DealLawyers.com Blog

Last week, the SEC announced settled enforcement proceedings against Cantor Fitzgerald for its alleged role in causing two SPACs that it controlled to make misleading statements to investors about the status of their discussions with potential acquisition targets ahead of their initial public offerings (IPOs). This excerpt from the agency’s press release summarizes the allegations:

The SEC’s order finds that Cantor Fitzgerald caused the SPACs in their SEC filings to deny having had contact or substantive discussions with potential business combination targets prior to their IPOs. However, the Order finds that at the time of each SPAC’s IPO, Cantor Fitzgerald personnel, acting on behalf of the SPACs, had already commenced negotiations with a small group of potential target companies for the SPACs, including with View and Satellogic, the companies with which the SPACs eventually merged.

Without admitting or denying the SEC’s allegations, Cantor Fitzgerald agreed to a cease & desist order and a civil money penalty of $6.75 million.

What makes this proceeding interesting isn’t really the allegations themselves, but a dissenting statement issued by Commissioner Uyeda covering several SPAC-related enforcement actions. In that statement, the Commissioner argues that SPACs are different than operating companies in ways that matter to deciding when preliminary merger negotiations should be regarded as “material”:

The U.S. Supreme Court in Basic v. Levinson adopted the probability/magnitude test for assessing the materiality of preliminary merger negotiations.  The Second Circuit case cited by Basic for this test involved a small corporation that would be merged out of existence. For this corporation, the Second Circuit stated, and Basic agreed, that its merger was “the most important event that can occur in [its] life, to-wit, its death” and accordingly, information about the merger “can become material” before there is an agreement on the acquisition price and structure.

Unlike the corporation discussed in Basic, each SPAC respondent’s stated purpose was to acquire a target company. The SPAC’s “death” is planned for and sought after from the time the SPAC is formed. Given this distinction, the probability/magnitude test, as applied to information concerning a SPAC’s preliminary merger negotiations, should result in such information not becoming material until a time much closer to the SPAC and target company reaching a binding agreement on the acquisition price and structure. Any discussions prior to such time, even if they are “substantive,” are part of the day-to-day operations of a SPAC.

With the upcoming change in administrations, my guess is that Commissioner Uyeda’s views on this topic may be more influential – and that today’s dissenting statement could well become tomorrow’s policy.

– John Jenkins