Acting Director of the Securities and Exchange Commission’s Division of Corporation Finance, John Coates, provided additional comments on SPACs on April 8, 2021. Acting Director Coates noted the “unprecedented surge” in SPAC activity. He focused his comments on the legal liability that attaches to disclosures made in connection with the de-SPAC transaction and, in particular, to claims that he says have been made by “practitioners and commentators” that “an advantage of SPACs over traditional IPOs is lesser securities law liability exposure for targets and the public company itself.” In particular, the Acting Director pointed to the safe harbor for forward-looking statements and commented on the fact that many commentators note that the availability of the safe harbor, in the case of a de-SPAC transaction, allows for the use of projections whereas, by contrast, the safe harbor is unavailable in the case of IPOs.
The Acting Director then went on to raise various interesting interpretive questions regarding the applicability of the Private Securities Litigation Reform Act (PSLRA). He noted that the PSLRA specifically excludes from the safe harbor statements made in connection with specified types of securities offerings, including: those made in connection with an offering of securities by a blank check company, those made by a penny stock issuer, and those made in connection with an initial public offering. Acting Director Coates points out that the statute does not define “initial public offering” and raises the possibility that perhaps this phrase in the statute may include de-SPAC transactions, as well as other transactions. He then goes on to present a number of different types of transactions in which a company first becomes subject to SEC reporting and becomes “public,” and raises the possibility that the “PSLRA safe harbor should not be available for any unknown private company introducing itself to the public markets. Such a conclusion should hold regardless of what structure or method it used to do so. The reason is simple: the public knows nothing about this private company. Appropriate liability should attach to whatever claims it is making, or others are making on its behalf.”
The Acting Director ends by identifying potential action items that might be taken in this area, including, having the SEC use its rulemaking process to reconsider and recalibrate the applicable definitions in the PSLRA, and having the SEC Staff provide guidance explaining its views on how, or if at all, the PSLRA safe harbor should apply to de-SPACs. He also asks whether it might be useful for the SEC to reconsider the concept of “underwriter” in the context of the new approaches to going public, like SPACs and direct listings, as well as to consider whether guidance is needed about how projections and related valuations are presented and used in the documents for these transactions.
Acting Director Coates notes the value of forward-looking information, while striking a cautionary note regarding the potential for such information to be misleading in certain instances. Coates also cautions against false or misleading claims made in articles and other public commentary regarding reduced liability exposure for SPAC participants. In his comments, he reminds market participants that “any material misstatement in or omission from an effective Securities Act registration statement as part of a de-SPAC business combination is subject to Securities Act Section 11.” Similarly, “any material misstatement or omission in connection with a proxy solicitation is subject to liability under Exchange Act Section 14(a) and Rule 14a-9, under which courts and the Commission have generally applied a “negligence” standard. Any material misstatement or omission in connection with a tender offer is subject to liability under Exchange Act Section 14(e). De-SPAC transactions also may give rise to liability under state law. Delaware corporate law, in particular, conventionally applies both a duty of candor and fiduciary duties more strictly in conflict of interest settings, absent special procedural steps, which themselves may be a source of liability risk. Given this legal landscape, SPAC sponsors and targets should already be hearing from their legal, accounting, and financial advisors that a de-SPAC transaction gives no one a free pass for material misstatements or omissions.”
See the full text of the Acting Director’s comments here.