May 13, 2022

Proposed SPAC Rules: Are PIPE Investors Potential “Underwriters”?

I recently blogged about some of the implications of the proposed SPAC rules for investment banks that underwrite SPAC IPOs.  Under the terms of the proposed rules, these banks could also find themselves subject to underwriter liability in connection with the de-SPAC transaction. Now, this Barnes & Thornburg memo says that it isn’t just the IPO underwriters that might face underwriter liability for the de-SPAC.  As this excerpt explains, hedge funds that provide PIPE offering may find themselves in a similar position:

Of course, hedge funds do not underwrite SPAC IPOs. Nonetheless, hedge funds that provide de-SPAC PIPE financing should be deeply concerned by the aggressive SEC attitude toward participation-based underwriter status that underlies proposed Rule 140a. That attitude is on full display in the proposal’s discussion that follows its description of the proposed rule.

The proposal cautions that Rule 140a and the accompanying list of activities potentially indicating de-SPAC underwriter status pursuant thereto are “not intended to provide an exhaustive assessment of underwriter status in the SPAC context.” In particular, the proposal states that federal courts or the SEC “may find” that a party other than a SPAC IPO underwriter has de-SPAC underwriter status due to “perform[ing] activities necessary to the successful completion” of a de-SPAC transaction. In this connection, the proposal says that a de-SPAC PIPE investor, depending on circumstances, could be deemed an underwriter due to “‘participating’ in a distribution” relating to the de-SPAC transaction.

The memo points out that the provision of PIPE financing is often “necessary to the successful completion” of a de-SPAC transaction.  When considered along with the SEC’s view that the de-SPAC involves a “distribution” of securities, the memo says this language suggests that the SEC may be open to “pushing the ‘underwriter’ envelope to ensnare hedge funds whose only connection to a de-SPAC transaction is investing the PIPE capital needed for its consummation.”

John Jenkins