Last week, Holland & Knight’s experienced Corporate, M&A and Securities Team dove into the details of the SEC’s recent rule proposal covering enhanced disclosures for SPACs and de-SPAC transactions. 1 As detailed in the post, if the proposed rule is ultimately approved, it will impact the SPAC market in several, significant respects. In today’s post, we tackle some of the litigation and enforcement risks associated with a particular aspect of the proposal: the expanded definition of “distribution” for the SPAC IPO underwriter.
Then-Acting Director of the SEC’s Division of Corporation Finance John Coates released a statement on April 8, 2021, covering the “unprecedented surge in the use and popularity” of Special Purpose Acquisition Companies (SPAC). In that statement, Coates foreshadowed a key aspect of the SEC’s recent SPAC rule, namely the enhanced focused on underwriters:
Are current liability protections for investors voting on or buying shares at the time of a de-SPAC sufficient if some SPAC sponsors or advisors are touting SPACs with vague assurances of lessened liability for disclosures? Do current liability provisions give those involved – such as sponsors, private investors, and target managers – sufficient incentives to do appropriate due diligence on the target and its disclosures to public investors, especially since SPACs are designed not to include a conventional underwriter at the de-SPAC stage?
Coates openly questioned whether “the SEC should reconsider the concept of ‘underwriter’ in these new transactional paths[.]” The SEC apparently didn’t wait for the proposed rule to start targeting the SPAC underwriter industry. Around the same time as Coates released his statement, news outlets reported that the SEC’s Division of Enforcement had opened an inquiry into certain underwriters’ practices in the SPAC space. Later in 2021, SEC Chair Gary Gensler presaged certain aspects of the proposed rule involving “gatekeeper obligations” – such as auditors, brokers and underwriters. According to Gensler, these gatekeepers “should have to stand behind and be responsible for basic aspects of their work.”
As SPACs, target companies, their respective officers and directors and other market participants digest the commission’s 327-page proposed rule covering enhanced disclosures and rules for SPAC and de-SPAC transactions, this SECond Opinions Blog explores the collateral implications for SPAC IPO underwriters, including increased liability exposure and possible defense limitations. Proposed New Rule and Key Implications
The term “underwriter” is defined under Section 2(a)(11) of the Securities Act of 1933 (Securities Act) as “any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking . . . .” 2 Although broadly defined, the definition does not appear to capture activities by any party in connection with the de-SPAC portion of a business combination, where there are no traditional underwriters.
While Gensler alluded to Aristotle in his statement on the proposed rule release to “[t]reat like cases alike,” the commission’s proposed rule was explicit about the aim: “Although the timing of a […]