May 23, 2022

SPACs: Proposed Underwriter Rules Helping to Put the Brakes on Deals

I’ve blogged a couple of times about some of the potential implications of the SEC’s proposed SPAC rules on the investment banks involved in SPAC IPOs & de-SPACs.  Now Bloomberg Law’s Preston Brewer has published an analysis indicating that although the rule proposal hasn’t yet been acted upon by the SEC, it’s already driving many banks out of the SPAC business:

Of the many proposed rules addressing special purpose acquisition companies, Securities Act Rule 140a may prove the most problematic for SPACs. It would make an underwriter for a SPAC’s IPO also liable as an underwriter for the de-SPAC transaction if certain conditions are met—generally, if the underwriter does anything that might be construed as facilitating the de-SPAC transaction or any related financing transaction.

The proposal is causing investment banks such as Goldman Sachs, Bank of America, and Citigroup, which underwrite securities offerings, to rethink their SPAC business. Those underwriters are balking at the prospect of their potential liability—already significant—being extended beyond a SPAC’s initial IPO to subsequent financings conducted by a SPAC, including the de-SPAC merger, even if their later involvement was minimal.

Preston goes on to observe that this reticence on the part of investment banks to sign-up for the new liability scheme isn’t a bug, but likely a feature of the SEC’s SPAC proposal. That conclusion won’t come as a surprise to anyone who’s been keeping an eye on the SEC’s increasingly skeptical view of SPAC deals over the past couple of years.

John Jenkins