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SEC Provides SPACtacular Disclosure Guidance

December 30, 2020, Covington Alert

On December 22, 2020, the Securities and Exchange Commission’s Division of Corporation Finance (the “Division”) issued disclosure guidance applicable to transactions involving special purpose acquisition companies (“SPACs”). CF Disclosure Guidance: Topic No. 11 outlines the Division’s view that certain aspects of SPAC initial public offerings (“IPOs”) and subsequent mergers or business combinations (so-called “de-SPAC” transactions) require enhanced disclosures given their differences from a typical IPO or public company merger. This alert discusses key highlights of Topic 11’s guidance, which all SPACs and private companies considering a merger with a SPAC should consider when preparing disclosure documents in connection with a proposed IPO or “de-SPAC” business combination transaction.

SPAC IPO Disclosure Considerations

Topic 11 highlights the following disclosure considerations relevant to a SPAC IPO:

Potential conflicts of interest

Has the SPAC clearly described potential conflicts of interest applicable to the SPAC’s sponsors, directors or officers (which we refer to collectively as “SPAC insiders”) and how such conflicts will be addressed? Relevant disclosure may address:

  • Fiduciary or contractual obligations to other entities (including other SPACs)
  • Potential targets in which any SPAC insider or its affiliates have an interest
  • Securities ownership of SPAC insiders (including securities acquired in the SPAC formation process) as well as the pricing of such securities, and how this pricing compares to the public offering price of shares to be sold in the IPO
  • Any compensation arrangements that may create misaligned incentives (e.g., if the SPAC fails to consummate a business combination transaction, some or all of the securities held by SPAC insiders may become valueless)
  • Compensation for services to the SPAC, including any compensation contingent upon a successful business combination

Negotiating power

Has the SPAC clearly described the specified time frame in which it must complete a business combination and how this time pressure might impact negotiations with potential acquisition targets? Relevant disclosure may address:

  • Any divergence between the financial incentives of SPAC insiders from the interests of public shareholders
  • Scope of losses SPAC insiders could incur if the SPAC does not complete a business combination
  • Amount of control that SPAC insiders and their affiliates have over approving a business combination
  • Ability of the SPAC to amend its governing documents to facilitate a business combination or to extend the business combination deadline
  • Prior experience of SPAC insiders and their affiliates with successful or failed business combination transactions

Underwriter-plus role

Has the SPAC disclosed any supplemental services to be provided by the underwriters, such as identifying targets, providing financial advice or acting as placement agent in a concurrent private placement? Relevant disclosure may address:

  • Fees payable and whether such fees will be paid in cash or otherwise
  • Whether payment for supplemental services will be conditioned on the completion of a business combination
  • Any conflict of interest the underwriter may have in providing such services in light of any arrangement to defer underwriting compensation

Additional sales of securities

Has the SPAC clearly explained how shares sold in the IPO may have terms that differ from other shares issued or to be issued by the SPAC? Relevant disclosure may address:

  • Differences between the rights that attach to SPAC insider shares and the rights that will attach to shares to be sold in the IPO
  • Whether the SPAC has sought or plans to seek additional financing and the terms of such financing, including whether affiliates may participate
  • Terms of any forward purchase agreement, including whether it is irrevocable, and any potential dilutive impact on other shareholders

SPAC Merger Disclosure Considerations

Topic 11 also highlights some disclosure considerations relevant during de-SPAC transactions:

Additional financing

Have the terms of any additional financing necessary to complete the business combination transaction been clearly described? Relevant disclosure may address:

  • Pricing and terms of financing as compared with pricing and terms of IPO shares
  • Whether SPAC insiders or their affiliates will participate in the financing
  • If financing will include convertible securities, the material terms for conversion and any material impact on the beneficial ownership of the combined company

Potential conflicts of interest

Have SPAC insiders’ potential conflicts of interest and how such conflicts will be addressed been clearly described? Relevant disclosure may address:

  • Method of identification, evaluation and selection of a target, including the role of the board of directors, the negotiation process, the consideration to be paid and other material terms of the transaction
  • Assessment of any conflicts of interest identified as well as any waiver of the SPAC’s conflict of interest policy
  • Any interest SPAC insiders or their affiliates have in the target
  • Benefits to be realized by SPAC insiders or their affiliates upon consummation of the business combination transaction, including compensation, return on investment or continuing relationship with the combined company
  • Total percentage ownership SPAC insiders and affiliates may hold in the combined company

Deferred compensation

Have the terms of any deferred compensation payable to the IPO underwriter been clearly described? Relevant disclosure may address:

  • Fees payable upon completion of the business combination transaction, including the amount of fees contingent upon a successful transaction
  • Any supplemental services provided by the underwriter, compensation for such services and any conflict of interest the underwriter may have had in providing such services in light of deferred underwriting compensation

If you have any questions concerning the material discussed in this client alert, please contact the following members of our Securities and Capital Markets practice.

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