SEC SPAC Projections: Enforcement Risks and Disclosure Obligations

Special purpose acquisition companies, or SPACs, have become an increasingly popular way for companies to go public in recent years. However, SPACs also come with unique risks and disclosure requirements that companies, sponsors, advisors and investors need to understand.

The SEC has been ramping up its scrutiny of SPACs and recently proposed new rules to enhance disclosures and investor protections. This article will examine the key issues around SEC enforcement risks and disclosure obligations relating to projections for SPACs.

Liability Risks

SPAC sponsors, advisors and companies going public via a SPAC merger face potential liability risks under securities laws if disclosures to investors are inadequate or misleading. Some key liability considerations include:

• Section 11 liability – Companies and underwriters can be liable for material misstatements or omissions in a registration statement. However, there may be uncertainty around who qualifies as a Section 11 underwriter in a de-SPAC transaction.
• Antifraud provisions – SPAC participants could face liability under antifraud provisions of securities laws like Rule 10b-5 if disclosures contain material misrepresentations or omissions.
• Safe harbor – SPAC projections may not qualify for the statutory safe harbor provisions that apply to traditional IPOs, increasing liability risk.
• Due diligence – Lack of a named underwriter in de-SPAC deals means there is less due diligence and gatekeeping compared to traditional IPOs.

The threat of liability gives companies and advisors an incentive to be careful and accurate with disclosures. However, some warn the liability protections for investors may be insufficient in SPAC deals compared to traditional IPOs [2].

SEC Concerns Around SPACs

The SEC has raised several concerns about the SPAC boom:

• Disclosures may be inadequate for investors to make informed decisions, especially for complex or highly speculative deals.
• Conflicts of interest between sponsors and investors may not be fully transparent.
• Marketing practices around SPACs may be overhyped or misleading.
• There is less liability and gatekeeper oversight compared to traditional IPOs.

SEC Chair Gary Gensler noted investors in SPACs deserve similar protections as traditional IPOs when it comes to disclosures, marketing practices, gatekeepers and liability [3]. The SEC aims to address these concerns while allowing SPACs as an alternative path to public markets.

SEC Proposed SPAC Rules

In March 2022, the SEC proposed new rules around SPACs to enhance disclosures and investor protections [1]. Key elements include:

• More disclosures on sponsors, conflicts, dilution – SPACs would need to provide additional details about sponsors, compensation, conflicts of interest, sources of dilution, and more.
• Disclosures on target companies – More information required on the private target company in the de-SPAC merger, including financials and operations.
• Timeframe for disclosures – Disclosure documents must be disseminated 20 days before shareholders vote on a de-SPAC deal.
• Projections – Stricter rules around projections, including liability for unrealistic forecasts.
• Marketing practices – Clearer rules on what communications require SEC filings.
• Gatekeepers – Potentially designating roles like financial advisors as underwriters for liability purposes.

The proposed rules aim to adapt existing IPO protections and disclosures to the SPAC process. The public comment period closed in May 2022 and final rules are expected later in 2022 or 2023.

SPAC Projections

Projections of future financial performance are common in de-SPAC transactions. However, these projections come with risks:

• Highly speculative – Projections for startup or early stage companies that lack financial history can be highly speculative.
• Misleading – Overly optimistic projections may mislead investors on growth potential.
• Unrealistic assumptions – Faulty assumptions can lead to unrealistic forecasts.
• Safe harbor questions – SPAC projections may not qualify for safe harbor provisions on forward-looking statements.

The SEC proposal notes that “disclosure relating to projections presented in de-SPAC transactions has, in some cases, been optimistic and lacked adequate disclosure regarding the assumptions underlying the projections.” [1]

To address these concerns, the SEC plans to update rules around projections in de-SPAC deals, including:

• Requiring a purpose statement explaining why projections are disclosed.
• Disclosing key assumptions and factors impacting the projections.
• Providing sensitivity analysis around key assumptions.
• Clear comparison to historical performance.
• Balanced presentation of risks and uncertainties.

Enhanced disclosures aim to give investors better context for evaluating the reliability of projections. The SEC also made clear SPAC participants could face antifraud liability for unrealistic projections.

Disclosure Obligations

SPAC sponsors, advisors and private companies should be aware of key disclosure obligations in the de-SPAC process to reduce liability risks, including:

• Material information – Disclose all material information investors need to make informed decisions.
• Transparent conflicts – Clearly disclose any potential conflicts of interest.
• Balanced projections – Ensure financial projections are reasonable, with balanced presentation of risks.
• Accessible disclosures – Make disclosures easy for retail investors to understand.
• Adequate time – Disseminate disclosures 20+ days before a shareholder vote.
• Due diligence – Conduct thorough due diligence even without a formal underwriter.

SPAC participants should also be aware that communications like press interviews or social media posts may require SEC filings. Disclosure obligations extend to the post-merger company as well.

While SPACs offer an alternative path to traditional IPOs, SEC rules aim to provide comparable investor protections around disclosures, projections and liability risks.

Key Takeaways

• SPAC sponsors, advisors and companies face potential liability for inadequate disclosures under securities laws.
• The SEC sees need to enhance disclosures and investor protections around SPAC deals.
• New SEC rules propose heightened disclosure requirements for SPACs.
• Projections in de-SPAC deals raise risks of misleading investors.
• SPAC participants must be diligent on disclosure obligations to investors.