As we all know, the new SPAC rule has been released and it clocked in at a whopping 581 pages. That’s a lot of words to try to untangle and summarize. And if your eyes glaze over when you ask a lawyer but they start throwing out things like “rule numbers” and securities acts, well, we’ve got the solution for you.

In the spirit of Jeremy Irons’ character “Dick Fuld”, in the movie Margin Call, who said, “Please, speak as you might to a young child, or a golden retriever”, we’ve attempted a short summary of the key takeaways.

Additionally, at the bottom of this article are links to some of the thought pieces many of the SPAC lawyers have put out recently on the new SPAC rule.

SPACs as Investment Companies under the ’40 Act.

NOTHING ADOPTED.  The SEC took no action on the 1940 Act proposal after all – nothing has changed (and it’s still not clear the SEC had legal power to change this to begin with).  Bottom line, it appears the SEC has backed-off on this one  and it remains that the typical SPAC is simply not an “investment company” under the ’40 Act. Credit to all the law firms and American Bar Association writing comment letters on this issue.

Defining Banks as Underwriters.

NOTHING ADOPTED.  The SEC did not adopt the proposed definition of “underwriter” and therefore, nothing has changed. However, again, it’s not clear the SEC had legal power to change this to begin with.  The consensus among lawyers is that after reviewing the discussion on the issue in the release, the issue may be decided by the courts, which may rule inconsistently with the SEC’s commentary.

There is a pending case in the Delaware Court regarding the Arrival deal which will weigh in on whether the advisors on the transaction participated as “underwriters”. The outcome of this suit should give additional clarity, but it should be noted that the suit was filed opportunistically by a plaintiff based on the original proposed rule. Ironically, this could work in SPACs favor if the judge decides that the banks in question functioned as “advisors” and not as “underwriters” to the DeSPAC transaction.

Eliminating Applicability of Forward-Looking Safe Harbor

ONE SAFE HARBOR ELIMINATED – OTHERS REMAIN. The SEC did adopt a new definition of “blank check company” but there seems to be a dispute among the SEC commissioners themselves as to whether they even have the power to do this. More importantly, the law firms don’t seem to think this is a big deal and the SEC affirmed that other safe harbor protections remain available. This one elimination could be seen as a boon to plaintiff lawyers, based on the initial interpretation of the law firms. However, this never stopped plaintiff’s from bringing lawsuits in the past!

Projections

RULES ADOPTED BUT THE SEC NEVER PROPOSED BANNING PROJECTIONS TO BEGIN WITH – This has been a false narrative, but it’s easy to see why. It’s a confusing topic! However, in proposed (and existing) Item 10 – the SEC states that it encourages the use of management’s projections presented on a reasonable basis!  The SEC even acknowledges that in the DeSPAC transaction the projections are available to everyone – but not in regular-way IPOs, which make projections available only to a select few important clients of the underwriters. Nonetheless, the SEC emphasizes that SPAC projections must be reasonable.

Other Disclosures and Requirements

RULES ADOPTED THAT TARGETS MUST FILE THE REGISTRATION STATEMENT. This, in particular, felt pretty benign – many of the law firms point out that at times the operating company was filing a registration statement anyway.

RULES ADOPTED FOR MORE DISCLOSURE. Here are two examples where the SEC abandoned Aristotle’s idea of treating “like for like” and let the academics prevail. Two points:

De-SPAC transaction disclosure will need to:

• • state exactly how each board member voted (not required in other deals);  and
  • provide disclosure regarding the material dilutive effect of compensation and security issuances to the SPAC sponsor and affiliates. Plus, the dilution based on percentages of the maximum redemption threshold are required on the outside front cover of the prospectus and the prospectus summary (dilution calculations in regular-way IPOs are not required to be on the cover).

These are just some main takeaways, but for those that wish to dig a little deeper and read up on what the law firms think, we’ve provided some links below (in alphabetical order).

Happy reading!

Davis Polk & Wardwell LLP

Goodwin Procter LLP

Kirkland & Ellis, LLP

Latham & Watkins LLP

Loeb & Loeb LLP

Paul Hastings LLP

Sidley Austin LLP

Skadden, Arps, Slate, Meagher & Flom LLP

Vinson & Elkins L.L.P.

Winston & Strawn LLP