in avoiding the use of unreasonable forward-looking statements, we do not believe it is necessary to adopt the commenter's suggestion and believe that these goals will be achieved by the final rules.

Another commenter suggested that the safe harbor should be made unavailable only to the “maker” of the statement but that others such as “underwriters (or sellers) could continue to enjoy the full protection of the PSLRA.” “Sellers” are not one of the enumerated persons whose forward looking statements are covered by the PSLRA safe harbors. With respect to underwriters, Securities Act section 27A(a)(4) provides that section 27A's safe harbor for forward-looking statements applies only to a forward-looking statement “made by” certain persons, including “an underwriter, with respect to information provided by such issuer or information derived from information provided by the issuer.” Exchange Act section 21E(a)(4) contains similar provisions. Sections 27A(a)(4) and 21E(a)(4) do not explicitly discuss situations where an underwriter is not the maker of the statement. Securities Act section 27A(g) and Exchange Act section 21E(g) give the Commission exemptive authority to adopt rules or regulations to provide exemptions from or under any provision of the PSLRA “with respect to liability that is based on a statement or that is based on projections or other forward-looking information if and to the extent that any such exemption is consistent with the public interest and the protection of investors, as determined by the Commission.” We are not exercising that authority and are not adopting the commenter's suggestion with respect to sellers and underwriters because we do not believe that it is consistent with the public interest and the protection of investors to expand the protections of the PSLRA safe harbors in this manner and believe it would be inconsistent with the purpose of the final rules to incentivize blank check companies to take more care in avoiding the use of unreasonable forward-looking statements.

Another commenter suggested that the safe harbor should be unavailable for longer-term projections (where the commenter provided the example of a statement, “we will penetrate 50% of [total addressable market] in 10 years”) but available for short-term projections (where the commenter provided the example of a statement, “we expect to make revenue in 1 year or have positive [free cash flow] in 2 years.”) We believe that it is equally important for investor protection purposes that blank check companies take care to avoid the use of unreasonable short-term projections as well as unreasonable longer-term projections. Therefore, we are not adopting this suggestion.

One commenter said it is inappropriate to deem a transaction to be a de-SPAC transaction where the SPAC survives as an IPO and suggested the Commission should provide an interpretation that de-SPAC transactions are “tender offers” which would make the PSLRA safe harbor unavailable. We disagree with the view de-SPAC transactions should not be considered the IPO of the target company. As we discuss in detail in this release, the de-SPAC transaction is functionally the IPO of the target company. While redemption rights exercisable by security holders in connection with the de-SPAC transaction (or extension of the timeframe to complete a de-SPAC transaction) generally have indicia of a tender offer, the business combination component of the de-SPAC transaction is typically structured as a statutory merger, and not as a tender offer. Therefore, we disagree with the commenter's suggestion that entire de-SPAC transactions could be interpreted or viewed as tender offers.

F. Underwriter Status and Liability in Securities Transactions

1. Proposed Rule

The Commission proposed Rule 140a to clarify that anyone who acts as an underwriter in a SPAC IPO and participates in the distribution associated with a de-SPAC transaction by taking steps to facilitate such transaction, or any related financing transaction, or otherwise participates (directly or indirectly) in the de-SPAC transaction is engaged in the distribution of securities of the surviving public entity and, therefore, is an “underwriter” within the meaning of section 2(a)(11) of the Securities Act. In this way, the proposed rule was intended to clarify that liability protections similar to those in traditional underwritten IPOs would apply to de-SPAC transactions in which a statutory underwriter has participated. The Commission also described in the Proposing Release some of the activities sufficient to establish a SPAC IPO underwriter as a participant in the distribution of target company securities, as securities of the combined company. The Proposing Release stated that the discussion of such activities was non-exhaustive and not intended to limit the definition of underwriter for purposes of section 2(a)(11) of the Securities Act.

2. Comments

Several commenters generally supported proposed Rule 140a. However, several other commenters expressed concerns about the potential impact on transaction participants and the overall market if proposed Rule 140a were adopted. Several commenters also expressed concerns about increased costs if proposed Rule 140a were adopted. In addition, numerous commenters expressed concerns that the proposed rule could result in increased liability and/or litigation risk for transaction participants. Several commenters also expressed broader concerns about the effects of proposed Rule 140a on M&A transactions other than de-SPAC transactions. A Commission advisory committee recommended that participants who would have underwriter liability should be clearly identified and participants should be held accountable to the same extent they would be in traditional IPOs.

Several commenters disagreed with the discussion in the Proposing Release regarding what it means to participate in a distribution. A number of commenters asserted that proposed Rule 140a was inconsistent with the statutory text of section 2(a)(11), other Commission rules, and case law construing the application of section 11 to parties other than named underwriters. In particular, commenters argued that the term “underwriter” as used in section 2(a)(11) does not have unlimited applicability to capture anyone associated with an issuance of securities within its meaning. Some commenters argued that no person in a de-SPAC transaction purchases with a view to distribution or sells for an issuer or participates in any purchase, offer, or sale of securities for distribution or that a de-SPAC transaction generally does not involve underwriters.

Some commenters questioned the scope of the section 11 liability that would attach to any underwriter under the proposed rule. In addition, commenters questioned how a court would apportion damages among underwriters were Rule 140a to be adopted as proposed. While some commenters stated that underwriter status would improve diligence performed by parties in a de-SPAC transaction, other commenters disagreed that proposed Rule 140a would improve diligence performed in de-SPAC transactions.

To the extent the Commission were to adopt Rule 140a, some commenters requested specific changes or additional provisions related to the rule. Several commenters asked the Commission to limit the scope of proposed Rule 140a underwriter liability in a de-SPAC transaction to disclosures akin to those in a traditional IPO.

Several commenters proposed alternatives to adopting Rule 140a, including:

• Relying on statutory “seller” liability under Securities Act section 12(a)(2);

• Requiring a SPAC to file a current report upon announcement of a signed agreement to consummate a de-SPAC Transaction;”

• Mandating “a new role for an investment bank in de-SPAC transactions for all exchange-listed SPACs;” and

• Establishing a maximum threshold on redemptions in order for a de-SPAC transaction to proceed.

Finally, several commenters asked the Commission to apply proposed Rule 140a on a prospective basis or to adopt a phase in period.

3. Declining To Adopt Proposed Rule 140a; Commission Guidance on Underwriter Status in De-SPAC Transactions

As discussed in the Proposing Release, underwriters play an important role in the U.S. financial markets, acting as gatekeepers for the investing public in the distribution of a new issuer's securities to the public markets for the first time. Section 2(a)(11) of the Securities Act defines underwriter as “any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking.” The Commission and courts generally have emphasized that such concepts should be applied broadly and not formulaically.

Having considered the comments received on proposed Rule 140a and given the broad nature of the definition of underwriter in section 2(a)(11), we are not adopting Rule 140a. Although we agree with commenters that the term underwriter does not have “unlimited applicability,” as further explained below, the statutory definition of underwriter, itself, encompasses any person who sells for the issuer or participates in a distribution associated with a de-SPAC transaction. To assist parties in applying section 2(a)(11) to de-SPAC transactions, we are providing the following general guidance regarding statutory underwriter status. For the avoidance of doubt, this guidance does not implement proposed Rule 140a. Rather than promulgate a rule clarifying when a specific party is an underwriter for de-SPAC transactions, we intend to follow the Commission's longstanding practice of applying the statutory terms “distribution” and “underwriter” broadly and flexibly, as the facts and circumstances of any transaction may warrant.

i. A De-SPAC Transaction Is a Distribution of Securities

The concept of distribution within section 2(a)(11) is not limited to a transaction taking the form of a traditional IPO or traditional capital raising. For example, a spin-off is not traditional capital raising; yet, in certain circumstances, has been found to constitute a distribution of securities for the purposes of section 2(a)(11). In the Proposing Release, the Commission stated that the de-SPAC transaction marks the introduction of the private operating company to the public capital markets and is effectively how the private operating company's securities “come to rest”—in other words, are distributed—to public investors as shareholders of the combined company.

Some commenters asked the Commission to better explain the distribution that occurs in a de-SPAC transaction. Although the word “distribution” has no definition in the Securities Act, the term “distribution” refers to the entire process in a public offering through which a block of securities is dispersed and ultimately comes to rest in the hands of the investing public. In a traditional IPO, an underwriter distributes shares in a private company to investors thereby providing access to capital and the public markets. Although different in form from traditional capital raising in an IPO, the purpose of a de-SPAC transaction is to provide the target company with capital and access to the public markets. In the course of such a transaction, regardless of the transaction structure, public shareholders of the SPAC become owners of the combined operating company through the business combination. Given this, in the context of a de-SPAC transaction, interests in the typically private target company are dispersed to the public via a business combination with a SPAC. The distribution is therefore the process by which the SPAC's investors, and therefore the public, receive interests in the combined operating company.

One commenter asserted that not every de-SPAC transaction would involve a distribution of securities because in at least some de-SPAC transactions the target company is not “selling” or “distributing” any securities in the transaction. As discussed elsewhere in this release, however, the statutory concepts of offer and sale have a very broad meaning and can encompass situations in which there is no actual exchange of securities. However, assuming, for the sake of addressing this commenter's argument, that a distribution requires a “sale” that meets the definition of such term under section 2(a)(3), we are adopting Rule 145a, which deems there to be a sale from the combined company to the SPAC's existing shareholders even in de-SPAC transaction structures where the target company is not “selling” or “distributing” its own securities into the market.

ii. Statutory Underwriters in De-SPAC Transactions

While one commenter asserted that there is not always a distribution of securities associated with a de-SPAC transaction, another asserted that the de-SPAC distribution “occurs directly from the issuer to the counterparties to the business combination, without the involvement of underwriters.” It is well established that the statutory definition of underwriter is not limited to traditional underwriters in firm commitment IPOs, but also includes anyone who otherwise meets the statutory definition. Anyone in this second category is generally known as a “statutory underwriter” because, although they may not be named as an underwriter in a given offering and may not engage in activities typical of a named underwriter, they nevertheless meet the definition of underwriter in the statute. As such, the statute applies to such parties in the same way as it would to a named underwriter in a firm commitment offering. In addition, the Commission has previously stated that “the statutory language of section 2[(a)](11) is in the disjunctive. Thus, it is insufficient to conclude that a person is not an underwriter solely because he did not purchase securities from an issuer with a view to their distribution. It must also be established that the person is not offering or selling for an issuer in connection with the distribution of the securities, does not participate or have a direct or indirect participation in any such undertaking, and does not participate or have a participation in the direct or indirect underwriting of such an undertaking.”

Several commenters disagreed with the discussion in the Proposing Release regarding what it means to participate in a distribution. These commenters asserted that some courts have adopted a narrower view of the concept of “participation” than what was discussed in the Proposing Release. ⁹¹³ We acknowledge that some courts have declined to find that parties other than named underwriters were acting as distribution participants. These cases, however, arose in more conventional capital raising contexts and were based on the particular facts and circumstances before the court. It is far from clear that the cases cited by the commenters should be determinative of how the concepts of “distribution” and “underwriter” apply in the context of a de-SPAC transaction, which combines elements of both a traditional IPO and an M&A transaction.

We acknowledge that in a de-SPAC transaction, there is generally no single party accepting securities from the issuer with a view to resell such securities to the public in a distribution in the same manner as a traditional underwriter in traditional capital raising. Nevertheless, in a de-SPAC distribution, there would be an underwriter present where someone is selling for the issuer or participating in the distribution of securities in the combined company to the SPAC's investors and the broader public. Depending on the facts and circumstances, such an entity could be deemed a “statutory underwriter” even though it may not be named as an underwriter in any given offering or may not be engaged in activities typical of a named underwriter in traditional capital raising. Section 11 would apply as it would to anyone acting as underwriter with respect to a registered de-SPAC transaction, and such person will have liability for any material misstatement or omission in the registration statement. Similarly such person would have any defenses available to the parties upon whom the statute imposes liability.

The prior discussion is not intended to signal that we believe that every de-SPAC transaction or offering of securities generally involves or needs the involvement of an underwriter. But where a distribution and an underwriter are present, the party acting as underwriter will need to perform the necessary due diligence of the disclosures made in connection with the registered offering of securities or face full exposure to liability without the benefit of the due diligence defense under the Securities Act of 1933.

iii. A De-SPAC Transaction Is Distinguishable From Other M&A Transactions

By its terms, proposed Rule 140a would have applied only to SPAC IPO underwriters that took steps to facilitate a de-SPAC transaction or any related financing transaction, or otherwise participated (directly or indirectly) in the de-SPAC transaction. However, as noted above, commenters indicated that the proposal raised numerous questions about whether other parties that similarly facilitate de-SPAC transactions would be subject to liability and, whether a similar analysis applies to other types of transactions, such as more “traditional” M&A transactions ( i.e., those not involving a SPAC).

In response to these comments, we note that Rule 140a was not intended to address any business combination transaction not involving a de-SPAC transaction. Similarly, the guidance presented in this release is not intended to influence current practice in traditional M&A, as the two situations are readily distinguishable. As discussed above, although de-SPAC transactions have many of the same features of traditional M&A transactions, they have a different purpose. While they take the form of a business combination, de-SPAC transactions serve as the means by which a private company may enter the public market for the first time and thus are the equivalent of an IPO by the target company. Indeed, it is in recognition of this unique method of conducting a public offering that we are adopting Rule 145a and the co-registration requirements to account for the fact that the combined company in a de-SPAC transaction is effectively acting as an issuer engaged in a sale of its securities to the public shareholders of the SPAC. We reiterate, however, that nothing in this release is intended to limit or alter the definition of underwriter for purposes of section 2(a)(11) of the Securities Act.

IV. Business Combinations Involving Shell Companies

In response to concerns regarding the use of shell companies as a means of accessing the U.S. capital markets, the Commission proposed new rules that would apply to business combination transactions involving shell companies, which include de-SPAC transactions. First, the Commission proposed new Rule 145a under the Securities Act that would deem such business combination transactions to involve a sale of securities to a reporting shell company's shareholders. The Commission is adopting that rule as proposed as discussed below. Second, the Commission proposed new Article 15 of Regulation S–X and related amendments to more closely align the required financial statements of private operating companies in connection with these transactions with those required in registration statements on Form S–1 or F–1 for an IPO. The Commission is adopting those rules mostly as proposed, with certain changes discussed below. The issues the Commission is addressing with the adoption of both of these sets of final rules are common to these shell company transactions, regardless of whether the shell company is a SPAC.

A. Shell Company Business Combinations and the Securities Act of 1933

1. Proposed Rule

The Commission proposed Rule 145a to address the use of reporting shell companies as a means to enter the U.S. capital markets without Securities Act registration and the related disclosures which are intended to protect investors. The rule was proposed due to the significant increase in such reporting shell company business combination transactions, including through the use of a SPAC, in an effort to provide reporting shell company shareholders with more consistent Securities Act protections regardless of transaction structure. Proposed Rule 145a would deem any direct or indirect business combination of a reporting shell company that is not a business combination related shell company involving another entity that is not a shell company to involve a sale of securities to the reporting shell company's shareholders. While nothing in proposed Rule 145a would prevent or prohibit the use of a valid exemption, if available, for the deemed sale of securities to the reporting shell company's shareholders, the Commission stated that the exemption under section 3(a)(9) of the Securities Act generally would not be available for the sales covered by the proposed rule. The proposed rule would not apply to the merger of an existing reporting shell company into a new shell company where the surviving company remains a shell.

2. Comments

Several commenters generally supported proposed Rule 145a. Some of these commenters pointed to investor protection concerns related to SPACs and de-SPAC transactions and the benefits associated with registration under the Securities Act. In this regard, some commenters pointed out that the reform contemplated by Rule 145a would help prevent certain disparities in regulation for transactions that vary in legal structure but not in economic substance, ensuring that unaffiliated security holders enjoy the protections that come from investing in a registered offering. Other commenters noted that the likely registration of de-SPAC transactions as a result of Rule 145a would result in enhanced liabilities for signatories to any registration statement and underwriter and expert liability, thereby ensuring investors receive fair and reliable information.

Other commenters generally opposed, or expressed concerns regarding, proposed Rule 145a. Some commenters discussed the potential costs and effects of proposed Rule 145a. Certain commenters questioned the Commission's authority to adopt Rule 145a where, in commenters' views, no distribution of securities actually occurs or for situations in which there is neither a vote nor any securities changing hands as there is no traditional “investment decision.” Some commenters asserted that proposed Rule 145a is unnecessary for the protection of investors and that de-SPAC transactions, in particular, are already accompanied by a full set of disclosures. Other commenters asserted that proposed Rule 145a conflicted with proposed Rule 140a because proposed Rule 140a implied that there is a single distribution occurring between a SPAC's IPO and the de-SPAC transaction.

One commenter asserted that not all shell company business combinations are similar and, in particular, that de-SPAC transactions are not comparable to shell company transactions with microcap companies. Another commenter stated that it is unclear to them why de-SPAC transactions should be treated differently than other reverse mergers.

A number of commenters requested that the Commission clarify and/or modify aspects of proposed Rule 145a. In particular, a commenter requested, if Rule 145a were adopted, that “[i]n the spirit of aligning treatment of IPOs and de-SPAC transactions, Rule 145 [17 CFR 230.145] should be revised to not apply to any transaction that Rule 145a applies to.” The same commenter requested that the Commission limit the scope of proposed Rule 145a so as not to apply to business combination related shell companies. Another commenter asked us to further clarify the application or operation of proposed Rule 145a. In particular, this commenter asked that the Commission clarify the intended trigger for the application of Rule 145a in a de-SPAC transaction.

Finally, certain commenters questioned the Commission's explanation of the application of section 3(a)(9) in Rule 145a transactions. In particular one commenter stated that they did not agree that the “deemed exchange” should be integrated with the exchange of the private company's securities for interests in the SPAC, such that section 3(a)(9) would be unavailable because a proxy solicitor is paid to solicit proxies from SPAC shareholders in connection with the shareholder vote on a de-SPAC transaction. The commenter asserted that any vote associated with the de-SPAC transaction and the related proxy solicitation is irrelevant to whether the transaction would be deemed a sale under existing rules. A different commenter asserted that if there is an exchange it is embodied in the redemption decision, not the vote in connection with a de-SPAC transaction, and thus payment of compensation for a proxy solicitor should not prevent reliance on Securities Act section 3(a)(9).

3. Final Rule

We are adopting Rule 145a as proposed. Currently, investors in reporting shell companies may not always receive the disclosures and other protections afforded by the Securities Act at the time when there is a fundamental change in the nature of their investment due to the business combination involving another entity that is not a shell company.

To address this, Rule 145a specifies that a sale occurs from the post-transaction company to the existing shareholders of a reporting shell company in situations where a reporting shell company that is not a business combination related shell company enters into a business combination transaction involving another entity that is not a shell company. In these situations, Rule 145a deems there to be a share exchange implicating the requirements and protections of section 5 of the Securities Act because the interests the former reporting shell company shareholders owned have been exchanged for something entirely different—interests in an operating company in the course of a transaction whereby the former reporting shell company provides the operating company with access to the public markets. The sale identified by the rule occurs regardless of whether securities are changing hands in the business combination transaction, and thus the transaction will need to be registered in accordance with the Securities Act unless an exemption from registration is available. The final rule also applies regardless of transaction structure or the form of business combination ( e.g., statutory merger, share exchange, stock purchase, asset purchase, etc.).

As discussed in the Proposing Release, Rule 145a will apply to any reporting shell company that has assumed the appearance of having more than “nominal” assets or operations. However, as proposed and for the avoidance of doubt, the final rule will not have any impact on traditional business combination transactions between operating businesses, including transactions structured as traditional reverse mergers and traditional business combination transactions that make use of only business combination related shells. In addition, we note that Rule 145a is not intended to change the treatment of any transaction, whether or not involving a shell company, under State or other Federal laws, including, but not limited to, State corporate law and the Internal Revenue Code. Finally, because it is premised upon the change in the nature of a security when a reporting shell company changes its status to an operating company, Rule 145a specifically does not apply to a transaction where a reporting shell company combines with another shell company. Below we respond to various objections raised by commenters regarding the proposal and provide additional explanation to clarify the scope and application of Rule 145a.

i. Arguments Regarding No Investment or Vote

Some commenters questioned the Commission's authority to adopt Rule 145a because, in the commenters' view, a sale cannot be deemed to occur in situations where no actual distribution of securities occurs or there is no traditional “investment decision.” Section 2(a)(3) of the Securities Act broadly defines the terms “sale” or “sell” to include every contract of sale or disposition of a security or interest in a security, for value. Finding it necessary for investors to have the protections of the Securities Act, the Commission has previously applied this definition broadly, including in cases where there is no affirmative decision from investors to buy or sell securities. For example, the Commission has previously determined that the following transactions may involve a sale even where there is no vote or investment decision: spin-offs, split-offs and similar transactions; short-form mergers; and distributions of “free stock.”

Similarly, here, we have concluded that, notwithstanding the fact that there may be no traditional investment decision or vote in connection with a business combination transaction where a shell company changes its status from a shell company to an operating company through a business combination, such a change is nonetheless a sale of securities for the purposes of section 2(a)(3) because investors are exchanging their interests in a shell company for interests in a combined public operating company, which is a transaction “for value.”

a. The “For Value” Requirement

Several commenters questioned whether the constructive sale would be “for value,” within the meaning of this term in section 2(a)(3). We disagree with the commenter that asserted that, similar to an ordinary M&A transaction, a de-SPAC transaction will not result in a fundamental change in the nature of the security held by SPAC stockholders that would constitute an exchange of value and, thus, should not be deemed to constitute consideration in connection with the business combination. Likewise, we disagree with the commenter that asserted that even though the specific target company is unidentified at the time of the SPAC's IPO, when acquired, a SPAC security represents an investment in a target company because the sole purpose of a SPAC is to engage in a business combination.

A change in a reporting shell company's status via a business combination with an operating company results in the reporting shell company investors effectively exchanging their security representing an interest in the reporting shell company, an entity that has no or nominal operations and either (i) no or nominal assets; (ii) assets consisting solely of cash and cash equivalents; or (iii) assets consisting of any amount of cash and cash equivalents and nominal other assets, for a new security representing an interest in a combined operating company. This is a change in the nature of the investment, which does not occur in traditional M&A transactions. Although shell company shareholders may not actually be receiving shares from the combined public operating company, they have surrendered “value” for purposes of section 2(a)(3) because, unlike a business combination not involving a reporting shell company and an operating company, they have effectively surrendered their shares in a public shell company for shares in a fundamentally different company, a combined operating company. In addition, unlike a business combination that does not involve a reporting shell company and an operating company, such a transaction involves the use of a public shell to create a public market for the combined operating company.

Moreover, courts and the Commission have determined that it does not matter what party in the course of a transaction receives value—as long as any party receives value, the “for value” requirement in section 2(a)(3) is satisfied. In particular, transactions involving the use of public shells to provide access to the public markets have been found to constitute a sale under section 2(a)(3) of the Securities Act. We view a reporting shell company (that is not a business combination related shell company) merging with a private operating company as similarly providing access to the public markets, and thus creating value. Therefore, the business combination transaction is a sale which entitles the reporting shell company's existing shareholders, who are the investors acquiring securities in this sale, to all applicable protections provided by the Securities Act.

Finally, one commenter asked that we clarify within the rule text that the sale contemplated by Rule 145a would be “a disposition of a security or an interest in a security . . . for value.” Although, as we explain above, we agree with the commenter that such a transaction would be “for value,” we do not believe it is necessary to add that detail within the text of Rule 145a because the Securities Act, itself, already contains the “for value” requirement in section 2(a)(3).

ii. No Additional Registration Statement Required Where a Shell Company Business Combination Is Already Registered

If, in the course of a business combination with a reporting shell company, the exchange of the shell company shares for securities of the surviving combined operating business is already being registered, then there is no need to register any additional transaction under the Securities Act to comply with Rule 145a because the transaction that is recognized as a sale by Rule 145a is already being registered. For example, in many de-SPAC transactions, an actual exchange of securities between the SPAC's existing shareholders and the target company or a new holding company is already being registered at the time of the business combination transaction. In these circumstances, the transaction that Rule 145a construes as a sale is typically already being registered because the SPAC's existing shareholders are receiving securities of the combined company in exchange for their shares of the SPAC. Where Securities Act registration of this transaction is already occurring, Rule 145a would not require the filing of an additional registration statement. However, Rule 145a only applies with respect to a shell company's existing security holders. The surviving company in a de-SPAC transaction must give separate consideration as to whether a registration statement or exemption would be required for any offer and sale of securities to the target company's security holders.

iii. Where Rule 145a Requires Registration in the Absence of an Exemption

However, in transaction structures where reporting shell company shareholders are not actually exchanging their shell company shares for securities of a combined operating company, the parties will need to consider Rule 145a in structuring the transaction. For example, in a de-SPAC transaction structured such that the shareholders of the SPAC keep their existing shares in the SPAC throughout the business combination transaction, and those interests change into interests in the combined company, the parties would need to consider the impact of Rule 145a on the transaction and either register the transaction or find an exemption for the constructive exchange between the shell company's pre-transaction shareholders and the surviving combined company. Such transactions would be situations implicating a Rule 145a constructive sale.

iv. Investor Protection and Liability

While we acknowledge, as several commenters have argued, that certain transactions, such as de-SPAC transactions, may already be accompanied by a set of disclosures provided to the reporting shell company's shareholders, the timing and nature of such disclosures may not be equivalent, and such disclosures do not have equivalent levels of investor protection as there currently would be in a transaction involving Securities Act registration. To the extent that Rule 145a transactions are registered, registration would result in enhanced liabilities for the registrant and other parties who have liability under the Federal securities laws with respect to the registration statement, including potential underwriter liability (as described elsewhere in this release) and liability under Securities Act section 11(a)(4) for experts. Given the change in the nature of an investor's security when a reporting shell company engages in a business combination transaction with an operating company, Rule 145a is designed to ensure that shareholders more consistently receive the full protections of Securities Act disclosure and liability provisions, as applicable, and that such investor protections will apply regardless of transaction structure.

v. Market for Shell Company Mergers

A commenter asserted that the Commission had not previously found it necessary to adopt a provision like Rule 145a to regulate shell company mergers “and was amenable at that time to allow such transactions to proceed so long as public investors were given current and complete information about the new business they owned.” The commenter further asserted that proposed Rule 145a no longer reflects this Commission position on shell company mergers and can be expected “to shut down [the shell company] market.” We disagree. Although the Commission adopted rules and rule amendments addressing the use of Form S–8, Form 8–K, and Form 20–F by shell companies, the Commission is not precluded from revisiting shell company transactions and considering the investor protections applicable to these transactions. In this regard, we believe Rule 145a complements the disclosure protections that the Commission adopted in 2005. In addition, we do not believe that a requirement to register a transaction or find an applicable exemption when a reporting shell company becomes an operating company, would “shut down the market.” Indeed, depending on the structure, many business combinations involving reporting shell companies are already registered under the Securities Act.

vi. Perceived Conflicts Between Non-SPAC Reporting Shell Companies and SPACs

A commenter stated that an investment in a SPAC transaction is not comparable to other reporting shell company business combinations. In particular, the commenter indicated that an investor in a non-SPAC reporting shell company does not necessarily invest in a company seeking a business combination opportunity. While we acknowledge that non-SPAC shell companies typically have some investors that predated the company's shell company status, this distinction is not relevant for this purpose because the effect of a business combination transaction in both cases is the same. Both involve a situation where a public shell company is no longer going to be a shell company and the nature of the investor's shares has changed to an investment in an entirely new operating business. Moreover, the purpose of the transaction is to provide the formerly private company with access to the public markets. As such, the concerns that we are addressing in adopting Rule 145a are present in both non-SPAC reporting shell company business combinations and de-SPAC transactions.

vii. Perceived Analogies to Traditional Reverse Mergers

A commenter argued that de-SPAC transactions should not be distinguished from other reverse mergers because the accounting predecessor in a reverse merger is not currently deemed to be engaged in a distribution of its securities to stockholders of the non-predecessor entity. We do not agree with the commenter's analogy because in traditional mergers, regardless of the accounting treatment of the respective parties, the issuer of securities whose offer and sale is registered is the entity whose securities are being sold to investors ( e.g., in a share exchange, the entity whose securities are being offered in exchange for outstanding securities of another entity). The commenter further asserted that if the SPAC is not actually issuing securities, the SPAC should not be a “registrant” and that, to the extent Rule 145a is adopted, only the target should be considered a registrant. We disagree, in part, with this argument. While we agree that the target company must be a registrant in all registered de-SPAC transactions, we see no basis to disregard the SPAC's status as a registrant, where applicable, even in cases where the SPAC is issuing securities only within the meaning of Rule 145a. Rule 145a is designed to identify a sale between the combined company and pre-business combination shareholders of the reporting shell company. For the reasons discussed above, we view this to be a sale even if the reporting shell company is not actually issuing securities. Given that this constructive sale occurs even if shares do not actually change hands, we decline to narrow Rule 145a by concluding that a sale occurs in a de-SPAC transaction only by the target company. To the extent that the choice of transaction structure may impact who is a registrant that must sign a registration statement, that is a separate analysis.

Additionally, some commenters asked for clarification regarding the intended trigger for the application of Rule 145a in a de-SPAC transaction and who would be the exchanging parties in a Rule 145a constructive sale. As discussed above, Rule 145a specifies that a sale occurs from the post-transaction company to the existing shareholders of a reporting shell company in situations where a reporting shell company that is not a business combination related shell company enters into a business combination transaction involving another entity that is not a shell company. Pursuant to Rule 145a, all existing holders of the reporting shell company's shares, at the time of the business combination, are constructively exchanging their securities for securities in the combined company, whether or not these investors are actually exchanging any shares to complete the business combination. The surviving public company will be the entity that is constructively selling the securities of the combined company.

viii. Section 3(a)(9) Does Not Apply to Rule 145a Constructive Sales

Having considered the views of commenters regarding the application of the section 3(a)(9) exemption in Rule 145a constructive sales, we continue to believe section 3(a)(9) would not be available for a transaction that is a Rule 145a constructive sale. There are several features of these transactions which cast doubt on the availability of the exemption. In particular, section 3(a)(9) was designed to facilitate “certain voluntary readjustment[s] of [an issuer's] obligations.” A reporting shell company business combination with an operating company is not merely a voluntary readjustment, but the combination of such an entity with an entirely new business.

In addition, the four requirements of an exchange qualifying for the section 3(a)(9) exemption are as follows:

• Same issuer—the issuer of the old securities being surrendered must be the same as the issuer of the new securities;
• No additional consideration from the security holder;
• Offer must be made exclusively with existing security holders; and
• No commission or compensation may be paid for soliciting the exchange.

The failure to meet any single one of these requirements would be enough to preclude use of the section 3(a)(9) exemption.

First, section 3(a)(9) is limited to securities exchanged by the issuer with its existing shareholders. In the case where shareholders of a reporting shell company constructively exchange their shares with securities of the combined entity, we view the combined entity to be a different issuer than the shell that originally issued the securities even if the reporting shell company is the entity that survives the merger. Although the combined company may retain the legal identity of the shell for the purposes of State or local law, it is substantively a new entity. To hold otherwise would place form over substance, given that the use of the section 3(a)(9) exemption is premised upon an investor's familiarity with the company in which they have already invested.

Second, the section 3(a)(9) exemption would not be available where the Rule 145a constructive sale occurs in connection with the offer and sale of securities to target company security holders. Such a sale would not occur exclusively to the reporting shell company's existing security holders. Thus, where interests in the existing reporting shell are also being exchanged with the target company's shareholders, the exchange would not be exclusively with the reporting shell company's existing security holders and section 3(a)(9) would not be available to exempt the deemed sale to the reporting shell company shareholders.

Finally, section 3(a)(9) is not available where a commission or other remuneration is paid or given directly or indirectly for soliciting participation in the deemed exchange. This would occur, for example, if a proxy solicitor is compensated to solicit the reporting shell company's shareholders for proxy votes in connection with the business combination. Certain commenters asserted that section 3(a)(9) of the Securities Act should not be rendered unavailable simply because a proxy solicitor is paid to solicit proxies from SPAC shareholders in connection with the shareholder vote on a de-SPAC transaction. As discussed above, Rule 145a deems there to be a share exchange in situations, such as de-SPAC transactions, where a reporting shell company that is not a business combination related shell company enters into a business combination transaction involving another entity that is not a shell company. In our view, if shareholder approval is being solicited on a matter that is required to accomplish a reporting shell company business combination, and compensation is being paid for such solicitation, then that is, in substance, a solicitation for approval of the Rule 145a transaction. This is consistent with views the Commission previously has expressed in analogous contexts. For example, the Commission has previously taken the position that where a solicitation of security holders is for the purpose of approving the authorization of additional securities which are to be used to acquire another specified company, and the security holders will not have a separate opportunity to vote upon the transaction, the solicitation to authorize the securities is also a solicitation with respect to the acquisition. Accordingly, if a proxy solicitor is compensated to solicit the reporting shell company's shareholders for proxy votes in connection with the shareholder vote on a de-SPAC transaction, such solicitation would mean the transaction would not qualify for the section 3(a)(9) exemption for the Rule 145a constructive sale.

B. Financial Statement Requirements in Business Combination Transactions Involving Shell Companies

After a business combination involving a shell company, the financial statements of a business that will be a predecessor to the shell company registrant become those of the registrant for financial reporting purposes.

How a business chooses to become a public company could affect its financial statement disclosures due to differences in the requirements of registration statements on Form S–1 or F–1 (for IPOs) and the requirements of registration statements on Form S–4 or F–4 (regarding business combination transactions). In our view, a company's choice of the manner in which it goes public should not generally result in substantially different financial statement disclosures being provided to investors.

In the Proposing Release, the Commission proposed amendments to its forms and rules to more closely align the financial statement reporting requirements in business combinations involving a shell company registrant and a business with those in traditional IPOs. The financial statement requirements that are being adopted under the final amendments are based, in part, on current Commission staff guidance for transactions involving shell companies. In proposing to codify this guidance, the Commission sought to reduce any asymmetries between financial statement disclosures in business combination transactions involving shell companies and traditional IPOs.

1. Proposed Rule 15–01(a), Rule 1–02(d), and Form Instructions: Audit Requirements

In the Proposing Release, the Commission proposed Rule 15–01(a), amendments to Rule 1–02(d), and related new instructions to Forms S–4 and F–4. The Commission noted in the Proposing Release that these changes would align the level of audit assurance required for the target business in business combination transactions involving a shell company with the audit requirements for an IPO. Specifically, proposed Rule 15–01(a) provided that the term “audit (or examination),” when used with respect to financial statements of a business that is or will be a predecessor to a shell company, means an examination of the financial statements by an independent accountant in accordance with the standards of the PCAOB for the purpose of expressing an opinion thereon. The Commission also proposed to amend Rule 1–02(d) to include the following new provision: “See § 210.15–01(a) for definition of an audit when used in regard to financial statements of a company that will be a predecessor to an issuer that is a shell company (other than a business combination related shell company).” The combined effect of the proposals would be that a predecessor to a shell company, including one that is a target private operating company, would be required to comply with the same definition of audit as in Rule 1–02(d) of Regulation S–X for its audited financial statements as if it were filing for an IPO.

2. Comments: Rule 15–01(a), Rule 1–02(d), and Form Instructions: Audit Requirements

We received comments from several commenters that were supportive of proposed Rule 15–01(a), because it would codify existing staff guidance. No commenters opposed proposed Rule 15–01(a), the proposed amendments to Rule 1–02(d), or the proposed new instructions to Forms S–4 and F–4. One commenter recommended that we adopt an exception to the audit requirements applicable to SPACs to permit the audits of the financial statements of target companies that would otherwise be eligible for multijurisdictional disclosure system (“MJDS”) reporting to be able to use Canadian Generally Accepted Auditing Standards (“Canadian GAAS”).

As noted in section III.C above, one commenter said that co-registration would result in disclosure requirements that are inconsistent with the proposed revisions to Regulation S–X, raising the issue of whether, if there were multiple target companies, each company would be required to provide financial statements audited in accordance with PCAOB standards in the de-SPAC registration statement, rather than solely the predecessor pursuant to proposed Rule 15–01(a) of Regulation S–X. This commenter indicated that co-registration would result in inconsistencies with IPOs where there are multiple target companies.

3. Final Rule 15–01(a), Rule 1–02(d), and Form Instructions: Audit Requirements

After considering the comments, we are adopting Rule 15–01(a), the amendments to Rule 1–02(d), and the instructions to Forms S–4 and F–4 largely as proposed, with a few modifications discussed below.

In the past, the Commission staff has advised shell companies that it expects the financial statements of the predecessor, including a private operating company, in a transaction involving a shell company, to be audited under the same standards as a registrant in an IPO, because, at consummation, the financial statements of the business become that of the shell company. As noted in section III.C above, the amendments to Form S–4 and Form F–4 will result in each business that is reported as a company being acquired on Form S–4 or F–4 being an issuer under section 2(a)(7) of the Sarbanes-Oxley Act. The final amendments to Rule 1–02(d) have been modified to refer any entity that is involved in a combination with a shell company to Rule 15–01(a), which in turn provides rules as to the level of audit assurance required depending on whether the entity in the combination is a predecessor or non-predecessor. Consistent with existing staff guidance and the proposal, an entity that is or will be a predecessor, whether it is part of a shell company transaction or an issuer under the amendments to Form S–4 and Form F–4 that is part of a shell company transaction, will be required to have its financial statements audited by an independent accountant in accordance with the standards of the PCAOB. Consistent with the level of assurance in an IPO involving multiple businesses today, the financial statements of an entity that is not a predecessor that are included in a registration statement or proxy statement filed for a combination with an issuer that is a shell company may be audited in accordance with either the standards of the PCAOB or U.S. GAAS as specified or permitted in the regulations and forms applicable to those entities for the purpose of expressing an opinion thereon. The final rule has been revised from that proposed in order to codify existing staff practice that the predecessor in a shell company transaction that does not involve a SPAC and is not an issuer be audited by an independent accountant registered with the PCAOB. In addition, the final rule refers to “entity” instead of “issuer,” as proposed, in order for the rule to apply to shell company business combinations that are not de-SPAC transactions. All issuers in a de-SPAC transaction would still need a PCAOB-registered audit firm in accordance with section 102 of the Sarbanes-Oxley Act to perform the audit. Further, these amendments that permit U.S. GAAS audits for the financial statements of an issuer that is not the predecessor apply to a small subset of de-SPAC transactions involving multiple target companies where there may be an issuer that is a not a predecessor.

We are not adopting amendments to permit the use of Canadian GAAS in connection with de-SPAC transactions involving a Canadian business. Under current rules, a registrant must meet the MJDS requirements and register on an MJDS form in order to rely on such accommodations. Also, under current rules, a SPAC that satisfies the MJDS-eligibility requirements and is involved in a de-SPAC transaction involving a Canadian business that also meets the MJDS-eligibility requirements once combined is permitted to use Canadian GAAS post-combination if it files on an MJDS form. Moreover, virtually all MJDS issuers provide audit opinions under PCAOB standards, even though they are able to provide audit opinions under Canadian GAAS, so it is unclear whether any Canadian registrants would provide audit opinions under Canadian GAAS even if that were an option at the time of filing the registration statement. MJDS accommodations go beyond the use of Canadian GAAS.

In final Rule 1–02(d), we have deleted the proposed term “financial statements of a company” and replaced it with the term “financial statements of an issuer.” The use of “issuer” rather than “company” will ensure consistency with related provisions in Rule 15–01.

We have revised proposed Instruction 1 to Item 17(b)(7) of Form S–4 and Instruction 4 to Item 8 of Form 20–F by replacing “provide the financial statements required by § 240.15–01 (Rule 15–01 of Regulation S–X)” with “see § 240.15–01 (Rule 15–01 of Regulation S–X),” because the financial statement requirements extend beyond Rule 15–01. We further revised Instruction 4 to Item 8 of Form 20–F by clarifying that it is applicable for filings on Form 20–F filed pursuant to General Instruction A.(d) of this form and for registration statements, so that a shell company would not consider Rule 15–01 when it is filing its annual report in due course before acquiring a business. Also, for this Instruction 4, we revised “shell company that will acquire a business” to “shell company that is combining with a business,” in order for the reference to Rule 15–01 to apply in more structures. Lastly, we have revised each of these instructions to remove reference to the predecessor because the instruction would apply to a non-predecessor as well.

4. Proposed Rule 15–01(b): Number of Years of Financial Statements

Currently, a registration statement in connection with a de-SPAC transaction on Form S–4 or F–4 and a proxy or information statement must include financial statements of the target company for the same number of years as would be required by the target company in an annual report and any subsequent interim periods, which could require three years of comprehensive income, changes in stockholders' equity, and cash flows even if the target company qualifies as an EGC. In contrast, in a traditional IPO under the Securities Act, a registrant that qualifies to be an EGC may provide only two years of these financial statements.

In the Proposing Release, the Commission proposed Rule 15–01(b) in order to align the number of fiscal years required to be included in the financial statements for a business that will be the predecessor(s) in a shell company business combination with the financial statements required to be included in a Securities Act registration statement for an IPO of equity securities. Proposed Rule 15–01(b) provided that when the registrant is a shell company, and the financial statements of a business that will be a predecessor(s) to the shell company registrant are required in a registration statement or proxy statement, the shell company registrant must file financial statements of that business(es) in accordance with §§ 210.3–01 through 210.3–12 and 210.10–01 (Articles 3 and 10 of Regulation S–X) or §§ 210.8–01 through 210.8–08 (Article 8), if applicable, as if the filing were a Securities Act registration statement for the IPO of that business's equity securities. The effect of proposed Rule 15–01(b) would be that, when the registrant filing is a shell company (which would include, but not be limited to, any SPAC), the Forms S–4 or F–4 or proxy statement may include only two years of statements of comprehensive income, changes in stockholders' equity, and cash flows for the business(es) that would be the predecessor when those business(es) would qualify as an EGC and/or SRC if it were doing its own IPO for equity securities.

5. Comments: Rule 15–01(b): Number of Years of Financial Statements

Several commenters supported this proposed rule, noting generally that it would align the number of fiscal years required to be included in the financial statements for a private company that will be the predecessor in a shell company combination with those that would be required for a traditional IPO. No commenters opposed the proposed rule.

6. Final Rule 15–01(b): Number of Years of Financial Statements

Having considered the comments received, we are adopting Rule 15–01(b) largely as proposed, except for certain revisions, in order to align the number of fiscal years required to be included in the financial statements for a business that will combine with a shell company registrant with the financial statements required to be included in a Securities Act registration statement for an IPO of equity securities. We are clarifying that a business that is combining with a shell company registrant, beyond just the predecessor, must comply with the financial statement requirements of Regulation S–X as if the filing were a registration statement for its own IPO by removing the reference to predecessor in this rule. Absent this revision, three years of financial statements for a business that would be an EGC but is not a predecessor may be required, which would exceed the two years required for a predecessor that qualifies as an EGC. We believe that the predecessor and another business combining with the shell company registrant should both be subject to Rule 15–01(b). Further, we are replacing the proposed term “the registrant” with “such registrant” to recognize there may be multiple registrants and promote readability. Also, in the final sentence of the rule, we have revised the phrase “if it were filing a registration statement itself” to delete the word “itself” and replace it with the word “alone”; we believe the term “alone” will more clearly convey the intent of the rule. Last, we added to final Rule 15–01(b), as well as Rule 15–01(c) and (d), “for which audited financial statements are available” to “most recently completed fiscal year” in order to conform to its usage in Item 10(f)(2) of Regulation S–K.

7. Proposed Rule 15–01(c): Age of Financial Statements

In the Proposing Release, the Commission proposed Rule 15–01(c) regarding the age of predecessor financial statements. The proposed rule provided that the financial statements of a business that will be the predecessor to a shell company must comply with the requirements in 17 CFR 210.3–12 (“Rule 3–12” of Regulation S–X) (Rule 8–08 when that business would qualify to be an SRC based on its annual revenues as of the most recently completed fiscal year, if it were filing a registration statement alone) in determining the age of the financial statements of the predecessor business in the registration statement or proxy statement of the registrant.

8. Comments: Rule 15–01(c): Age of Financial Statements

Several commenters indicated support for proposed Rule 15–01(c). No commenters opposed the proposed rule.

9. Final Rule 15–01(c): Age of Financial Statements

We are adopting Rule 15–01(c) largely as proposed, with certain modifications discussed below.

Currently—with respect to companies being acquired that do not meet Form S–3 use requirements and are not subject to the reporting requirements of either section 13(a) or 15(d) of the Exchange Act, which is the case with most target companies in de-SPAC transactions—Form S–4 (under Item 17(b)(7)) requires inclusion of financial statements that would be required in an annual report sent to security holders under 17 CFR 240.14a–3(b)(1) and (2) (Rule 14a–3(b)(1) and (2)), if an annual report is required. In summary, Rule 14a–3(b)(1) and (2) require the inclusion of consolidated audited balance sheets as of the end of the two most recent fiscal years and consolidated audited statements of income and cash flows for each of the three most recent fiscal years prepared in accordance with Regulation S–X. Form F–4 is similar in this respect. The position of the Commission's staff is that the requirement to update target company financial statements in a Form S–4 is based on the obligation of the registrant filing the Form S–4 to update under Rule 3–12 (or Rule 8–08 for a smaller reporting company). Rule 3–12 addresses the age of financial statements at the effective date of a registration statement or at the mailing date of a proxy statement. A registration statement on Form S–1 for an IPO would also require application of Rule 3–12 (or Rule 8–08 for SRCs), regarding the age of financial statements at the effective date of a registration statement or at the mailing date of a proxy statement. However, Rule 3–12 requires application of Rule 3–01(c), which permits reporting companies 45 more days to update annual financial statements when certain conditions are met.

Absent this amendment, the required financial statements of each company being acquired in a Form S–4, because the shell company is a reporting company, would not have the same age requirements as those in the context of an initial registration statement.

Thus, in order to align the age requirements for financial statements for each business involved in a business combination with a shell company filed on Form S–4 or F–4 with those for an issuer in an IPO on Form S–1 or F–1, we are adopting final Rule 15–01(c). Further, we revised the rule to clarify that Rule 3–12 or 8–08 must be applied to each business involved in a business combination with a shell company as if the financial statements were included in an initial registration statement. Based on the Commission staff's experience reviewing filings in de-SPAC transactions and other shell company business combination transactions, Rule 15–01(c) is consistent with existing market practice for the age of financial statements, where they are updated similar to an IPO. We further revised the rule to clarify that the rule applies to any business being acquired by a shell company, and not only a predecessor, that is included in registration statement under Item 17 of Form S–4, in order to ensure that the financial statements of non-predecessors are subject to the same age requirements. Also, in the parenthetical in the final sentence of the rule, we have revised the phrase “if it were filing a registration statement itself” to delete the word “itself” and replace it with the word “alone”; we believe the term “alone” will more clearly convey the intent of the rule.

10. Proposed Rules: 15–01(d), 1–02(w)(1), 3–05(b)(4)(ii), 3–14(b)(3)(ii): Acquisition of a Business or Real Estate Operation by a Predecessor

Currently, the financial statements of a business that is, or will be, the predecessor to a shell company registrant are required in registration statements or proxy statements related to the business combination. Aside from the predecessor, the financial statements of any other businesses that have been, or are probable to be, acquired may also be required. For example, “Shell Company A” and “Target Business B” are part of a business combination and a Form S–4 registration statement is filed. Target Business B, the predecessor, acquired “Company C” before the Form S–4 was filed, so Company C is not another company being acquired by Shell Company A (the registrant) as Company C will have been subsumed into Target Business B before the Form S–4 is filed. The proposed rules and amendments addressed the financial reporting required for Company C in this non-exclusive example.

Commission staff has taken the position that existing Securities Act Rule 408(a) and Exchange Act Rule 12b–20, elicit financial statements of a business ( e.g., “Company C” in the above example) acquired or probable of being acquired by the target business ( e.g., “Target Business B” in the example) in a shell company business combination filed in a registration statement or proxy statement only when omission of those financial statements would render the target business's financial statements substantially incomplete or misleading. The Commission proposed Rule 15–01(d) of Regulation S–X to reduce the judgment required in determining when to include financial statements of a business other than the shell company registrant or its predecessor and instead provide certainty by requiring application of Rule 3–05 or Rule 8–04 of Regulation S–X, aligning with the reporting in an IPO when there is a similar acquisition. These provisions would dictate when the financial statements of a non-predecessor business that has been acquired, or is probable to be acquired, by a shell company registrant or its predecessor should be included in the registration statements or proxy statements related to the business combination.

Since proposed Rule 15–01(d) would require the application of Rule 3–05 or 8–04, which in turn would require application of 17 CFR 210.1–02(w)(1) (“Rule 1–02(w)(1)” of Regulation S–X) in measuring significance, the Commission also proposed amendments to Rule 1–02(w)(1) and a new Rule 15–01(d)(1) to change how significance is measured in a shell company business combination transaction.

The existing significance tests in 17 CFR 210.1–02(w) (“Rule 1–02(w)” of Regulation S–X), as applied to acquisitions involving shell companies where significance would be measured against the shell company registrant, appeared inconsistent with the reasons underlying the sliding scale approach adopted in Rule 3–05 (or Rule 8–04). The sliding scale approach recognizes that certain acquisitions have a greater impact on a company than others and those acquisitions should result in additional financial information about the acquired business. The significance tests in Rule 1–02(w) do not address the scenario when there is both a shell company registrant and a business that is or will be its predecessor. Because a shell company has nominal activity and therefore the denominator for the tests would be minimal, the application of such tests generally result in an acquisition being significant at the maximum level, which suggests that the existing sliding scale for business acquisitions may not be effective in the context of a shell company business combination transaction. In order to address the ineffectiveness of the existing sliding scale in these specific transactions, the proposed amendments to Rule 1–02(w) would require the significance of the acquired business that is not the predecessor to be calculated using the predecessor's financial information as the denominator instead of that of the shell company registrant.

The Commission also proposed Rule 15–01(d)(2) to specify when the proposed Rule 15–01(d)-required financial statements, through application of Rule 3–05 (or Rule 8–04), for a business that is not the predecessor to a shell company, would be required to be filed if such financial statements are properly omitted from a registration, information, or proxy statement under Regulation S–X. Specifically, 17 CFR 210.3–05(b)(4)(i) (“Rule 3–05(b)(4)(i)” of Regulation S–X) provides that financial statements of a recently acquired or to be acquired business may be omitted from a registration or proxy statement when the significance of that acquisition, under the required significance tests in Rule 3–05, is measured at 50% or less. Rule 3–05 further provides that such omitted financial statements must be filed under cover of Form 8–K within 75 days after consummation of the acquisition. A company that is not required to register a class of securities under the Exchange Act is not required to file a current event report, such as Form 8–K, and we are not changing that in our final rules. However, the Commission proposed in Rule 15–01(d)(2) that the financial statements of the business acquired by the shell company or the predecessor that were properly omitted under Rule 3–05 from the previously-filed registration or proxy statement would be required as part of the already-required Item 2.01(f) Form 8–K filed with Form 10 information within four business days of the de-SPAC transaction. The Commission also proposed amendments to Rules 3–05 and 3–14 to refer to Rule 15–01(d)(2) for completeness and to avoid confusion on when such financial statements are due when a shell company business combination transaction is involved.

11. Comments: Rules 15–01(d), 1–02(w)(1), 3–05(b)(4)(ii), 3–14(b)(3)(ii): Acquisition of a Business or Real Estate Operation by a Predecessor

Several commenters expressed general support for proposed Rule 15–01(d) or general support for proposed changes to Regulation S–X. However, each of the commenters who were generally supportive of Rule 15–01(d) and a few other commenters suggested changes to Rule 15–01(d)(2). Specifically, these commenters observed that the proposed rule could accelerate the filing of financial statements of an acquired business in a Form 8–K that have previously been omitted from a registration statement, compared to the timing that would be required after an IPO, and recommended that we conform the timing. After an IPO, a registrant must file the omitted financial statements no later than 75 days after consummation of the acquisition. In contrast, commenters suggested the proposed rule could give the combined company insufficient time to prepare the financial statements of the acquired business because the proposed rule could require the omitted financial statements to be filed sooner than 75 days after the relevant acquisition in cases where the Form 8–K filed in connection with the consummation of the de-SPAC transaction is filed earlier than 71 days after such acquisition.

One commenter recommended “that the Commission address the interaction between proposed Rule 15–01(d)(2) of Regulation S–X and the company's reporting requirements under section 15(d) as it relates to recently acquired businesses (or real estate operations) which are excluded from a registration or proxy or information statement prepared in connection with the de-SPAC transaction.”

This same commenter also recommended that Rule 15–01(d) reference Rule 3–14 for real estate operations the same way the proposed rule referenced Rules 3–05 and 8–04 for businesses so that the acquisition of real estate operations is explicitly addressed.

Several commenters supported, and no commenters opposed, the proposed amendments to Rule 1–02(w)(1) that required that the significance of acquired businesses be measured using the predecessor's financial information as the denominator, instead of the shell company's, because use of the predecessor's financial statements for the denominator should produce results more consistent with the sliding scale approach in Rule 3–05.

12. Final Rules 15–01(d), 1–02(w)(1), 3–05(b)(4)(ii), 3–14(b)(3)(ii): Acquisition of a Business or Real Estate Operation by a Predecessor

We are adopting new Rule 15–01(d) introductory text and (d)(1) and (2), as well as the amendments to Rules 1–02(w)(1), 3–05, and 3–14, substantially as proposed, except for certain modifications discussed below. New Rule 15–01(d) and corresponding amendments more closely align the financial reporting of an acquired business in a shell company business combination transaction reported on Form S–4 or F–4 or proxy statement with that in an IPO by requiring application of Rule 3–05 or 8–04 of Regulation S–X to acquisitions of a business or real estate operation, respectively, by a predecessor to the shell company. They are also consistent with the Commission staff observations that current market practice applies Rule 3–05 (or Rule 8–04) to acquisitions by the business that will be the predecessor.

In the context of a registration statement on Form S–4 or F–4, the acquired business financial statements addressed in Rule 15–01(d) that are filed pursuant to Rule 3–05 do not represent financial statements of a company being acquired that would be a co-registrant in a shell company business combination. For example, the financial statements of a business when its acquisition is cross-conditioned on the acquisition of a predecessor would ordinarily fall under Item 17 of Form S–4 or Form F–4, rather than under Rule 3–05. Judgment may be required in other examples when determining whether the financial statements of a business would be required under Item 17 of Form S–4 or Form F–4 as a “company being acquired” or under the provisions of Rule 3–05 for a significant acquisition.

New Rule 15–01(d)(1) directs registrants to Rule 1–02(w)(1) in order to determine how significance is measured in certain shell company business combination transactions. New Rule 15–01(d)(2) clarifies when and how financial statements for a recently acquired or to be acquired business should be filed.

We have made a few revisions to the final rule in response to comments received and some other revisions to improve the clarity of the final rules. First, consistent with commenters' suggestions, we revised Rule 15–01(d)(2) from the proposal so that when the financial statements of a recently acquired business that is not or will not be the predecessor to the shell company are omitted from a registration statement or proxy statement pursuant to Rule 3–05(b)(4)(i) of Regulation S–X, those financial statements must be filed in a Form 8–K by the later of the filing of the Form 8–K filed pursuant to Item 2.01(f) or 75 days after consummation of the acquisition. This revision does not accelerate the filing of such financial statements when compared to the application of Rule 3–05(b)(4)(i) outside of a shell company transaction.

In response to a comment about the interaction of this rule and section 15(d) of the Exchange Act, which includes requirements relating to periodic reporting on Forms 10–K and 10–Q and current reporting on Form 8–K, the revised rule specifies that a business whose financial statements are omitted from the registration statement in reliance on Rule 3–05(b)(4)(i) will be required to file those financial statements in a Form 8–K.

Next, we have revised Rule 15–01(d) to add references to Rule 3–14 and Rule 8–06 regarding real estate operations, which were inadvertently omitted from the proposal, as noted by a commenter. For similar reasons we have also revised Rule 15–01(d)(2) to change the reference from “recently acquired business” to “recently acquired business or real estate operation.” We reference “real estate operation” in the context of Rule 15–01(d) and not the other rules in Article 15 because a real estate operation can meet the definition of a business under 17 CFR 210.11–01(d) (“Rule 11–01(d)” of Regulation S–X), but the permitted financial statement presentation for an acquired real estate operation (Rule 3–14) is different than that for other acquired businesses (Rule 3–05). Where the rules in Article 15, other than Rule 15–01(d), refer to “business,” such references contemplate a real estate operation.

Unrelated to commenter feedback, we revised the parenthetical in Rule 15–01(d) related to when Rules 8–04 and 8–06 for SRCs will apply to clarify that these rules would apply when the predecessor qualifies as an SRC.

We also made several technical changes to improve the clarity of each of final Rule 15–01(d) introductory text and (d)(1) and (2). In final Rule 15–01(d), in place of the proposed term “when that business,” we have inserted instead the term “when the predecessor.” This change will help clarify which entity's SRC status is being referred to. Also, we have changed the term “itself” to “alone” for the same reasons the same change was made in Rule 15–01(b) and (c) as discussed above.

We also removed from final Rule 15–01(d) references to acquisitions by a shell company, because we determined that the financial statements for acquisitions by a shell company would be required by Item 17 of Form S–4 or F–4 as a “company being acquired” and not required through application of Rule 3–05 or 3–14. Relatedly, we revised Rules 1–02(w), 3–05, and 3–14 so that they pertain to acquisitions by a predecessor rather than an acquisition by a shell company. Lastly, we reorganized some of the language in Rule 15–01(d)(2) to improve the readability of the requirement.

We are adopting the amendments to Rule 1–02(w) largely as proposed, except for two modifications discussed below. Final Rule 1–02(w) provides for the use of the predecessor's financial statements as the denominator in the significance tests, which determine when financial statements are required for an acquired business, instead of those of the shell company registrant. We expect the rule will produce results more consistent with the objective of the sliding scale approach in Rule 3–05 and appropriately differentiate for investors those acquisitions that have a greater impact to the predecessor than others.

In the final rule, we made some technical changes and the modification already discussed above, in relation to final Rule 15–01(d), to remove the reference to acquisitions by a shell company. In the final rule, we also added the terms “consolidated” before “predecessor” and “those of” before “the shell company registrant” as well as eliminated “the subsidiaries consolidated” for clarity. We also added “shell company” before “registrant” in order to clarify which registrant should not be used as part of the significance test.

13. Proposed Rule 15–01(e): Financial Statements of a Shell Company Registrant After the Combination With Predecessor

In recent years, the Commission staff has received questions on whether the historical financial statements of a shell company registrant are required in filings made after a business combination. The Commission proposed new Rule 15–01(e) to allow a shell company, including a SPAC, to exclude the financial statements of the shell company, for periods prior to a business combination that results in the combined entity no longer being a shell company, once the following conditions have been met: (1) the financial statements of the predecessor, as that term is used in financial reporting, have been filed for all required periods through the acquisition date, and (2) the financial statements of the combined entity registrant include the period in which the acquisition was consummated, which would also include the accounting for the business combination.

In the example of a de-SPAC transaction, assuming the first condition is met, the financial statements of the SPAC, as a shell company, would generally no longer be relevant or meaningful to an investor once the financial statements of the registrant include the period in which the de-SPAC transaction was consummated for any filing.

14. Comments: Rule 15–01(e): Financial Statements of a Shell Company Registrant After the Combination With Predecessor

Several commenters were supportive of the proposed rule. One of these commenters expressed the view that shell company financial statements would no longer be relevant or meaningful once the financial statements of the registrant include the period in which the combination was consummated.

Two commenters, however, asserted that the financial statements of the shell company should no longer be required in any filings made after consummation of a transaction because the shell company's financial statements would no longer be relevant or material. Two commenters highlighted an inconsistency between the proposed rule text and the discussion of the proposed rule in the Proposing Release as it relates to one of the conditions for when the shell company's financial statements may be omitted.

15. Final Rule 15–01(e): Financial Statements of a Shell Company Registrant After the Combination With Predecessor

We are adopting Rule 15–01(e) substantially as proposed, except for modifications discussed further below. The final rules reflect our belief that the financial statements of a shell company would be necessary and material to an investor until such time that the combined registrant's financial statements include the period in which the acquisition was consummated.

We disagree with commenters' assertions that the shell company's financial statements would provide no material information prior to the point in time when the financial statements of the combined entity registrant include the period in which the acquisition was consummated. Specifically, we note that the shell company's financial statements may include material information about its equity or outstanding derivative financial instruments. While we understand, as a commenter asserted, that application of Securities Act Rule 408(a) may result in inclusion of the shell company's financial statements in a registration statement because of a determination that they are material, we believe that the new rule appropriately eliminates a determination that could result in the financial statements' exclusion and the related regulatory uncertainty involved in such judgment because we believe the shell company's financial statements would be material. The staff has not objected to the registrant excluding the historical financial statements of the shell company from periodic reports once the financial statements include the period in which the acquisition or recapitalization was consummated. Further, in the staff's experience with reviewing these filings, the registrant has continued to include the historical shell company's financial statements until that time period. Thus, the new rule codifies the existing staff view and current practice.

In response to the comments on the inconsistency between the proposed rule text and the discussion in the Proposing Release, we added “registrant” to “shell company” for clarity that the shell company in this rule represented a registrant. As a registrant, the shell company is required to file financial statements for all required periods through the acquisition date under Exchange Act section 13(a) or 15(d) and rules thereunder.

In final Rule 15–01(e), we have made a change from the proposal to include a provision that has a similar effect as the proposed amendments to Rule 11–01(d) would have had if we had adopted them. This added provision states that if a registrant is to acquire or has acquired a shell company, the financial statements of the shell company are required to be included in any filing that requires the registrant's financial statements, as if the shell company were the registrant for the filing, unless the financial statements of the registrant include the period in which the acquisition of the shell company was consummated. As also discussed below, as a result of this change, it is unnecessary to adopt proposed Rule 11–01(d) which would have had a similar effect.

The final rule will provide clarity as to when the financial statements of a shell company are required after a shell company business combination transaction. The final rule applies regardless of whether the business combination is accounted for by the shell company as a forward acquisition of the business, which may be a private operating company, or as a reverse recapitalization of the business. Under the final rule, the historical financial statements of the shell company will be required in all filings that require financial statements (including registration statements and the Form 8–K with Form 10 information filed following the de-SPAC transaction) filed prior to the first periodic report, such as Form 10–Q, that includes those post-business combination financial statements. For example, under the final rule, registration statements filed before the first periodic report filed with the post-business combination financial statements, such as a registration statement to register the resale of shares issued in connection with a PIPE financing filed shortly after the de-SPAC transaction, will require the SPAC's financial statements.

16. Proposed Rule 11–01(d)

The Commission proposed to amend Rule 11–01(d) of Regulation S–X to state that a SPAC is a business for purposes of the rule. While Rule 11–01(d) states that an entity is presumed to be a business, consideration of the continuity of the SPAC's operations prior to and after the de-SPAC transaction may lead some parties to conclude that the SPAC is not a business. The Commission noted in the Proposing Release that, given the significant equity transactions generally undertaken by a SPAC, the Commission believes the financial statements of the SPAC could be material to an investor, particularly when they underpin adjustments to pro forma financial information in a transaction when an operating company is the legal acquirer of a SPAC.

As a result of the proposed rule, an issuer that is not a SPAC may be required to file financial statements of the SPAC in a resale registration statement on Form S–1.

Further, the proposed amendment to Rule 11–01(d) would change the application of 17 CFR 210.11–01(b)(3)(i)(B) (“Rule 11–01(b)(3)(i)(B)” of Regulation S–X) by allowing the significance of a future acquired business to be compared to the pro forma amounts related to the shell company and target company business combination transaction in filings made after the consummation of the business combination transaction. The impact of such application would be that the shell company's financial statements, including its cash, would be part of the pro forma financial information and would likely increase the denominator in the significance tests compared to measuring the significance of an acquisition against only the target private operating company's financial information. While the Commission did not propose amendments to Rule 11–01(b)(3)(i)(B), the Proposing Release sought feedback on the potential change in its application as a result of the proposed amendments to Rule 11–01(d).

17. Comments: Rule 11–01(d)

Several commenters opposed the proposed amendments to Rule 11–01(d) that would treat the SPAC as a business for purposes of 17 CFR 210.11–01. One commenter, while not specifically referring to proposed Rule 11–01(d), expressed views consistent with support for the rule.

One commenter that opposed the amendments said that the SPAC historical financial statements are not relevant to the ongoing business of the target operating company. The commenter said that the balance sheet of the combined public company will already reflect the impact of the combination of the SPAC with the target operating company. The commenter also said that the proposed amendment would result in significant additional compliance costs while resulting in no substantive additional public disclosure.

One commenter expressed the view that the proposed amendment is contradictory to current Rule 11–01(d)'s requirement to evaluate whether there is sufficient continuity of the acquired entity's operations prior to and after the transaction so that disclosure of prior financial information is material to an understanding of future operations. Another commenter expressed similar views, asserting that, “[i]n a de-SPAC transaction there is no continuity of operations between the SPAC and the surviving company, and the SPAC's revenue producing activities (interest on short term U.S. government securities or money market funds investing in the same) do not continue post-closing and are not material to investors in the surviving company.”

This commenter also said, “[w]hile there is a presumption that a separate entity, such as a SPAC, is a business, none of the attributes identified in S–X Rule 11–01(d)(2) for evaluation of whether a lesser component of a business constitutes a business ( i.e. physical facilities, employee base, market distribution system, sales force, customer base, operating rights, production techniques or trade names) remain after the de-SPAC transaction.”

Current Rule 11–01(b)(3)(i)(B) permits pro forma information to be used in the denominator of significance tests under certain circumstances. This commenter also said that “[t]he use of pro forma financials should only be allowed to the extent they would be permitted for an acquisition in connection with a pending or completed IPO.”

One commenter said that the proposed amendment to Rule 11–01(d) is contradictory to proposed Rule 15–01(e), about which the Proposing Release stated: “the financial statements of the SPAC, as a shell company, would generally no longer be relevant or meaningful to an investor after a de-SPAC transaction once the financial statements of the registrant include the period in which the de-SPAC transaction was consummated for any filing.” The commenter expressed a similar view with respect to pro forma information as the foregoing, stating that the historical financial statements of the SPAC are not necessary for the purposes of the pro forma financial information. The commenter said, “[f]or example, the trust account amounts in the pro forma information significantly differ from actual amounts due to transaction costs and redemptions. Any private investment in public equity (PIPE) transaction is also not reflected in the historical SPAC financials, and much of the SPAC's historical income statement activity is generally eliminated in the preparation of the pro forma financial statements.”

One commenter, while not specifically referring to proposed Rule 11–01(d), expressed views consistent with proposed Rule 11–01(d). The commenter said, “we agree that the pro forma financial information that gives effect to the shell company transaction should be allowed to be used as the denominator in measuring the significance of other acquisitions not involving a predecessor.” The commenter also indicated that the use of pro forma financial information to measure significance should not be limited to acquisitions that occur subsequent to a de-SPAC transaction. The commenter said, “[i]n most de-SPAC transactions there are numerous other contemporaneous transactions occurring that affect the target's capital structure and, as a result, using proforma financial statements for measuring significance can produce a more accurate analysis of an acquiree's significance.”

18. Decline To Adopt Rule 11–01(d)

After considering the comments received, we are not adopting the proposed amendment of Rule 11–01(d), because we agree with a commenter's feedback that it would be contradictory to proposed Rule 15–01(e). In this regard, the proposed amendment to Rule 11–01(d) could require filing of the shell company's financial statements in subsequent registration statements despite Rule 15–01(e) potentially permitting their omission. Instead we are making revisions to proposed Rule 15–01(e) to require that, if a registrant is to acquire or has acquired a shell company, the financial statements of the shell company must be filed, as if the shell company were the registrant for the filing, unless the financial statements of the registrant include the period in which the acquisition was consummated. Accordingly, in structures where another issuer is the legal acquirer of a shell company, that issuer will look to final Rule 15–01(e), rather than Rules 11–01(d) and 3–05, for determining whether financial statements of the shell company are required in filings made subsequent to the transaction. Final Rule 15–01(e) will require financial statements of the SPAC in registration statements filed subsequent to the de-SPAC transaction when the de-SPAC transaction has not yet been reflected in in the financial statements filed by the registrant. In contrast to the proposed rule, the final rule would not require financial statements of the SPAC once the de-SPAC transaction has been reported on in the financial statements filed by the registrant. The final rules reflect our view that the financial statements of the SPAC could be material to an investor.

As highlighted in the Proposing Release, application of the proposed amendment to Rule 11–01(d) that would treat a shell company as a business could have resulted in significance testing of a future acquired business ( i.e., numerator) being measured against pro forma amounts that combine the shell company and target private operating company ( i.e., denominator). Because the proposed amendment to Rule 11–01(d) is not being adopted, the shell company will not be included in the denominator, similar to how proceeds from an offering would not be included in the comparison.

19. Proposed Item 2.01(f) of Form 8–K

Item 2.01(f) of Form 8–K currently requires a shell company registrant to file, after an acquisition, the information that would be required if the registrant were filing a general form for the registration of securities on Form 10 under the Exchange Act. The Commission proposed to revise this item to refer to “acquired business,” rather than “registrant,” in an effort to clarify that the information provided relates to the acquired business for periods prior to consummation of the acquisition and not the shell company registrant.

20. Comments: Item 2.01(f) of Form 8–K

One commenter supported the proposed amendment to refer to “acquired business” instead of “registrant.” Another commenter recommended that we use the term “predecessor,” instead of “acquired business,” in order to avoid potential confusion with acquired businesses that are not the predecessor.

Currently, a Form 8–K filed pursuant to Item 2.01(f) may require three fiscal years of financial statements for an acquired business that is the predecessor to a shell company, while only two fiscal years may be required in the Form S–4 for the de-SPAC transaction for the same company under Rule 15–01(b). For example, an EGC that is not an SRC would need to present an additional year of financial statements within four business days of consummation of the de-SPAC transaction. Several commenters responded to a request for comment that asked whether we should amend the Form 8–K requirement to provide an exception to the required Form 10 type-information so that the financial statements of the acquired business need not be presented for any period prior to the earliest audited period of that acquired business previously presented in connection with a registration, proxy, or information statement of the registrant. Each of the commenters that responded to the request for comment supported the exception, with one commenter stating that it was not clear why an earlier annual period would be required in the Form 8–K filed after consummation of the merger when such information was not considered necessary for an investment decision by the SPAC's shareholders. No commenters opposed such an exception.

21. Final Item 2.01(f) of Form 8–K

We are adopting the proposed amendments to Item 2.01 of Form 8–K, with modifications made in response to comments received. We agree with the commenter's recommendation that we use the term “predecessor,” instead of “acquired business,” in order to avoid potential confusion with acquired businesses that are not the predecessor.

We agree with the comments suggesting that, when the predecessor meets the conditions of an EGC at the time of filing the Form 8–K, the registrant should not be required to present audited financial statements for any period prior to the earliest audited period presented in the predecessor's financial statements in connection with a de-SPAC registration or proxy statement of the registrant. The final rule provides that, when, at the time of filing of the Item 2.01(f) Form 8–K, the predecessor meets the conditions of an “emerging growth company,” as defined in Securities Act Rule 405 or Exchange Act Rule 12b–2, the registrant need not present audited financial statements for the predecessor for any period prior to the earliest audited period presented in its financial statements included in a previously filed registration or proxy statement for the transaction resulting in the loss of shell company status.

22. Proposed Rules 3–01, 8–02, 10–01(a)(1): Balance Sheets of Predecessors

Currently, 17 CFR 210.3–02 (“Rule 3–02” of Regulation S–X) requires that statements of comprehensive income be filed for the registrant and its predecessors. Rules 3–01 and 8–02 and 17 CFR 210.10–01(a)(1) (“Rule 10–01(a)(1)” of Regulation S–X), however, specify that balance sheets be filed for the registrant but do not specifically refer to balance sheets of predecessors. In the Proposing Release, the Commission proposed amendments to Rules 3–01, 8–02, and 10–01(a)(1) of Regulation S–X to refer specifically to financial statements of predecessors (consistent with the provision in current Rule 3–02 regarding statements of comprehensive income).

23. Comments: Rules 3–01, 8–02, 10–01(a)(1): Balance Sheets of Predecessors

One commenter expressed support for the proposed amendments. No commenters opposed the proposed amendments.

24. Final Rules 3–01, 8–02, 10–01(a)(1): Balance Sheets of Predecessors

We are adopting the amendments largely as proposed, with a technical modification discussed below. We do not believe the intent of current Rules 3–02, 8–01, and 10–01(a)(1) is to require a predecessor's statements of comprehensive income without the balance sheets as that would not be considered a complete set of financial statements, which would be inconsistent with Article 3 of Regulation S–X.

These final amendments are consistent with existing financial reporting practices of registrants. We do not expect the final amendments to result in any changes in disclosures.

Finally, we made a technical revision to Rule 8–02 to add “and its subsidiaries consolidated” to “registrant” in order to conform to Rule 3–01.

25. Other Shell Company Matters

In order to deter potential abuses involving shell company transactions, the Commission has adopted various rules and limitations over the years, some of which apply to former shell companies. For example:

• For a person to resell securities initially issued by a shell company in reliance on 17 CFR 230.144, a former shell company must satisfy the requirements of 17 CFR 230.144(i)(2);

• A former shell company may not use Form S–8 until at least 60 calendar days after the company is no longer a shell company and has filed current Form 10 information;

• For three years following the change in shell company status, a former shell company is an “ineligible issuer” under Rule 405 that may not, among other things, use free writing prospectuses for communications during a registered offering or rely on the safe harbor of Rule 163A from section 5(c) of the Securities Act for pre-filing communications; and

• For three years following the change in shell company status, a broker-dealer may not rely on the safe harbors of Securities Act Rules 137, 138, and 139 for research reports regarding a former shell company.

Several commenters asked the Commission to carve out a post-de-SPAC transaction combined company from these and other former shell company limitations and to make certain safe harbors available to the combined company that are not available to former shell companies. Generally, these commenters expressed the view that doing so would more closely align the rules that apply to target companies that enter the public markets through a de-SPAC transaction with the rules that apply to companies that conduct a traditional IPO.

We are not adopting changes to these limitations or to other rules and limitations related to former shell companies that may apply to the combined company at this time. In light of the comments we received and taking into account the rules being adopted herein and market practices that may develop as a result, we believe that further consideration of potential application of these rules and limitations to the combined company is warranted.

V. Enhanced Projections Disclosure

A. Proposed Items 10(b) and 1609 of Regulation S–K

1. Proposed Rules

Current Item 10(b) of Regulation S–K provides Commission guidance with respect to factors to be considered in formulating and disclosing management's projections of future economic performance that applies to all filings made with the Commission. The Commission proposed to amend Item 10(b) of Regulation S–K to expand and update the Commission's views on the use of such projections. The proposed amendments to Item 10(b) continued to state the Commission's view that projected financial information included in filings must have a reasonable basis. To address specific concerns with respect to the format of projections, namely that some companies may present projections more prominently than actual historical results (or the lack of historical results where they have no operations at all) or use non-GAAP financial measures in the projections without a clear explanation or definition of such measures, the Commission proposed amending Item 10(b) to state that:

• Any projected measures that are not based on historical financial results or operational history should be clearly distinguished from projected measures that are based on historical financial results or operational history;
• It generally would be misleading to present projections that are based on historical financial results or operational history without presenting such historical measure or operational history with equal or greater prominence; and

• The presentation of projections that include a non-GAAP financial measure should include a clear definition or explanation of the measure, a description of the GAAP financial measure to which it is most closely related, and an explanation why the non-GAAP financial measure was used instead of a GAAP measure.

Finally, the Commission proposed amending Item 10(b) to clarify that it would apply to a target company's projections when they are presented to investors through the registrant's Commission filings. Pursuant to the proposed amendments, the guidance in amended Item 10(b) would apply to any projections of future economic performance of both the registrant and persons other than the registrant (which would include a target company in a de-SPAC transaction), that are included in the registrant's Commission filings.

The Commission proposed Item 1609 of Regulation S–K, which would apply only to de-SPAC transactions, to require a registrant to provide the following disclosures:

• With respect to any projections disclosed in the filing, the purpose for which the projections were prepared and the party that prepared the projections;
• All material bases of the disclosed projections, all material assumptions underlying the projections, and any factors that may impact such assumptions (including a discussion of any material growth rates or discount multiples used in preparing the projections, and the reasons for selecting such growth rates or discount multiples); and
• Whether the disclosed projections reflect the view of the board or management of the SPAC or target company, as applicable, as of the date of the filing; if not, then a statement regarding the purpose of disclosing the projections and the reasons for any continued reliance by management or the board on the projections.

2. Comments

A number of commenters generally supported the proposed items. In addition, some of these commenters, in response to issues raised in a request for comment in the Proposing Release, indicated that the updated guidance in proposed Item 10(b) should apply to all filings.

In a comment letter that addressed issues raised in a request for comment in the Proposing Release, one group of commenters expressed support for the proposals but stated that “[w]e are opposed to mandating the disclosure of certain financial statement line items ( e.g., revenue, EBITDA [earnings before interest, taxes, depreciation, and amortization], etc.)” and said, “Some of the proposals regarding Item 10(b) of Regulation S–K and Item 1609 . . . should also extend to the investor presentations disclosed as an attachment to the Form 8–K.” These commenters said their analysis and that of others “suggests that the market response to a de-SPAC transaction and financial projections occur at the time of the merger announcement.”

Several commenters addressed the reasonableness of projections made concerning companies with no operating history. One of the commenters who supported the proposed amendments recommended that we adopt an additional provision providing that “if a registrant does not have a history of operations for the basis of the projections, then it is possible to acquire an outside review of the projections as support for the `reasonable' projections.” Another commenter said, “As for the proposed amendments to Regulation S–K on the use of projections, we believe not only that non-GAAP metrics need to be conspicuously highlighted and marked for investor review, but also that disclosures should state succinctly that issuers with no historical operations or completed negotiations for company/asset acquisitions do not have a reasonable basis for projections.”

Another commenter recommended that Item 1609(b) include a requirement to disclose sensitivity testing of the key assumptions underlying the projections.

A few commenters also sought clarification that the staff guidance provided in Questions 101.01, 101.02 and 101.03 of the Compliance and Disclosure Interpretations relating to Non-GAAP Financial Measures (last updated December 13, 2022) will continue to apply, notwithstanding adoption of proposed Item 10(b)(2)(iv).

In response to a request for comment, one commenter stated that we should not require projections to be presented in a separately captioned section of a Commission filing because doing so would “change the purpose” for which the projections were prepared. On the other hand, a few commenters stated that such a requirement would be consistent with current practice and unlikely to lead to significant changes in the information disclosed or create undue burdens on registrants.

In comment letters that addressed issues raised in a request for comment in the Proposing Release, some commenters suggested that Item 1609 should apply to all filings, while one commenter expressed support for limiting the applicability of Item 1609 to de-SPAC transaction filings only. Some commenters who supported Item 1609 applying to all filings emphasized that Item 1609 should apply to all companies that disclose financial projections in Commission filings (and not just to de-SPAC transactions as proposed) in connection with business combinations in which the target is at an early stage and has a limited financial track record and the transaction may involve more significant dilution.

A few commenters indicated that proposed Item 1609(b) is likely to reduce the disclosure of projections in Commission filings but acknowledged that the rules are unlikely to “significantly impact the willingness of parties to De-SPAC Transactions to continue preparing and disclosing projections” because the disclosure of projections is compelled by certain other Federal and State requirements.

A few commenters stated that the requirement in proposed Item 1609(b) to discuss the material bases and assumptions underlying projections, despite the inclusion of a materiality qualifier, is unduly prescriptive, may result in the inclusion of “inputs and assumptions that are not material to an investor's understanding of the projections” and may lead registrants towards a conservative approach of disclosing growth rates or discount multiples in order to protect against future claims that such inputs were material. Another commenter, however, said that “asking for more clarity in assumptions and identifying where they came from strike us as very sensible.”

With respect to Item 1609(c), some commenters indicated that registrants should not have to affirm the validity of projections as of the date of the filing because it would be unduly burdensome and inconsistent with the purpose of the preparation of the projections. The commenters also suggested that the disclosure requirement may result in the need to prepare an updated set of projections, which would be expensive and time-consuming. Two commenters suggested an alternative approach to Item 1609(c) involving several elements. First, they suggested requiring disclosure of “(i) the date as of which the projections were prepared and (ii) the views of the preparer of the projections as of such date of preparation and, if different, the date upon which the SPAC board approved the transaction.” Second, they suggested that registrants should be permitted to “disclaim any duty to update the projections as of a later date except to the extent there is a material lapse in time and change in circumstances.” Third, they suggested “the Commission may seek disclosure confirming whether the projections still reflect management's views on future performance and/or describing what consideration the board gave to obtaining updated projections or a lack of reliance upon the projections.”

Also regarding Item 1609(c), one commenter expressed the view that projections are included in a de-SPAC transaction disclosure document to describe the basis upon which the directors of the SPAC approved the transaction, not to serve as a basis for investors to make an investment decision. The commenter also indicated that “projections are routinely disclosed in proxy statements and registration statements as the basis for fairness opinions issued at the time of the execution of the merger agreement of the public merger, but the SEC has not historically required the parties to the merger to confirm the projections in connection with each filing.”

Some commenters expressed the view that the proposed rule was not sufficiently specific in its use of the phrase “as of the date of the filing” and that the requirement could be interpreted to require compliance with this item in the original filing and all subsequent amendments.

One commenter made a number of suggestions with respect to the disclosure of projections in IPOs of all types, including in de-SPAC transactions. First, the commenter recommended requiring disclosure of management's assessment of the probability of achieving any forecasts provided and the major assumptions underlying all forecasts provided. Second, the commenter suggested that when financial projections are disclosed, to qualify for the PSLRA safe harbor, the directors, management and other affiliates must agree to a lock-up on sales of shares until the combined company has released audited financial statements for its first full fiscal year following the transaction. Third, the commenter suggested requiring disclosure of the track record of the company, the sponsor, or the chief executive officer or chief financial officer for meeting past projections disclosed.

3. Final Rules

We are adopting the amendment of Item 10(b) as proposed and new Item 1609 substantially as proposed, except for clarifying revisions that we discuss below.

With respect to the final amendment to Item 10(b), we note that the rule is Commission guidance that already applies to all filings made with the Commission and this aspect of Item 10(b) precedes the revisions to the rule adopted in this release. We also note that Item 1609 applies only to de-SPAC transactions.

In response to one commenter's opposition to an obligation to present certain specific line items in all projections, we note that the Commission guidance in Item 10(b) does not mandate the inclusion of any specific line item. Instead, the final amendment to Item 10(b) acknowledges that projections have traditionally included certain line items, but registrants are free to determine which line items are appropriate to include in projections.

With respect to the recommendation to revise the rule to allow a company with no history of operations to obtain an outside review of projections, we note that neither Item 10(b) nor Item 1609 prevents companies from obtaining any such outside review.

With respect to the suggestion from a commenter that non-GAAP financial metrics should be highlighted for investor review, we believe the provisions of Item 10(e) already address this concern. With respect to the same commenter's suggestion that we require a statement from the registrant when a target company has no history of operations or a negotiated acquisition that the projections disclosed do not have a reasonable basis, we believe the provisions of Items 10(b) and 1609 and other rules adopted in this release will provide sufficient information about the basis for any disclosed projections.

With respect to commenters' request for clarification that certain staff guidance will continue to apply notwithstanding adoption of proposed Item 10(b)(2)(iv), we confirm that the final rules do not impact the staff's guidance in Questions 101.01, 101.02 and 101.03 of the Compliance and Disclosure Interpretations related to Non-GAAP Financial Measures.

With respect to commenters' responses to our request for comment that we should not require projections to be presented in a separately captioned section of a filing, we note that we have not added such a requirement to the presentation of projections.

In the final rules, we made three technical revisions to Item 10(b). First, in final Item 10(b)(2)(i), we replaced the term “foregoing measures of income” with the term “foregoing measures of income (loss).” Second, in final Item 10(b)(2)(iii), we replaced the term “historical financial measure” with the term “historical financial results.” We believe these changes will enhance clarity and avoid potential ambiguity. Third, we made revisions in final Item 10(b)(2)(iv) to require a description of the GAAP financial measure “most directly comparable” to the non-GAAP measure, rather than “most closely related” (as proposed). We made this change in final Item 10(b)(2)(iv) to create consistency with the terms used in existing Item 10(e)(1)(i)(A) of Regulation S–K, which requires the inclusion of the directly comparable financial measure or measures calculated and presented in accordance with GAAP whenever one or more non-GAAP financial measures are included in a filing with the Commission.

With respect to commenters' views that Item 1609 should apply to all companies that publicly disclose financial projections in Commission filings, we decline to expand the coverage of Item 1609 beyond SPACs since the specialized disclosure requirements in new subpart 1600 of Regulation S–K are intended to only apply to SPAC IPOs and de-SPAC transactions. Item 10(b), as updated in this release, will continue to provide helpful guidance for all companies that publicly disclose projections in Commission filings.

With respect to commenters who expressed concern there could be an uncertain impact on the use of projections under Item 1609, we note that final Item 1609 does not restrict the registrant's ability to disclose projections and is not intended to alter the registrant's determination as to whether or not projections should be disclosed under other Federal or State law requirements. Rather, if a registrant determines to include projections in a filing in connection with a de-SPAC transaction, Item 1609 creates a level of consistency for the presentation of projections that would make the information more useful to investors.

With respect to the recommendation that Item 1609(b) include a requirement to disclose sensitivity testing of the key assumptions underlying the projections, we believe that such a requirement would be inconsistent with the general approach of Item 1609, which does not prescribe a specific format for the projections and does not require specific line items to be included in the projections.

With respect to the comment that the requirement in Item 1609(b) to discuss material growth rates or discount multiples used in preparing the projections is unduly prescriptive and may result in the over-inclusion of certain immaterial information, we note that this requirement includes a materiality qualifier, which makes clear that Item 1609(b) is not intended to capture immaterial information and does not require disclosure of growth rates or discount rates that are not material.

In final Item 1609(b), we have added a materiality qualifier to the requirement to disclose any factors that may impact the material assumptions underlying the projections to clarify that only material factors are required to be disclosed. In final Item 1609(b), we have also made two technical revisions to the proposal in order to improve the clarity of this item and avoid potential ambiguity. First, we have replaced the proposed terms “material growth rates” with the terms “material growth or reduction rates” throughout final Item 1609(b), because projections may involve some line items in financial statements that are projected to increase and others that are projected to decrease. Second, we have replaced the proposed term “discount multiples” with the term “discount rates” throughout final Item 1609(b) to reflect more closely the terminology for the relevant concept that is frequently used by valuation professionals.

With respect to the proposed requirement in Item 1609(c)—to include a statement regarding whether or not projections disclosed in a filing reflect the current views of the SPAC or target company management or board of directors as of the date of filing—commenters expressed concerns that the requirement would be unduly burdensome, may involve an expensive and time-consuming effort to update the projections, and would be inconsistent with the purpose of the preparation of the projections and current market practice. We acknowledge that if the SPAC or the target company determines to affirm that the projections disclosed in a filing reflect the current views of the SPAC or target company management or board of directors, the SPAC or the target company, as applicable, would likely undertake additional analysis with respect to the projections, whether to provide updated projections or otherwise. If the SPAC or the target company determines to state that the disclosed projections do not reflect the current views of the SPAC or target company management or board of directors, we believe the additional burden created by final Item 1609(c) is likely to be considerably less because the level of analysis undertaken, if any, will be minimal as compared to the analysis undertaken to affirm that the disclosed projections reflect the current views of the SPAC or target company management or board of directors. For example, if the target company chooses not to affirm that its projections reflect the current view of management due to a significant lapse of time, we do not believe target company management will update the projections or rerun its analysis in order to make that choice. We believe the required disclosure reflects an appropriate balance between the benefits to investors of this disclosure and the costs of compliance with the rule requirements. The required disclosure should help investors better assess the continued reliability of the projections through the current views of the SPAC or target company management or board of directors. We also note that Item 1609(c) does not impose a duty to update the disclosed projections. Item 1609(c) only requires a statement as to whether or not the disclosed projections reflect the view of the SPAC or target company management or board of directors about its future performance as of the most recent practicable date prior to the date of the disclosure document required to be disseminated to shareholders. We revised Item 1609(c) to replace the proposed terms “state whether the projections” and “disclose whether the target company” with the terms “state whether or not the projections” and “disclose whether or not the target company”, respectively, for purposes of clarity.

In response to commenters who said that the proposed terms “as of the date of the filing” were unclear and could be interpreted to require compliance with this item in the original filing and all subsequent amendments, we are making one change to final Item 1609(c) to improve the clarity of this item and avoid potential ambiguity. We replaced the proposed term “as of the date of the filing” with the term “as of the most recent practicable date prior to the date of the disclosure document required to be disseminated to security holders” throughout final Item 1609(c). This change is intended to clarify that the statement required by Item 1609(c) on whether or not the projections reflect the view of management or the board of directors (or similar governing body) about future performance must be made as of a recent date prior to, and as close as is feasible to, the date of the disclosure document disseminated to security holders. Thus, the Item 1609(c) statement is not required to be made as of the filing date of the initial or preliminary filing and as of each amendment thereto.

For several reasons we discuss below, we are not adopting the alternative approach suggested by two commenters that involved several elements, including: (1) that disclosure should be required that provides the date the projections were prepared and the views of the preparer of the projections as of the date of preparation, (2) that, with certain exceptions, registrants should be permitted to disclaim any duty to update the projections, and (3) that the Commission may seek disclosure confirming whether the projections still reflect management's views on future performance. First, there is nothing in final Item 1609 that prevents the disclosure of the date of the projections or the projection preparer's views. Depending on the facts and circumstances, this information could be material to investors. In addition, we note that, where an outside party is the preparer of a report, opinion, or appraisal that materially relates to any of certain criteria set out in final Item 1607(a), final Item 1607(b)(6) requires a summary of such report, opinion, or appraisal that includes, among other things, a summary of findings and recommendations. Second, as we discuss immediately above, Item 1609(c) does not impose a duty to update the projections disclosed in a filing. Also, as we discuss above in section III.E.3, to the extent a SPAC is concerned that security holders may rely on the projections disclosed in a filing in instances where the SPAC believes security holders should not rely on them, a SPAC could provide supplemental disclosure advising and alerting security holders of this fact, including by noting factors such as the date of the projections (and discussing any staleness issues) and the independence from the SPAC of the third-party that conducted the analysis. Third, we do not agree with the suggestion that having the Commission seek disclosure confirming the ongoing reliability of the projections included in the filing would better ensure that investors have information about the ongoing reliability of those projections than a disclosure rule. On the contrary, registrants will be in a better position to know about the ongoing reliability of projections concerning the SPAC or the target company and to make the related disclosures under final Item 1609 than the Commission, which would need to determine when it may be necessary to request the confirmatory disclosure depending on the particular facts and circumstances of the SPAC or the target company.

For several reasons we discuss below, we are also not adopting the following suggestions of one commenter with respect to the disclosure of projections in IPOs of all types, including in de-SPAC transactions: (1) requiring disclosure of management's assessment of the probability of achieving any forecasts provided, (2) requiring as a condition to qualify for the PSLRA safe harbor when projections are disclosed that directors, management and other affiliates must agree to a lock-up on sales of shares until the company has released audited financial statements for its first full fiscal year following the transaction, and (3) requiring disclosure of the track record of the company, the sponsor, or the chief executive officer or chief financial officer for meeting past projections disclosed. First, we believe that management's assessment of the probability of achieving any forecasts provided would require a high degree of subjectivity and such disclosure would likely not be useful to investors without significant additional disclosure regarding the assessment, including the bases and assumptions that underlie the assessment, which disclosure could be distracting or confusing to investors. We also believe that such disclosure may cause investors to place undue reliance on the probability or projections disclosed. Second, we believe requiring a long-term lock-up as a condition to qualify for the PSLRA safe harbor has potential far-reaching implications for the parties involved and the market that are uncertain. Third, we believe the track records for meeting projections disclosed in prior transactions would not necessarily be relevant to an investor's evaluation of the projections disclosed with respect to the de-SPAC transaction that is the subject of the filing and may not be useful without significant additional disclosure regarding the facts and circumstances of the prior transactions. Such additional disclosure, if added, could become distracting or confusing for investors trying to evaluate the projections disclosed with respect to the subject de-SPAC transaction.

We are amending General Instruction B to Form 8–K to require the information set forth in paragraphs (a) and (b) of Item 1609 in any Form 8–K report or exhibit to such report that relates to a de-SPAC transaction and includes projections that relate to the performance of the SPAC or the target company. One commenter indicated that the market response to a de-SPAC transaction and the disclosed financial projections occurs at the time of the merger announcement, and “[s]ome of the proposals regarding Item 10(b) of Regulation S–K and Item 1609 as discussed above should also extend to the investor presentations disclosed as an attachment to the Form 8–K.” The issue noted by this comment raises significant investor protection concerns, and we are amending the General Instructions to Form 8–K and revising proposed Item 1609(a) in response. Based on the Commission staff's experience, Form 8–K filings in connection with the announcement of a de-SPAC transaction may contain projections in the exhibits to the Form 8–K filings, including in investor presentation materials featuring projections that also have been provided by the SPAC to PIPE investors. These projections may begin to shape investors' decisions concerning the de-SPAC transaction even before a registration or proxy statement in connection with the de-SPAC transaction is filed. We believe investors would benefit from the background and context provided by the application of new Item 1609 to those projections.

Finally, we revised Item 1609(c) to replace the proposed term “board” with the terms “board of directors (or similar governing body)” for purposes of clarity and consistency with other final rules.

VI. The Status of Spacs Under the Investment Company Act

A. Background

The Commission proposed Rule 3a–10 under the Investment Company Act, which would have provided a safe harbor from the definition of investment company under section 3(a)(1)(A) of the Investment Company Act for certain SPACs. As discussed in the Proposing Release, in recent years, the number of SPACs has grown dramatically, and some SPACs and their sponsors have sought to operate SPACs in ways that suggest that SPACs and their sponsors should increase their focus on evaluating when a SPAC could be an investment company. Such developments sparked debate about the status of SPACs as investment companies under the Investment Company Act. For the reasons discussed below, we are not adopting the proposed safe harbor.

Instead, we are setting forth below our views on facts and circumstances that are relevant to whether a SPAC meets the definition of investment company under the Investment Company Act. Like any other issuer, depending on the facts and circumstances, a SPAC may meet the definition of investment company under section 3(a)(1)(A) or 3(a)(1)(C) or both. The views below are intended to assist SPACs in analyzing their status under these sections, particularly with regard to how SPACs may apply the five-factor test that is traditionally used to determine whether an issuer is an investment company under section 3(a)(1)(A) (known as the Tonopah factors).

The Commission received comments that represented a range of views and positions on proposed Rule 3a–10. While some commenters expressed the view that SPACs are not investment companies, others stated that SPACs are unregistered investment companies. Similarly, while some commenters disagreed with the Commission's concern that investors might view SPACs as fund-like investments, other commenters asserted that SPAC shareholders often treat SPACs like investment companies and should be regulated under the Investment Company Act accordingly.

Commenters also held varying views about the need for a Commission safe harbor. Some commenters believed that a safe harbor would provide clarity. Other commenters, including some that believed SPACs are not investment companies, believed the proposed safe harbor was unnecessary. In contrast, some commenters suggested that the proposed safe harbor was unnecessary because SPACs are investment companies that should be subject to the Investment Company Act. Finally, one commenter stated that it welcomed the Commission's efforts to provide clarity but suggested that instead of adopting a safe harbor, the Commission should issue interpretive guidance on the activities that SPACs could undertake that would cause a SPAC to become an investment company.

Commenters also expressed differing opinions about the proposed safe harbor's duration limits. Some commenters stated that the duration limits were unnecessary and potentially harmful to SPACs and their investors. Some of these commenters suggested that if duration limits are to be included in the safe harbor, the duration limits should be lengthened to require SPACs to complete the de-SPAC transaction within 36 months (with no interim target agreement duration limit) to match national securities exchanges' current listing standards. In contrast, other commenters argued that the proposed duration limits were too long, and suggested that the Commission should require a SPAC to announce a de-SPAC transaction within 12 months and complete the transaction within 18 months. In their view, any additional leeway would provide SPACs with special treatment not afforded to “transient investment companies” as permitted under 17 CFR 270.3a–2 (“Rule 3a–2” under the Investment Company Act), and thus would not be consistent with the Commission's approach in that rule. One of these commenters also argued that shorter duration limits would benefit investors by reducing the number of “low quality de-SPAC transactions to which investors are exposed.”

As discussed above, depending upon the facts and circumstances, a SPAC may meet the definition of “investment company” in section 3(a)(1) of the Investment Company Act. Given the fact-based, individualized nature of this determination and because, depending on the facts and circumstances, a SPAC could be an investment company at any stage of its operation such that a specific duration limitation may not be appropriate, we have decided not to adopt proposed Rule 3a–10. Rather, whether a SPAC is an investment company under section 3(a)(1) is based on the particular facts and circumstances, which a SPAC should evaluate both at its inception and throughout its existence. No one specific duration period is the sole determinant of a SPAC's status under the Investment Company Act. The duration of a SPAC, however, should be considered in its analysis of the long-standing factors that are considered in the determination of an issuer's status as an investment company under section 3(a)(1)(A) of the Act, including, for example, a SPAC's historical development and the activities of its officers, directors and employees.

B. SPAC Activities

Typically, a SPAC is organized for the purpose of merging with or acquiring one or more operating companies. The SPAC thereby provides its shareholders with the opportunity to own interests in a public entity that, in contrast to an investment company, will, as a result of the de-SPAC transaction, either be an operating company, or will, through a primarily controlled company, operate such operating company. Nevertheless, a SPAC might engage in certain activities that would raise serious questions about whether it is an investment company under the Investment Company Act, including activities that would affect a SPAC's analysis under the Tonopah factors. By way of illustration, some activities of a SPAC that would raise concerns about its status as an investment company under the Investment Company Act include:

1. The Nature of SPAC Assets and Income

A SPAC may hold, or propose to hold, assets that would weigh heavily in favor of it being an investment company. For example, if a SPAC were to invest in corporate bonds, or not engage in a de-SPAC transaction but instead acquire a minority interest in a company with the intention of being a passive investor, such activities would affect the analysis of the SPAC's status under section 3(a)(1)(C). In this regard, a SPAC that owns or proposes to acquire 40% or more of its total assets in investment securities would likely need to register under the Investment Company Act unless an exclusion from the definition applies. Such activities would also weigh in favor of a SPAC being considered to be primarily engaged in the business of investing, reinvesting, and trading in securities under section 3(a)(1)(A). In addition, a SPAC whose income is substantially derived from such assets would further suggest that the SPAC is an investment company under section 3(a)(1)(A).

A SPAC that holds only the sort of securities typically held by SPACs today, such as U.S. Government securities, money market funds and cash items prior to the completion of the de-SPAC transaction, and that does not propose to acquire investment securities, would be more likely not to be considered an investment company under section 3(a)(1)(C). While U.S. Government securities and money market funds are securities for purposes of section 3(a)(1)(A), asset composition is only one of the factors that should be considered in analyzing a SPAC's status under the Investment Company Act. For example, an issuer that holds these assets, but whose primary business is to achieve investment returns on such assets would still be an investment company under section 3(a)(1)(A).

2. Management Activities

Another significant factor in the analysis of whether a SPAC is an investment company under section 3(a)(1)(A) is the actions of its officers, directors, and employees. For example, we would have serious concerns if a SPAC held its investors' money in securities, but the SPAC's officers, directors, and employees did not actively seek a de-SPAC transaction or spent a considerable amount of their time actively managing the SPAC's portfolio for the primary purpose of achieving investment returns. Such activities would affect the analysis as to whether the SPAC was primarily engaged in seeking to complete a de-SPAC transaction and weigh more in favor of the SPAC being primarily engaged in the business of investing, reinvesting, or trading in securities such that it would be an investment company under the Investment Company Act.

Depending on the facts and circumstances, the management of a SPAC also could cause SPAC sponsors to come within the definition of “investment adviser” in section 202(a)(11) of the Investment Advisers Act of 1940. That section generally defines an investment adviser as any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or any person who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities. The definition generally includes three elements for determining whether a person is an investment adviser: (i) the person provides advice, or issues analyses or reports, concerning securities; (ii) the person is in the business of providing such services; and (iii) the person provides such services for compensation. Each element must be met in order for a person to be deemed an investment adviser.

3. Duration

When evaluating whether it is an investment company under section 3(a)(1)(A), a SPAC whose assets and income are substantially composed of, and derived from, securities should be mindful of the length of time that it has been operating prior to entering into an agreement with a target company and then completing the de-SPAC transaction with that company. While the duration of a SPAC is not the sole determinant of its status under the Investment Company Act, a SPAC's activities may become more difficult to distinguish from those of an investment company the longer the SPAC takes to achieve its stated business purpose. For example, when a SPAC operates without completing a de-SPAC transaction with a target company, particularly where its assets are substantially composed of and its income derived from securities, its duration may indicate that its historical development is that of an investment company even if its representations say otherwise. Similarly, the longer that a SPAC takes to achieve its stated business purpose, the more questions arise as to whether its officers, directors, and employees are more engaged in achieving investment returns from the securities the SPAC holds rather than in achieving the SPAC's stated business purpose. Accordingly, after a certain period of time, a SPAC's historical development and director, officer, and employee activities, together with its asset composition and sources of income may suggest that the SPAC is primarily engaged in the business of investing, reinvesting, and trading in securities.

In evaluating whether a SPAC has reached such a point in time, a SPAC should consider how its duration falls within the framework of the Investment Company Act, the rules thereunder, and past Commission positions, including Rule 3a–2 under the Investment Company Act and the Commission's position regarding Rule 419 under the Securities Act. Rule 3a–2 provides a one-year safe harbor to so-called “transient investment companies” which are issuers that, as a result of an unusual business occurrence may be considered an investment company under the statutory definitions but intend to be engaged in a non-investment company business. In addition, the Commission took the position that accounts of certain blank check companies relying on Rule 419 need not be required to be regulated under the Investment Company Act in part because, among other things, the rule limits the duration of such accounts to 18 months and restricts the nature of investments. A SPAC that operates beyond these timelines raises concerns that the SPAC may be an investment company, and these concerns increase as the departure from these timelines lengthens. Thus, a SPAC needs to be cognizant that, depending on the facts and circumstances, it could be viewed as a fund-like investment if it operates beyond the duration limits contemplated in other similar contexts. Accordingly, we believe that a SPAC should reassess its status and analyze whether it has become an investment company if it has, for example, failed to enter into an agreement with a target company beyond such timelines. ¹¹⁷⁷ When considering its status under the Investment Company Act, a SPAC should consider all relevant facts and circumstances, including, among other things the length of time that it has been operating prior to entering into an agreement with a target company and then completing the de-SPAC transaction with that company.

4. Holding Out

A SPAC that holds itself out in a manner that suggests that investors should invest in its securities primarily to gain exposure to its portfolio of securities prior to the de-SPAC transaction would likely be an investment company under the definition in section 3(a)(1)(A). For example, if a SPAC were to market itself primarily as a fixed-income investment, as an alternative to an investment in a mutual fund, or as an opportunity to invest in Treasury securities or money market funds, it would likely be holding itself out as being primarily engaged in the business of investing, reinvesting, or trading in securities. Accordingly, such a SPAC would likely be an investment company under section 3(a)(1)(A).

5. Merging With an Investment Company

If a SPAC were to engage or propose to engage in a de-SPAC transaction with a target company that meets the definition of investment company, such as a closed-end fund or a business development company, the SPAC is likely to be an investment company under section 3(a)(1)(A) of the Investment Company Act because it would be proposing to be engaged in the business of investing, reinvesting and trading in securities as set out in section 3(a) of that Act. A SPAC that seeks to engage in a de-SPAC transaction with an investment company would, at some point prior to the de-SPAC transaction, be proposing to engage in the business of being an investment company.

C. Conclusion

Depending upon the facts and circumstances, a SPAC may meet the definition of investment company in section 3(a)(1)(A) or 3(a)(1)(C) (or both) of the Investment Company Act. To the extent that a SPAC's activities—including any of those discussed above—may cause it to fall within one or more of these definitions, a SPAC should consider options that would bring it into compliance such as changing its operations, winding down its operations, or registering as an investment company under the Investment Company Act. The Investment Company Act imposes registration, reporting, governance and minimum capital requirements on investment companies. Issuers that meet the definition of investment company but fail to comply with the Investment Company Act's provisions, or otherwise qualify for an exclusion or exemption from the provisions of the Act, could, among other things, be subject to enforcement action by the Commission or to private litigation.

VII. Other Matters

If any of the provisions of these rules, or the application thereof to any person or circumstance, is held to be invalid, such invalidity shall not affect other provisions or application of such provisions to other persons or circumstances that can be given effect without the invalid provision or application.

Pursuant to the Congressional Review Act, the Office of Information and Regulatory Affairs has designated this rule as a “major rule,” as defined by 5 U.S.C. 804(2).

VIII. Economic Analysis

We are mindful of the costs and benefits of these new rules and amendments. The discussion below addresses the potential economic effects of the new rules and amendments, including the likely benefits and costs, as well as the potential effects on efficiency, competition, and capital formation. We have analyzed the expected economic effects of the new rules and amendments relative to the current baseline, which consists of the existing regulatory framework of disclosure requirements and liability provisions, current market practices, and the distribution of participants and their characteristics.

A SPAC is a shell company organized for the purpose of combining with one or more target companies. Like traditional IPOs, SPACs provide target companies with a way to raise capital through public markets. To that end, as noted above, the SPAC process is unique in that the de-SPAC transaction is a hybrid transaction that contains elements of both an IPO and an M&A transaction. Under the current regulatory framework, the SPAC process allows the target company to raise capital through public markets without requiring the same level of disclosure or incurring the same liability as with a traditional IPO. As such, some commenters and academics have expressed the view that, compared to traditional IPOs, de-SPAC transactions raise additional “adverse selection” concerns stemming from information asymmetry and conflicts of interest between SPAC investors and managers that are not fully resolved by market forces.

The final rules include a number of additional disclosure requirements that help address information asymmetries between investors and the SPAC, which will enable investors to make more informed investment and voting decisions. For example, at the SPAC IPO stage, as discussed in detail in the sections below, the rules require disclosures about dilution, compensation, and conflicts of interest, among other things. As another example, at the de-SPAC transaction stage, the rules require disclosures related to the information considered by the SPAC in its assessment of the transaction, such as projections or assessments by third parties, among other things.

The final rules also include several provisions to help ensure that shareholders more consistently receive the full protections of Securities Act disclosure and liability provisions in connection with the de-SPAC transaction. For example, because the target company is effectively an “issuer” of the securities in any registered de-SPAC transaction, the rules require that the target company sign the registration statement filed in connection with the de-SPAC transaction. Because signatories are subject to section 11 liability for material omissions and misstatements, we expect this requirement to increase incentives for targets to ensure the accuracy of the disclosures in de-SPAC transaction registration statements. We are also adopting definitions of “blank check company” for PSLRA safe harbor purposes that would not contain a qualification that the company issues penny stock. As a result, the safe harbor for forward-looking statements under the PSLRA will be unavailable to SPACs and other blank check companies, regardless of whether they would have qualified as an issuer of penny stock. This approach will help incentivize such blank check companies taken to take greater care when making forward-looking statements.

Certain rules we are adopting are intended to align disclosures in de-SPAC transactions more closely to those of traditional IPOs. For example, certain non-financial disclosures regarding a target company that are currently not filed by the company until a Form 8–K, within four business days after the completion of a de-SPAC transaction, will be required to be included in the disclosures that are filed in connection with a de-SPAC transaction (on Form S–4 or F–4, a proxy or information statement, or a Schedule TO). Also, the combined company following a de-SPAC transaction will be required to re-determine its eligibility for SRC status and reflect any change in status in its filings, beginning 45 days after consummation of the de-SPAC transaction.

We are also adopting final rules that apply to shell companies more broadly. Rule 145a deems any business combination involving a reporting shell company and another entity that is not a shell company to involve a sale of securities to the reporting shell company's shareholders. Currently, investors in reporting shell companies may not always receive the disclosures and other protections afforded by the Securities Act at the time when there is a fundamental change in the nature of their investment due to the business combination involving another entity that is not a shell company. In addition, the amendments to Regulation S–X more closely align the financial statement requirements in business combinations between a shell company and a non-shell company with those required in connection with traditional IPOs.

As discussed in section I, market participants have raised concerns that disclosures that currently accompany SPAC IPOs and de-SPAC transactions do not provide investors with adequate information to assess the potential risks of investing in SPACs and the ways in which the SPAC sponsor and other affiliates stand to gain from these transactions. We expect the final rules to elicit information regarding SPAC transactions that is more consistent, useful, and readily comparable. As a result, investors will be able to make more informed voting and investment decisions, resulting in more efficient pricing of securities. Moreover, by reducing information asymmetry and agency costs, we expect the final rules to result in less adverse selection than might otherwise occur at the de-SPAC transaction stage, which should encourage greater investor participation. We further anticipate that, by addressing the liability of various parties in de-SPAC transactions and other shell company business combinations, the final rules will incentivize parties to exercise greater care in disclosing information in connection with relevant business combinations, increasing the protections afforded to investors. Overall, we expect the final rules will enhance the protection of investors and promote market efficiency.

SPACs and their target companies may incur costs related to the public disclosure of the newly required information. The costs will be lower for parties that already provide such disclosures voluntarily in response to market demands. We are also mindful that some aspects of this rulemaking may deter some forms of communications or some transactions that might otherwise be economically beneficial to issuers or investors (or both). We discuss these considerations in more detail below.

We received several comments specifically addressing the economic analysis of the Proposing Release. A number of commenters shared the results of quantitative analyses that addressed SPAC-related issues considered by the proposed rules. We discuss these comments below in our analysis of the costs and benefits of the final rules. We also discuss the anticipated impacts on efficiency, competition, and capital formation and assess several reasonable policy alternatives. Where possible, we have attempted to quantify the economic effects of the final rules. In many cases, however, we are unable to do so because we lack access to data that would allow us to quantify the effects with a reasonable degree of accuracy. Further, even in cases where the Commission has some data, quantification is not practicable due to the number and type of assumptions necessary to quantify certain economic effects, which render any such quantification unreliable. Where we are unable to quantify the economic effects of the final rules, we provide a qualitative assessment of the potential effects.

A. Baseline and Affected Parties

The baseline against which the costs, benefits, and the effects on efficiency, competition, and capital formation of the final rules and amendments are measured consists of the current state of the SPAC market, current practice as it relates to SPAC IPOs and subsequent business combination transactions between SPACs and private operating companies, and the current regulatory framework.

We begin by discussing current market practices related to SPAC IPOs in section VIII.A.1. We then discuss de-SPAC transactions in section VIII.A.2.

1. SPAC Initial Public Offerings

The parties most likely to be directly affected by the final rules regarding specialized disclosure requirements for SPACs in IPOs and other registered offerings are: SPAC sponsors and their affiliates or potential SPAC sponsors intending to organize a new SPAC; current SPAC officers, SPAC directors, or promoters; SPAC investors; and any other market participants whose service or activities involve analysis of the information, data, and disclosures related to SPACs in these offerings.

In addition, if the adoption of the final rules alters the incentives for other parties ( e.g., SPAC sponsors or underwriters) to participate in or be involved with SPAC transactions, we would expect secondary impacts on the prospects or opportunities of private companies that would be potential target companies of such newly-organized SPACs. The final rules also may affect parties who provide advisory or other services to SPACs or SPAC sponsors in connection with SPAC transactions through additional disclosures about the parties and provided services or potential liability.

Table 2 shows the estimated number of SPAC IPOs since 1990. They peaked in 2021, following a similar trend in traditional IPOs. In 2023, there were an additional 31 SPAC IPOs.

The vast majority of SPACs claim either SRC or EGC status, with the majority claiming both. For example, all of the 86 SPAC IPOs in 2022 claimed EGC status and 84 claimed SRC status.

i. SPAC Exchange Listings

SPAC listings have migrated from the over-the-counter (OTC) market to three national securities exchanges: first, NYSE American (formerly, the American Stock Exchange (“AMEX”)); then, the Nasdaq Stock Market (“Nasdaq”) and the New York Stock Exchange (“NYSE”) (see Table 2).

NYSE, Nasdaq, and NYSE American have rules setting forth listing requirements for a company whose business plan is to complete an IPO and engage in a business combination. Among other things, the rules of all three exchanges permit the initial listing of SPACs only if at least 90% of the gross proceeds from the IPO and any concurrent sale by the SPAC of equity securities will be deposited in a trust account. The rules of these exchanges further require that, within three years of the effectiveness of its IPO registration statement (or such shorter period specified in the registration statement under Nasdaq and NYSE American rules or its constitutive documents or by contract under NYSE rules), the SPAC complete a business combination(s) having an aggregate fair market value of at least 80% of the value of the net assets in the trust account excluding certain costs. The rules of NYSE, Nasdaq, and NYSE American require that a business combination meeting this 80% requirement be approved by a majority of the SPAC's independent directors. The rules of all three exchanges also require, if a shareholder vote is held, that a majority of the shares voted at the shareholder meeting approve a de-SPAC transaction meeting this 80% requirement. In addition, the rules of all three exchanges provide that, if a business combination transaction meeting this 80% requirement is approved and consummated, public shareholders voting against the transaction must have the right to convert their shares of common stock into a pro rata share of the aggregate amount then in the trust account net of taxes and working capital disbursements. Under the rules of all three exchanges, if a shareholder vote on a business combination transaction is not held, the SPAC must provide all shareholders with the opportunity to redeem all their shares for cash equal to their pro rata share of the aggregate amount then in the trust account net of taxes and working capital disbursements, pursuant to Rule 13e–4 and Regulation 14E under the Exchange Act, which regulate issuer tender offers.

ii. SPAC Sponsors

SPACs are managed by SPAC sponsors, who spend time and effort managing the SPAC process and searching for a suitable target to complete a de-SPAC transaction. Sponsors also invest in the SPAC and are compensated with a portion of ownership in the combined company that results from the de-SPAC transaction, which means that such compensation will generally only be realized if a de-SPAC transaction occurs. Commentators have suggested that one reason a SPAC might provide a more attractive route to the public markets than a traditional IPO is because the target company may benefit from the leadership and professional advice from one or more individuals composing the SPAC sponsor, including in some cases beyond the consummation of the de-SPAC transaction and into the life of the resulting combined public company. Although the majority of sponsors from 2019 through the first half of 2021 were financial institutions, a sizable fraction (47%) of companies classified as SPACs were self-reported as sponsored by individuals. This percentage has been increasing, as 66% of SPACs with IPOs in the second half of 2021 and 83% in 2022 were sponsored by individuals.

iii. SPAC IPO Underwriters

Underwriters of SPAC IPOs may be affected by the final rules, to the extent they are liable for IPO disclosures or any involvement in de-SPAC transactions. During the period 1990–2022, the average number of named underwriters participating in a SPAC IPO was 2.4. In 2022, the average was 2.1. Although we are not aware of any database listing investment banks that are willing to provide underwriting services for SPACs, there were six investment banks that participated in at least ten SPAC IPOs in 2021 that did not participate in any SPAC IPOs in 2022 or in the first two quarters of 2023. All of these SPAC IPOs were done via a firm commitment underwriting. The average fee charged by SPAC IPO underwriters from 1990–2022 was approximately 5.4% of IPO proceeds. The average underwriting fee has declined from approximately 6.9% in the 1990s and 2000s to approximately 5.2% in the 2010s and 2020s. The average underwriting fee for SPACs in 2022 was 5.1%. SPAC IPO underwriters may provide services to a SPAC or its eventual target company both before and after the completion of an IPO. For example, a SPAC IPO underwriter may help a SPAC identify potential target companies, provide financial advisory services to the SPAC or the target company, or act as a PIPE placement agent. As discussed in the Proposing Release, current SPAC IPO underwriter practice is to defer a portion of the underwriting fee until, and conditioned upon, the completion of the de-SPAC transaction. Prior to 2004, SPAC IPO underwriters typically did not defer their fee until completion of the de-SPAC transaction. During the period 2005–2022, we estimate that the average size of the deferred SPAC IPO underwriting fee was 3.1% of IPO proceeds (3.4% if excluding the cases where there was no deferred fee), or approximately 56% of total SPAC IPO underwriting fees. We have not observed significant differences in the structure or level of SPAC IPO underwriting fees and deferred fees, as disclosed at the IPO stage, when comparing SPACs that have completed a de-SPAC transaction versus SPACs that did not do so.

iv. Public Warrants

Most SPAC IPOs register the offering of a unit composed of a common share, warrants, or fractions thereof, and—in some cases—rights. Currently, SPAC units usually include one common share and one or more fractional out-of-the-money warrants. Public warrants, i.e., those issued to non-affiliated shareholders, give the holder the right to purchase common stock, typically at an exercise price of $11.50, for up to five years after the completion of the de-SPAC transaction.

As SPAC offerings have evolved, however, the dilutive potential of the warrant component of a SPAC offering unit appears to have somewhat diminished. As indicated in Figure 1, across all the years included in Table 1, many SPACs offer units with fractional warrant components. In more recent years (2019–2022, inclusive), the majority of SPACs that have conducted an IPO offered units with fractional warrants representing half a share or less. The result of this trend is that warrant features have in some respects become less dilutive in more recent years. SPAC sponsors also often acquire warrants, with some studies estimating the amount of those acquisitions representing 3–5% of the IPO proceeds.

2. De-SPAC Transactions

At the de-SPAC transaction stage, the primary parties affected by the new disclosure requirements include SPACs, SPAC sponsors, investors (including PIPE investors if any), and target companies. Additionally, the final rules to amend or otherwise clarify the existing liability framework would affect those same parties (and certain individuals at those parties).

As illustrated in Table 3, based on staff analysis of SPAC IPOs that registered a sale of securities between 1990 and 2023, approximately two- thirds (65%) of all SPACs following their IPOs announced a de-SPAC transaction, and about one-half (49%) completed such transactions. It is possible that SPACs currently searching for target companies may still identify target companies, complete de-SPAC transactions, and thereby increase the fractions of SPACs with announcements and completed transactions. This de-SPAC transaction completion rate of approximately one-half is generally consistent with previous research findings (which may have used different ranges or filters for their samples).

Currently, the typical SPAC discloses in its IPO prospectus that it is formed for the purpose of effecting a business combination with one or more businesses. Most SPACs pursue only one target company for a de-SPAC transaction. Of the 583 business combination transactions with operating companies that occurred over the 1990–2022 period involving SPAC IPOs approximately 3% of transactions (17 of 583) involved two or more target companies (15 transactions involved two target companies and two transactions involved three target companies).

i. PIPEs in Connection With De-SPAC Transactions

PIPEs have supported de-SPAC transactions since approximately 2005. However, in some recent de-SPAC transactions, PIPEs have played a larger role than they have historically played, and this has given rise to concern about the potential dilutive effects of PIPEs on SPAC shareholders and how well these dilutive effects might be understood by other investors.

According to a recent study analyzing the 47 registered de-SPAC transactions that occurred between January 2019 and June 2020, the median cash raised through third-party PIPE investors was approximately 25% of the cash raised in the de-SPAC transactions. The same study found that, following these transactions, the median portion of the post de-SPAC company owned by SPAC shareholders including the sponsor was 35% and the median portion owned by the sponsor alone was 12%. Because PIPE investors may receive confidential information with which to make an investment decision (including one-on-one conversations with the target company's management, which may convey soft information that enables PIPE investors to assess management abilities or determine their level of confidence in the management team) and may also engage in extended and detailed due diligence on the SPAC and target company, their participation has at times been considered a benefit to SPAC IPO investors, providing a positive signal of the expected future financial performance of the post-de-SPAC transaction combined company.

As the SPAC market has evolved, so too has the role of PIPEs that support, and in some cases enable, de-SPAC transactions. In 2021, according to one study, approximately 95% of de-SPAC transactions included PIPE financings and the average ($316 million) and median ($210 million) amounts raised in PIPE financings were similar to the average size of the SPAC trust account at the time of the IPO. This may reflect that in more recent SPACs, in addition to enabling larger deals, some PIPEs may provide capital to ensure that a deal that otherwise may fail due to a high redemption rate can proceed to completion, although many PIPE offerings in connection with a de-SPAC transaction still appear to facilitate larger acquisitions rather than replace SPAC share redemptions. In these cases, the ownership stake of the PIPE investors in the combined company may exceed that of the non-redeeming SPAC investors. PIPE investors may, therefore, come to have a larger stake in the combined company than SPAC IPO investors anticipated when making an initial investment. In 2022, this trend may have lessened slightly, with only 71% of de-SPAC transactions including PIPE financing, and the average ($128 million) and median ($92 million) amounts raised in PIPE financings were smaller than the average and median (both $269 million) sizes of the SPAC trust account at the time of the IPO.

PIPEs are typically priced at a discount relative to the market value of the publicly traded securities. For example, one study of PIPE transactions (including but not limited to de-SPAC transactions) indicates that the average discount for PIPE investors is 11.2% (compared to the market value of those securities), and for the subsample of PIPEs that do not include warrants, the average discount is 5.7%. Another study that focused on PIPEs in de-SPAC transactions of SPACs that conducted an IPO in or after 2015 and that completed a de-SPAC by March 2021 estimates that the mean discount for PIPE investors was approximately 20%.

ii. Use of Projections in Connection With De-SPAC Transactions

Item 1609 of Regulation S–K will require certain enhanced disclosures about any projections disclosed in de-SPAC transactions. Hence, Item 1609 will potentially affect preparers and users of financial projections related to de-SPAC transactions, including SPACs, SPAC boards of directors, SPAC sponsors, target companies, both sets of controlling shareholders and management, and current and prospective investors.

Three recent papers discuss the use of projections by SPACs and target private operating companies in de-SPAC transactions. Chapman, Frankel, and Martin (2021) collected data on SPACs with IPO dates from 2015 to 2020. The authors found that 87% (249 out of 285) of de-SPAC transactions were accompanied by at least one forecast. Dambra, Even-Tov, and George (2022) focus on de-SPAC transactions between January 1, 2010, and December 31, 2020. The authors restricted their sample to transactions with a single target and excluded SPACs that delisted before the merger effective date, traded on the OTC market, or focused on the biotechnology industry, yielding a sample of 142 observations. They identified 128 target private companies (90.1%) that provided at least one form of forecast ( e.g., revenue or net income) in investor presentations. Blankespoor, Hendricks, Miller, and Stockbridge (2022) reviewed a sample of 963 SPAC IPOs completed between January 1, 2000, and July 1, 2021. The authors removed companies “that are still seeking a merger target, have liquidated, are foreign, or have not publicly filed their roadshow” and arrived at a sample of 389 SPACs. Of this sample, 312 (80.21%) SPACs provided a revenue forecast. These three studies suggest that the use of projections is common in de-SPAC transactions.

iii. Use of Fairness Opinions

Item 1607 of Regulation S–K will require disclosures related to any report, opinion (other than an opinion of counsel) or appraisal received by the SPAC or the SPAC sponsor from an outside party or unaffiliated representative materially relating to, among other things, the fairness of the de-SPAC transaction to the SPAC, its security holders or SPAC sponsor if the SPAC or SPAC sponsor receives such a report, opinion, or appraisal. Third-party providers of fairness opinions may factor the requirement for these disclosures into how they price their services as well as the types of information included in their reports and opinions. As such, this disclosure requirement may affect SPACs' determination of whether to obtain fairness opinions.

In 2021, only 15% of de-SPAC transactions disclosed that they were supported by fairness opinions, according to one study. In 2022, that proportion increased to 32%. In contrast, a broader study of M&A transactions (not limited to SPACs) found that 85% of bidders obtained fairness opinions.

iv. Changes in Jurisdiction of the Combined Company

In considering the potential economic effects of the final rules, we have taken into consideration elements of both the economic and the regulatory baseline, including consideration of variations between the applicable legal frameworks in the jurisdictions in which SPACs are organized. Table 4 presents information on the jurisdiction of organization for each SPAC that conducted its IPO after 1990 and completed a de-SPAC transaction before 2022. The first two columns state the percentage of SPACs that later had de-SPAC transactions that were originally organized in each of six listed jurisdictions at the time of their IPO. The second two columns state—for each originating jurisdiction—the percentage of combined companies that have their jurisdiction of organization in the listed jurisdictions following a de-SPAC transaction.

While the majority of SPACs that subsequently consummated a de-SPAC transaction remain organized in the same location, Table 4 indicates that, for some SPACs, the jurisdiction of organization of the combined company may change (compared to the SPAC's jurisdiction) in connection with the de-SPAC transaction. As a result, SPACs may face changes in prevailing legal standards that arise from a change in jurisdiction of organization. To the extent that different jurisdictions have different disclosure requirements and provide differing levels of investor protections, the baseline regulatory framework will vary across SPACs and may change upon the de-SPAC transaction. For example, the incremental impact of the minimum dissemination period requirement may vary by jurisdiction.

3. Blank Check Companies

We are adopting final rules that define “blank check company” for purposes of the PSLRA safe harbor provisions regarding forward-looking statements. The final rules will affect SPACs and any other companies that would otherwise meet the Rule 419 definition of “blank check company” except that they are not issuers of penny stock, which currently seek to rely on the PSLRA safe harbor. The final rules also may affect investors and other market participants' access to the informational content of forward-looking statements or potential remedies in the case of material omissions from, or material misstatements in, a prospectus or registration statement or in connection with the purchase or sale of a security.

We estimate that, in addition to potentially affected SPACs, as previously discussed, the final rules also may affect approximately 32 non-SPAC entities that self-identified as blank check companies but would not meet the current definition of “blank check company” under Rule 419 given that they did not self-identify as penny stock issuers.

4. Shell Company Business Combinations

Securities Act Rule 145a and Article 15 of Regulation S–X may affect SPACs and other shell companies (other than business combination related shell companies) involved in business combination transactions. To the extent that Rule 145a transactions are registered, investors would receive disclosures in a registration statement, and registration would result in enhanced liabilities for the registrant and other parties who have liability under Securities Act section 11 with respect to the registration statement. Article 15 of Regulation S–X will affect the financial statements associated with business combinations involving shell companies and thereby affect parties that are typically associated with the preparation, review, and dissemination of financial statements.

Table 5 below illustrates that the proportion of de-SPAC transactions to non-SPAC reporting shell company business combinations has increased due to the recent increase in the number of SPACs entering the market and subsequently merging with target companies. In 2016, only 8% of all targets acquired by a reporting shell company merged with a SPAC. The proportion increased to 76% in 2021 and 65% in 2022.

We estimate that, in addition to existing SPACs that have yet to complete a de-SPAC transaction (as of the end 2022, there were 324 such SPACs according to the figures reported in Table 3), approximately 156 additional existing non-SPAC reporting shell companies may be affected by the final rules. Almost all of these non-SPAC reporting shell companies trade in the OTC market and are smaller than SPACs in terms of market capitalization and total assets. We further estimate that approximately 7.7% (12) of these shells may also be affected by the definition of the term “blank check company” for purposes of the PSLRA in the final rules.

B. Benefits and Costs of the Adopted Rules

1. Disclosure-Related Rules

i. Definitions (Item 1601)

New Item 1601 defines certain parties and transactions to which the requirements of subpart 1600 of Regulation S–K apply. Defining the terms “special purpose acquisition company,” “de-SPAC transaction,” “SPAC sponsor,” and “target company” establishes the scope of the parties and transactions subject to the requirements of subpart 1600 and any other rules, including other final rules, that rely on these definitions and thereby provides both registrants and investors notice of the associated obligations and expectations.

As discussed above, in response to commenters, the Commission is adopting Item 1601 with modifications. We have designed the rules with particular types of parties and transactions in mind and we have endeavored to define these parties and transactions in a way that is consistent with our understanding of current market usage. Overly narrow definitions will generally result in reduced costs and benefits. Conversely, overly broad definitions may introduce unintended costs to market participants without necessarily providing commensurate benefits, as they may be less applicable to settings we are not explicitly contemplating today.

ii. SPAC IPOs and Other Registered Offerings

At the SPAC IPO stage, there are information asymmetries between potential SPAC investors and the SPAC, making it challenging for investors to differentiate between SPACs and other investment options and to differentiate among SPACs. A SPAC sponsor looking to secure IPO investments may have incentives to obscure information that would be relevant to potential investors. Information regarding the specifics of the SPAC that informs investors about the probability of completion of a de-SPAC transaction and the potential payoffs to the investor of such a transaction is important for investment decisions. For example, information about the SPAC sponsor or potential conflicts of interest of the SPAC sponsor may factor into investors' decisions. This information should also benefit investors attempting to differentiate between investments in alternative SPACs.

a. Prospectus Cover Page, Summary, and Other Disclosures (Item 1602)

Item 1602 requires a prospectus filed in connection with a SPAC's IPO to disclose information in plain English on certain features unique to SPAC offerings and the potential associated risks, in addition to the information currently required by Item 501 of Regulation S–K and 17 CFR 229.503(a) (Item 503 of Regulation S–K), on the prospectus cover page and in the prospectus summary, as discussed above. On the cover page, SPACs will be required to disclose, among other information: the proposed timeline of the SPAC to consummate a de-SPAC transaction; redemption terms; compensation (including securities issued to certain SPAC insiders); any actual or potential conflict of interest of the SPAC sponsor, its affiliates, or promoters; and a tabular disclosure of net tangible book value per share, as adjusted, for various redemption levels. In the prospectus summary, SPACs will be required to disclose, among other information, the manner in which the SPAC will identify and evaluate potential business combination candidates, period of time in which the SPAC intends to consummate a de-SPAC transaction and its plans in the event it does not consummate such a transaction within the time period including the timeline and potential extensions, the material terms of the trust or escrow account, plans to seek additional financing (and the impact on shareholders), and details on the impact of compensation and securities issuances on dilution. These additional disclosures are meant to reduce the information asymmetry between the SPAC and potential investors. These disclosures will provide enhanced information for investors to assess their investment and voting decisions and to differentiate between the SPAC and other investment options.

We expect Item 1602 will also reduce SPAC investors' information processing costs. Investors in SPACs vary in financial sophistication and ability to process the information provided in SPAC IPO prospectuses, and the potential benefits may accrue more to investors that are less financially sophisticated. Specifically, because investors are likely to allocate their attention selectively, requiring disclosure regarding important features and associated risks of SPAC investments on the prospectus cover page and in the prospectus summary will increase the likelihood that investors focus on the salient information by making it more noticeable and easier to parse. In addition, the new disclosures in the prospectus summary may further reduce information processing costs by providing information about important SPAC features in plain English and in a concise format.

Item 1602(b)(6) will require tabular disclosure in the prospectus summary regarding the nature and amount of the compensation received or to be received by, as well as the amount of securities issued or to be issued to, the SPAC sponsor, its affiliates, and promoters separately, and the extent to which this may result in a material dilution of the purchasers' equity interests. There is empirical evidence that visualization improves individuals' perception of information. For example, one experimental study shows that tabular reports can lead to better decision-making. Because information about compensation received by and securities issued to SPAC sponsors and others may be important to SPAC investor decision-making, the tabular format of these required disclosures may help those investors (especially those that are less financially sophisticated) more easily process the implications of such compensation or securities issuances thereby potentially improving their investment decisions.

More broadly, Item 1602 will standardize these disclosures across all registration statements filed for SPAC IPOs, which may make it less costly for investors to compare terms across offerings and thereby promote better investment decisions to the extent these lower costs facilitate broader or more comprehensive analysis.

Finally, to the extent the additional disclosures on the cover page and in the prospectus summary would increase investors' awareness of SPAC sponsors' incentives and potential conflicts of interest, they may have an incremental disciplining effect on SPAC sponsors' behavior. For example, if SPAC sponsors face greater scrutiny from investors, they may take additional care in finding and negotiating terms with various parties or take steps to mitigate the extent of any conflict of interests they will have to disclose.

The additional required disclosures on the prospectus cover page and in the prospectus summary may increase compliance costs for SPACs to the extent that they will need to provide more information in their IPO prospectuses than they currently provide. We believe that SPACs are likely to have this information readily available. In addition, based on the experience of the Commission staff reviewing current SPAC filings, SPACs often already disclose some of this information, such as the time frame for the SPAC to consummate a de-SPAC transaction. Thus, we expect that the additional compliance costs resulting from these new items will not be significant.

Investors may also experience additional economic costs from these new disclosures. In particular, it is possible that, by requiring more items to be added to the cover page and the prospectus summary, the salience of the current required disclosures on the cover page and in the prospectus summary may be reduced because they will have to compete with the new required disclosures for investors' attention, a concern voiced by some commenters. In addition, because Item 501(b) of Regulation S–K limits the information on the outside cover page to one page, it is possible that, under certain facts and circumstances, the amount of information required to be included could reduce the readability of the cover page. As a result, some investors may pay less attention to the cover page as a whole. Conversely, it is possible that investors may overweigh the salience of certain disclosures of potential outcomes, such as tentative plans to seek additional financing, potentially assuming them to be statements of greater certainty than intended. However, this potential cost could be mitigated by firms providing clarity as to their assumptions and expectations regarding these disclosures.

b. Dilution (Item 1602(a)(4) and (c))

SPAC investors may experience dilution from various transactions by a number of parties at various stages of a SPAC's lifecycle, and understanding these potential dilutive impacts is important for investment and other decisions. As an example of such a source of dilution, in different transactions over the life cycle of the SPAC, there may be variations in the amount of consideration paid in exchange for shares of the SPAC that will cause dilutive or anti-dilutive effects. One specific example of such variations involves the SPAC sponsors' “promote,” which is typically obtained at a nominal value ( e.g., $25,000, which depending on specific facts and circumstances could result in a per share purchase price of several cents) compared to the SPAC IPO purchase price (typically $10 per share). SPAC IPO shares are also commonly bundled with warrants and rights, resulting in the potential future impacts on net tangible book value per share, which may be dilutive or anti-dilutive of net tangible book value per share depending on whether the exercise price exceeds net tangible book value per share at the time.

The impact of dilution is further magnified by a common feature in many SPACs whereby public shareholders may redeem their shares before the de-SPAC transaction and have their original investment returned plus a pro-rata amount of earnings (typically interest) accrued on the original investment proceeds held in the trust account. Following these redemptions, the non-redeeming IPO investors will own a relatively smaller portion of the SPAC relative to the portion owned by the SPAC sponsor (SPAC sponsor shares are typically not redeemable). This change in the relative portion of shares generally has a dilutive effect because the IPO investors often contribute more per share to net tangible book value (typically $10/share) than do SPAC sponsors (typically several cents per share, as mentioned above).

To put the effects of redemption in context, we present the historical redemption levels below in Figure 2. Figure 2 presents the average realized redemptions from de-SPAC transactions between 2010 and 2022. As shown in Figure 2, typically just over half of the public shareholders opt to redeem their shares on average before the de-SPAC transaction (the average redemption level for de-SPACs from 2010 to 2022 was 55% and the median was 65%), but that the level of redemptions is not consistent over time. For example, in 2022 the average redemption level was 85%, whereas the average in 2020 and 2021 was 38% and 45%, respectively. This time-series variation in average redemption rates is not a result of variation in the average maximum redemption rate, which has remained relatively steady at just above 90% since 2015.

Understanding the sources and extent of dilution, including the impact of potential redemptions, is important for investors to make informed decisions and efficiently allocate capital. As discussed above, the final rules require new disclosures about the sources and extent of expected dilution, which we expect will reduce the information asymmetry between the various SPAC participants by providing information that investors can use to form their expectations about the investment value of a SPAC. Further, we are requiring disclosures that demonstrate the changing effect on dilution that various levels of redemptions might have.

The dilution disclosures in Item 1602(a)(4) and (c) require measuring dilution using net tangible book value per share, adjusted as if the offering (and assumed redemption levels) have occurred and giving effect to material probable or consummated transactions (other than the de-SPAC transaction itself). Net tangible book value per share, as adjusted, captures effects from changes in net tangible book value, as adjusted, in the numerator (for example, returning cash to redeeming shareholders or other transactions that change the amount of assets held in the SPAC trust account), and/or the number of shares outstanding in the denominator (for example, redemptions of shares or other transactions that change the total shares outstanding).

As a simple illustrative example of how net tangible book value per share, as adjusted, reflects various dilutive effects, a hypothetical SPAC might conduct an IPO at $10/share, and sell 80 shares, resulting in $800 in the trust account. The SPAC sponsor might receive promote shares equal to 25% of the IPO shares sold, or 20 shares, bringing the total shares outstanding to 100 (for simplicity, we omit the typical nominal amount SPAC sponsors often pay for their promote). Assuming no other expenses, the net tangible book value per share, as adjusted, in this simplified hypothetical would be $800/100 shares or $8/share. In this hypothetical example, if 75% of public shareholders, representing 60 total shares, were to redeem their shares for $10/share, then $600 would be removed from the trust account and paid to those redeeming shareholders, and the SPAC would be left with $200 in the trust account, 20 shares owned by the public shareholders, and 20 shares owned by the sponsor. In this case, the net tangible book value per share, as adjusted, would be $200/40 or $5/share. This $5/share value can be thought of as reflecting that, of the $10/share invested by public investors in the IPO, only half remains to be invested in the target. It can also be seen to reflect the fact that the SPAC sponsor and the non-redeeming public investors now have an equal ownership (where initially there was a 4:1 ownership ratio), and the SPAC sponsor owns half of the remaining shares.

At the SPAC IPO stage, we expect that the tabular disclosure of net tangible book value per share, as adjusted, under Item 1602(a)(4) and (c) typically may include fewer sources of dilution that factor into such calculation as compared to the number of sources of dilution that factor into tabular disclosure of value. While many SPACs adopt a standard structure and set of governing terms, and we expect the sources of dilution to be broadly similar across SPACs at the IPO stage, we expect the final rules will enable investors to better differentiate the SPAC from other investment opportunities and, where they exist, identify differences among individual SPACs.

Specifically, Item 1602(a)(4) requires registration statements on Form S–1 or Form F–1 filed by SPACs, including for an IPO, to include on the cover page a tabular disclosure of net tangible book value per share, as adjusted, as of the most recent balance sheet date at quartile intervals based on the percentages of the maximum redemption threshold, and the difference between this value and the offering price. This net tangible book value measure must be adjusted “as if” the offering and assumed redemption levels, under Item 1602(a)(4), have occurred and to give effect to material probable or consummated transactions (other than the completion of the de-SPAC transaction itself).

Item 1602(a)(3) also requires a further cover page disclosure of whether the compensation or issuance of securities described in Item 1602(a)(3) may result in material dilution of the purchasers' equity interests. Item 1602(b)(6) requires in the prospectus summary similar disclosure to that of Item 1602(a)(3) but specifies that the registrant should describe the extent (rather than “whether,” as required in Item 1602(a)(3)) to which the associated compensation or issuance of securities may result in material dilution of the purchasers' equity interests.

Item 1602(c) requires that registered offerings by SPACs (other than de-SPAC transactions) provide a description of each material potential source of future dilution following the registered offering ( e.g., a SPAC's IPO). The item also requires tabular disclosure for the same quartile intervals as in Item 1602(a)(4) of the net tangible book value per share, as adjusted, and the natures and amounts of dilution used to determine the values in the tabular disclosure, as well as other information necessary to understand the disclosure, among other things. These new disclosures will provide investors with more detailed information on the potential sources of dilution which may better enable them to form expectations regarding the future value of their securities, including their shares should they opt not to redeem.

We expect these dilution disclosures at the SPAC IPO stage will facilitate investor differentiation between SPACs as an investment and other non-SPAC investments by highlighting the sources of potential dilution and demonstrating their effects for investors to incorporate into their investment decisions. While some of this information is available elsewhere as required by existing disclosures ( e.g., outstanding share information), these dilution disclosures centralize and standardize that information, making it more salient and readily available for investors to understand the material differences in a SPAC in contrast with other investments. Similarly, we expect the additional detail of potential sources of dilution and tabular disclosure of net tangible book value per share, as adjusted, to provide relevant comparison information to investors seeking to differentiate between SPACs. Together, we expect this information will help investors to better understand the effects of dilution on their investments and ultimately to make better-informed investment decisions.

We acknowledge that it is possible the dilution disclosures could be interpreted by investors as conveying more certainty about the sources or effects of dilution (or lack or omission thereof, where those sources are not deemed probable) than is intended by the SPAC. However, the requirement in Item 1602(c) that the SPAC include a “description of the model, methods, assumptions, estimates, and parameters necessary to understand the tabular disclosure” should mitigate this possibility, and provide investors sufficient context to fully understand the disclosure's underlying assumptions and limitations they impose.

We expect the dilution disclosures at the IPO stage to provide valuable information to investors, both to compare between SPAC IPOs, and as a baseline against which they can compare the de-SPAC dilution disclosures, if and when a de-SPAC transaction is proposed. We expect this dilution disclosure to be especially informative for SPAC investors who remain investors in the combined company, as historically they have been greatly impacted by the above-mentioned dilution effects. Further, if investors do not understand the full extent of the dilution, it may not be fully reflected in market prices, and thus we expect that requiring clear and concise dilution disclosures will ameliorate this potential mispricing (especially so for potential warrants or other derivative securities) and improve overall allocative efficiency.

Given the empirical evidence that visualization improves individuals' perception of information and that any dilution caused by redemption may have an adverse effect on investors who choose not to redeem, we expect that the tabular format of these disclosures will help investors (especially those that are less financially sophisticated) more easily process the financial implications of dilution and consequently improve their investment decisions.

Moreover, the required dilution disclosure should provide prospective SPAC investors with information (with the aforementioned benefits of the tabular format) that more accurately represents the dilution that they might experience if they invest in the SPAC, as compared to current Item 506 disclosures with regard to the effect of potential redemptions. SPACs currently disclose the potential dilution pursuant to Item 506, and commonly focus solely on a single maximum redemption scenario. This single threshold may be less useful to investors than the new tabular presentation of quartile intervals of redemption levels because the actual redemptions in connection with a de-SPAC transaction rarely reach the maximum allowable amount. Commenters largely agreed with this assessment, with one commenter noting that “more detailed information on the potential impact of dilution on the value of SPAC shares could help investors better understand the various sources of dilution and the extent to which their investments might drop in value” and that this information could “factor into their decision making.”