The US Securities and Exchange Commission has extended the comment period on its controversial proposal to more tightly regulate special purpose acquisition companies, or SPACs, which will increase liability for banks as well as offer greater protections for investors.
The comment period had been set to expire on May 31, but has been extended to June 13.
In the weeks leading up to the original deadline, many banks had already pulled back from participating in SPACs – at least as fully as they had previously – as attorneys advising banks said the SEC’s proposal extended liability for banks.
“People are hoping that the SEC carefully considers the comments and listens to practitioners and not just academics,” said one attorney. “It seems the SEC is forming its view on SPACs in a vacuum, on the basis of academic studies cited frequently in the rule proposal. It does not seem to-date that there’s been a significant amount of dialogue with actual industry participants.”
As part of the proposal, the SEC included a new rule that vastly expands the responsibility of SPAC underwriters as well as their liability when the vehicle goes through the de-SPAC transaction – effectively a merger of the SPAC with another company. The proposed rule gives underwriters of SPAC IPOs similar responsibilities to those leading traditional IPOs if they participate, even indirectly, in the de-SPAC.
Most banks now view the SEC's language around the rule proposal to mean the regulator considers banks to already have the same liability for due diligence and disclosures surrounding SPACs as they do for traditional IPOs.
“Plaintiffs lawyers will seize upon that language to drag banks into litigation for transactions that are taking place even before the rules are formally adopted,” the attorney said.
"Can't fight the SEC..."
Despite the extension of the comment period banks and their attorneys are not hopeful the final rule will differ from the proposal.
“You can’t fight the SEC here,” said one ECM banker involved in SPACs. “So we’ve hit the button.”
That “button” is not so much to halt SPAC transactions, but to set a flashing red light to clients warning them that they are not underwriters, he said. “Banks are issuing more section 11(b) withdrawals from underwriting letters in the last weeks than ever,” he said.
Section 11 of the 1933 Securities Act allows investors to hold issuers, officers, underwriters, and others liable for damages caused by untrue statements of fact or material omissions of fact within registration statements. Section 11(b) provides affirmative defences.
The ECM banker said most banks were shocked by the SEC stance conferring on them the liabilities of underwriters without any of the protections. Banks, he said, were trying to send the SEC a message a couple of weeks ago when they backed away from SPACs.
Goldman Sachs this month suspended underwriting of SPACs, and several other banks have also pulled back. “We are reducing our involvement in the SPAC business in response to the changed regulatory environment," Goldman said.
Boilerplate language is also appearing in the filing documents for more SPAC IPOs to limit bank roles and liability. Most recently, Deutsche Bank warned in a filing for the US$200m SPAC IPO of SK Growth Opportunities: "We have not entered into any understanding or arrangement to engage, and are under no contractual obligation to engage, the underwriter to provide any services for us after this offering, but we may do so at our discretion."
There is a question whether the SEC has the authority to make such a rule without Congressional action, the attorney said. But the change in guidance is seen as an attempt to clearly set out the SEC's stance even before the rules change.
The SEC has been signalling that it wanted more guardrails around SPACs, and the industry was aware of that and there were improvements being made on disclosure and practices, the attorney said.
“The commission is fairly set in their thinking on this, but there is hope that through the comment process and through dialogue people will be able to influence the final rules," he said. "However, the expectation is that the rules will be adopted as they are proposed."