Happy new year! To complete the year- and term-end surge, just before Christmas, the Corp Fin staff issued CF Disclosure Guidance: Topic No. 11 regarding disclosure considerations for special purpose acquisition companies in connection with their IPOs and subsequent business combinations, often referred to as de-
Very loosely, SPACs are companies with no real operations formed for the purpose of raising capital in an IPO and placing the offering proceeds into a trust or escrow account to be used to acquire an operating company. Essentially, they act as vehicles for the acquired operating companies to go public through the de-
The fundamental message that informs this guidance is to be on the alert for potential conflicts of interest—particularly the potentially competing or different economic interests (including compensation) of the
SideBar
In October, at the CNBC Financial Advisor Summit, then SEC Chair
"I think what investors need to understand and what the professionals who are involved need to help them understand, is that it's not the same as an IPO. The motivations of the
In another interview on CNBC with
Sorkin commented that it can be especially difficult to understand the
IPO disclosure considerations. In this category, the staff have identified five topics with related questions (copied below) to consider for disclosure:
- One conflict of interest that may arise is that the
SPAC sponsors, directors and officers may not work exclusively on behalf of theSPAC to identify acquisition targets for the de-SPAC transaction and may have fiduciary or contractual obligations to other entities, even entities that compete with theSPAC for business combination opportunities.
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"Have you clearly described the sponsors', directors' and officers' potential conflicts of interest? Have you described whether any conflicts relating to other business activities include fiduciary or contractual obligations to other entities; how these activities may affect the sponsors', directors' and officers' ability to evaluate and present a potential business combination opportunity to the
SPAC and its shareholders; and how any potential conflicts will be addressed? - Is it possible that you will pursue a business combination with a target in which your sponsors, directors, officers or their affiliates have an interest? If so, have you disclosed how you will consider potential conflicts of interest?"
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Typically, under the
SPAC's governing documents, if theSPAC does not complete a de-SPAC (business combination) transaction with an operating company within by a specified time, it must liquidate and make a pro rata distribution to its public shareholders of the net offering proceeds that are held in trust. As a result, toward the end of that time period, acquisition targets have more leverage in negotiations.
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"Have you clearly described the financial incentives of
SPAC sponsors, directors and officers to complete a business combination transaction? Have you disclosed how these incentives may differ from the interests of public shareholders? Have you quantified, to the extent practicable, information about the losses the sponsors, directors and officers could incur if theSPAC does not complete a business combination transaction? -
Have you disclosed the amount of control that
SPAC sponsors, directors and officers and their affiliates will have over approval of a business combination transaction?-Have you disclosed whether theSPAC may amend provisions in its governing instruments to facilitate the completion of a business combination transaction? Have you described how theSPAC may amend such provisions, whether shareholder approval is required, and, if so, the requisite voting standard for approval and whether the sponsors have sufficient voting power to approve it? -
Have you disclosed whether, and if so how, the
SPAC may extend the time it has to complete a business combination transaction? If theSPAC may extend the time period, have you disclosed whether shareholders may redeem their shares in connection with any proposal to extend it? -
If the sponsors, directors, officers or their affiliates have prior
SPAC experience, have you provided balanced disclosure about the prior experience and the outcome of presented and completed business combination transactions and liquidations?"
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The underwriter of the SPAC IPO may agree to defer its compensation until the de-
SPAC transaction has closed.
- "If the underwriter of your IPO may provide additional services such as identifying potential targets, providing financial advisory services, acting as a placement agent in a private offering or underwriting or arranging debt financing, have you described those potential services and disclosed the fees you may pay for those services and whether you may pay those fees in other than cash? Will you condition payment for these additional services on the completion of a business combination transaction? Have you disclosed any conflict of interest the underwriter may have in providing such services given any deferred IPO underwriting compensation?"
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A
SPAC's sponsors, directors, officers and their affiliates have investments in theSPAC and, as a result of securities ownership, compensation arrangements or relationships with affiliated entities, have financial incentives that differ from those of the public shareholders, which could result in conflicts when evaluating potential opportunities for de-SPAC transactions.
- "Have you clearly disclosed the securities owned by sponsors, directors, officers and their affiliates including the price paid for the securities? Have you included a discussion of any concurrent offering of securities to the sponsors and their affiliates, the amount of those securities and the price to be paid? How does the price of securities previously sold and currently offered to sponsors, directors, officers and their affiliates compare to the public offering price in the IPO?
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Do you clearly describe the conflicts of interest that result from sponsors', directors', officers' or their affiliates' securities ownership, compensation arrangements or relationships with affiliated entities that may create financial incentives to complete a business combination transaction even if the transaction may not be in the best interest of other shareholders? For example, do you clearly disclose that if the
SPAC fails to complete a business combination transaction, some or all of the sponsors', directors', officers' and their affiliates' securities would have no value and the sponsors, directors, officers and their affiliates may incur a substantial loss on their investment? - Have you disclosed whether and how you may compensate your sponsors, directors, officers and their affiliates for services to the SPAC? Will any payments be contingent on the completion of the business combination transaction? Have you quantified known amounts?"
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Unlike the securities the
SPAC sells to the public, the securities theSPAC issues to its sponsors often give the sponsors "substantial control" over theSPAC . In addition, if theSPAC conducts private offerings, those securities may also have different negotiated terms.
- "Have you clearly disclosed the terms of securities held by sponsors, directors, officers, and their affiliates and discussed how the rights of those classes of securities compare to and differ from the rights and terms of securities offered in the IPO, as well as the resulting risks to public shareholders? If the sponsors, directors, officers, and their affiliates hold convertible debt, have you disclosed the material terms for conversion, such as when the debt is convertible, the maximum number of securities they may acquire through conversion and any contingencies on conversion?
- Have you disclosed whether you plan to seek, or have obtained, additional funding and how the terms of securities issued or to be issued in private offerings compare to the terms of securities offered in the IPO? Have you disclosed whether the sponsors, directors, officers or their affiliates may participate in or have an interest with respect to such financing?
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If the
SPAC enters into a forward purchase agreement allowing the purchaser to invest in theSPAC at the time of a business combination transaction, have you clearly described the terms of the agreement and any potential dilutive impact on other shareholders? Is it clear whether the forward purchaser's commitment to purchase the securities is irrevocable?"
Disclosure Considerations—De-SPAC Transaction (Business Combination)
In this category, the staff have identified three topics with related questions (copied below) to consider for disclosure:
- In the course of negotiations, the
SPAC may seek additional financing.
- "Do you disclose clearly any additional financing necessary to complete the business combination transaction and how the terms of such financing may impact public shareholders? If the terms of additional financing involve the issuance of securities, have you described how the price and terms of those securities compare to and differ from the price and terms of the securities sold in the IPO? Are sponsors, directors, officers, or affiliates participating in additional financing?
- If you will issue convertible securities, do you describe the material terms for conversion and any material impact on the beneficial ownership of the combined company?"
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In selecting the target (among alternatives) for the de-
SPAC , theSPAC sponsors, directors and officers may have interests and incentives that conflict with those of the public shareholders.
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"Have you provided detailed information about how you evaluated and decided to propose the identified transaction? Have you explained how and why you selected the target company? Who initiated contact? Why did you select this target over other alternative candidates? Have you explained the material terms of the transaction? How did you determine the nature and amount of consideration the
SPAC will pay to acquire the private operating company? Have you clearly described the negotiations regarding the nature and amount of consideration? - What material factors did the board of directors consider in its determination to approve the identified transaction? How did the board of directors evaluate the interests of sponsors, directors, officers and affiliates?
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Have you clearly described any conflicts of interest of the sponsors, directors, officers and their affiliates in presenting this opportunity to the
SPAC and how theSPAC addressed these conflicts of interest? If theSPAC had a policy to address conflicts of interest and waived any provisions of that policy, have you disclosed the waiver and the reasons therefor? Have you described any interest the sponsors, directors, officers or their affiliates have in the target operating company, including, if material, the approximate dollar value of the interest, when the interest was acquired and the price paid? - Have you provided detailed information on how the sponsors, directors, officers or their affiliates will benefit from this transaction? Have you quantified any material payments that they will receive as compensation, the return they will receive on their initial investment and any continuing relationship they will have with the combined company?
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Have you disclosed the total percentage ownership interest the
SPAC sponsors, directors, officers and affiliates may hold in the combined company, including through the exercise of warrants and conversion of convertible debt?"
The IPO underwriter may have provided other services and may have deferred a portion of its underwriting compensation until the closing of the de-
- "Have you disclosed the fees that the underwriter of your IPO will receive upon completion of the business combination transaction, including the amount of fees that is contingent upon completion of a business combination transaction?
- Have you clearly described any additional services the underwriter provided, the cost of those services and how you compensated the underwriter and/or its affiliates for those services? Were those services conditioned on the completion of the business combination transaction? Have you disclosed any conflict of interest the underwriter may have had in providing such services given any deferred IPO underwriting compensation?"
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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