July 12, 2022

SPACs: Dealmakers Call Foul on SEC’s “Clarification” of Underwriter Status

Judging from the comments submitted on the SEC’s SPAC proposal, it’s pretty clear that those in the M&A business aren’t exactly fans of the SEC’s proposed rule changes.  This recent article from Bloomberg Law’s Preston Brewer says that one aspect of the proposal that caused particular discomfort at the annual SPAC conference relates to the SEC’s characterization of its new underwriter liability scheme for SPAC deals as a “clarification” of existing standards:

The most concerning aspect of the Commission’s proposed SPAC rules involves what the SEC describes as a clarification of rules, particularly underwriting rules. Under the clarification, enforcement for rule violations could be retrospective as well as prospective. That prospect has roiled the SPAC industry.

SPAC Conference speakers like Ellenoff are rightly unsettled by the SEC using this language because it connotes that actors should have been conforming to this interpretation all along. Since SPACs have been around since 1993, issuing clarifications of the rules governing their conduct that contradict in essential ways how the SEC has regulated SPACs for all those years feels unfair.

This interpretation also feels disingenuous. The SEC claims that proposed new Rule 140a would “clarify” that an underwriter in a SPAC IPO is also liable for most later financings—whether the underwriter participates directly or indirectly. The transaction would be treated as a distribution of securities of the surviving public entity in a de-SPAC transaction within the meaning of Section 2(a)(11) of the Securities Act.

Of course, in addition to whatever potential enforcement consequences may lurk in the SEC’s pitch that this is a “clarification” of existing requirements, such an action also could add an arrow to the quiver of the plaintiffs’ bar in their efforts to expand the already target rich environment for SPAC litigation.

John Jenkins