SECURITIES CORNER

Recently, the SEC approved a set of new rules (the “Rules”) that will greatly change the disclosure and liability requirements that govern SPACs, and de-SPAC transactions. According to the SEC, these rules are aiming to "protect investors by addressing information asymmetries, misleading information and conflicts of interest in SPAC and de-SPAC transactions."

 

A Special Purpose Acquisition Company (SPAC) is a shell or blank check company that, through a public offering (IPO) process, raises capital to merge with a target private company (the “Target”). Once a Target becomes identified and its merger with a SPAC takes place, the private target company becomes a publicly traded one, or, in other words, a SEC-reporting company (“de-SPAC transaction”). 

 

The finalized Rules, which will become effective 125 days after publication in the Federal Register:

 

While in 2020 and 2021 the SEC saw a spike in SPAC IPO filings, there was a significant decline in 2022 with only 86. The SPAC trend continued to cool in 2023, with 21 firms that were taken public via SPACs went bankrupt. Since the SEC views SPACs as an alternative method of conducting an IPO, these Rules will affect SPACs, shell companies and the use of projections in SEC filings while preventing another resurgence of SPACs. 

The SEC recently approved rules expanding the definition of "dealer" under the Securities Exchange Act of 1934. The SEC identified market participants that it believes engage in liquidity providing activities while trading in their own accounts similar to those performed by “dealers”, and despite a significant share of market volume, do not need to register with the SEC. These new “dealers” will include any person with at least $50 million in total assets that exhibits a regular pattern of providing liquidity to other market participants by either: 1) regularly expressing trading interest that is at or near the best available prices on both sides of the market for the same security and that is communicated and represented in a way that makes it accessible to other market participants, or 2) earning revenue primarily from capturing bid-ask spreads, by buying at the bid and selling at the offer, or from capturing any incentives offered by trading venues to liquidity-supplying trading interest. The new rules bring certain proprietary trading firms and private funds, including hedge funds and high-speed traders, within the definition of securities dealers that had previously been exempt based on the “trader” exception.  

These firms will now be required to register as members of the Financial Industry Regulatory Authority. Members must meet certain reporting, recordkeeping and minimum capital requirements that previously did not apply to these firms. The purpose of the change is to require firms acting like dealers to register as dealers, thereby protecting investors and promoting market integrity, resiliency, and transparency. The new rules include exemptions for central banks, sovereign entities, and international financial institutions, as well as indicate that pension funds do not fall within the definition, although there is no specific exclusion.

The approval was divided amongst the SEC Commission, with one dissenting member describing the change as a “war on private funds” and an overreach of SEC oversight. Despite these concerns, the SEC estimates fewer than 16 private funds will be affected by the new registration requirements. Uncertainty remains around the reach and impact of the new rules and discussions between SEC staff and market participants should be expected; however, the new rules will raise the regulatory risk for at least some private funds.