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2023 was a bad year for SPACs. 2024 may be even tougher, if the SEC has anything to say about it. On Wednesday, the agency approved rules intended to increase investor protections around SPACs and bring their treatment more in line with that of traditional IPOs.
Special purpose acquisition companies, or SPACs, are companies that go public through IPOs with the intent of merging with or acquiring private companies, known as target companies. The target companies can then be publicly listed without having to go through an IPO. SPACs, which allow companies to go public more quickly than ordinary IPOs, became popular in 2020 and 2021.
But the “SPAC boom” ended in 2022 as the market worsened, and the SEC first proposed the tighter regulations it just released. In 2023, only 31 SPACs went public, compared with 613 in 2021.
SEC Chair Gary Gensler, a longtime critic of SPACs, hailed the new regulations as a means of safeguarding investors.
“Just because a company uses an alternative method to go public does not mean that its investors are any less deserving of time-tested investor protections,” he said in a statement.
The new rules, which will be effective 125 days after they’re published in the Federal Register, require SPACs to disclose additional information about conflicts of interest, sponsors, sponsor compensation, and dilution risk, among other items. They also remove the “safe harbor” protections that shielded SPACs from liability over their projections.
The rules make the treatment of a “de-SPAC”—a SPAC’s merger with a target company—more similar to that of a traditional IPO. A new provision, Rule 145a, states that any deal combining a shell company—including a SPAC—and a non-shell company will be considered a sale under the Securities Act.
During de-SPACs, target companies will now need to sign Securities Act registration statements, giving them greater liability for “false or misleading disclosure,” Gensler said. And target companies will need to disclose their boards’ opinions on a de-SPAC.