May 3, 2022

Proposed SPAC Rules: Implications for Investment Banks

As Broc used to so colorfully put it, we’re posting “oodles” of memos on the SEC’s SPAC proposal in our “SPACs” Practice Area. This recent one from Debevoise caught my eye, because it focuses on the proposal’s significant implications for investment banks involved in SPAC transactions. If adopted in their current form, the rules will expose a bank that served as an underwriter of a SPAC’s IPO to liability as an underwriter for its de-SPAC transaction if the bank “facilitates” that transaction or participates directly or indirectly in it.  This excerpt from the memo says that this proposed rule could have a significant impact on market practice:

The proposed rules, if adopted, will likely lead to significant changes to current market practice. As noted above, an underwriter of the SPAC IPO often serves in additional roles that could be caught up in the rule. De-SPAC transactions, funded with a substantial new equity placement (through a PIPE), are often larger than the original SPAC IPO, and banks would understandably like to participate in that larger transaction. But under the new rules, participation may trigger underwriter liability for the bank with respect to the de-SPAC registration statement.

It is not always obvious whether a bank will be subject to backend underwriter liability. If the bank plays no role other than as underwriter in the original SPAC IPO, then we believe that the fact that a portion of its compensation is payable only if the de-SPAC transaction is consummated should not, by itself, trigger underwriter liability regarding the de-SPAC disclosure. On the other hand, if an underwriter acts as financial advisor to the target company, under the plain language of the proposed rules, the underwriter could be deemed to be “facilitating” the de-SPAC transaction and thus be subject to underwriter liability on the de-SPAC registration statement.

The memo points out that absent major changes in current market practice, the standard protections that would apply to an IPO underwriter would not apply to the de-SPAC transaction. There would be no underwriting agreement, indemnification rights, due diligence process (including legal opinions and auditor “comfort” letters), and no control over the timing of the closing. Furthermore, once a bank that underwrote the SPAC’s IPO decides to cross the Rubicon and serve as its financial advisor for the de-SPAC, it’s unclear if the bank can avoid liability as an underwriter by withdrawing and foregoing its success fee.

John Jenkins