The Special Purpose Acquisition Company, or SPAC, boom has cooled. Cooled in the sense that in the years 2020 and 2021 we saw 248 and 613 SPAC initial public offerings, or IPOs, and in 2023 we saw 31 SPAC IPOs.[1] Yet today’s rule is as needed as ever.

The Commission is not seeking to regulate a bubble or opine on the merits of a rise in SPACs. Rather, the Commission and its staff have worked to put forth a rule that reduces incentives for financial engineering and arbitrage. Further, there are many asymmetries in terms of investor protections between a traditional IPO and a SPAC transaction.[2] Today’s rule seeks to reduce those asymmetries so that investor protections are not significantly reduced on one path to the public markets versus another.

The statements of my fellow Commissioners and the staff provide a detailed overview of how the rule will operate, and have provided an overview of the multi-stage structure of a SPAC IPO, de-SPAC transaction, and the intervening time when the shell company is in search of a private operating company. Today, I will focus my remarks on two discrete aspects that should be considered in the lifecycle of any SPAC. First, I will discuss investment company analyses, an issue relevant to the post-SPAC IPO shell company holding investor money. Second, I will discuss statutory underwriters in the context of a SPAC transaction.

Investment Company Status

In the rule it adopts today, the Commission reiterates the existing test for determining whether an entity meets the definition of investment company. Rather than setting, among other things, a prescribed timeframe, the final rule continues to rely on a more principles-based facts and circumstances analysis.[3] Under this test it is certainly possible that SPACs that have existed to date do not meet the definition of the investment company under the 1940 Act. I believe it is likely that certain SPACs satisfy that definition, and I urge all participants in a SPAC transaction to carefully consider whether the particular features of the SPAC – whether considered alone or in aggregate – cause the SPAC to meet the definition of investment company. As the release reiterates, each day a SPAC exists increases the likelihood that the SPAC is, in fact, an investment company, particularly once the SPAC exceeds the existing twelve-month grace period already afforded to “transient investment companies.”[4] SPAC sponsors who have proven unable to complete a de-SPAC transaction expeditiously should either register as an investment company, as required by the 1940 Act, or return investors’ money.

Underwriters

Underwriters are important gatekeepers for the public markets. This is, at least in part, because they are responsible under section 11 of the Securities Act for the content of registration statements. That liability helps incentivize them to conduct thorough due diligence and to ensure the accuracy of those registration statements.[5] As a court put it many years ago “the purpose of Section 11 is to protect investors. To that end the underwriters are made responsible for the truth of the [offering documents]. If they may escape that responsibility by taking at face value representations made to them by the company’s management, then the inclusion of underwriters among those liable under Section 11 affords the investors no additional protection.”[6]

The applicability of that investor protection in a SPAC transaction through potential statutory underwriter status is as important today as it ever was, even though the rule today did not adopt the specific language prescribing that an underwriter for a SPAC IPO that participates in, or takes certain other steps to facilitate, the de-SPAC is automatically an underwriter in the de-SPAC transaction as well. Instead, participants in SPAC transactions should be aware that the analysis under the existing Securities Act provisions is dependent upon the facts and circumstances. They should consult existing statutory provisions and case law to conduct an analysis of whether they may be an underwriter given the activities they are conducting. And those participants conducting such analysis should be aware that, as the adopting release states, a de-SPAC is a distribution of securities and, under the statute and existing law, parties who are involved in the distribution of securities may become statutory underwriters and assume all attendant liabilities and responsibilities.[7]

Conclusion

Over the past few decades, there have been many instances when the Commission has reviewed the public registration process and has engaged in rulemaking related to accessing the capital markets. Throughout all of those experiences, one simple fact remains the same – the markets, and the people who participate in those markets, value the public registration process. It is the best method we have for valuation of a private company that has not been subject to the rigors of public financial statement reporting, which is a time when the information asymmetry between the company and the investing public is at its greatest.[8] The reliability of public financial reporting informs the fairness and efficiency of the U.S. capital markets.[9] It would be easier, according to some, if there were fewer requirements, less liability, less due diligence. However, the U.S. public markets remain the envy of the world and a beacon for the American economy precisely because of the thoroughness and reliability of the processes we have in place allowing for companies to access the public’s hard-earned dollars. We cannot sacrifice the mechanisms, incentives, and protections that have been developed for nearly a century, because to do so would be to undermine the capital markets that have fueled past American successes – and will continue to fuel the next century of success. Today’s rule ensures that we do not.

I want to thank all of the staff at the Commission who worked on this rule, including those within the Division of Corporation Finance, Division of Investment Management, Division of Economic and Risk Analysis, Office of the Chief Accountant and the Office of the General Counsel.