Aon | Financial Services Group
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The U.S. Securities and Exchange Commission’s (SEC) proposed disclosure rules for special purpose acquisition companies (SPACs) that, if adopted, would ensure “greater transparency and more robust investor protections” that “could assist investors in evaluating and making the investment, voting, and redemption decisions for these transactions.” The SEC’s public statement with respect to the proposed rules declared: “functionally, the SPAC target IPO is being used as an alternative means to conduct an IPO. Thus, investors deserve the protections they receive from traditional IPOs, regarding information asymmetries, fraud, and conflicts, and when it comes to disclosure, marketing practices, gatekeepers, and issuers."
To further these protections, the SEC proposed, in part, the following:
- Enhanced disclosure requirements to provide additional investor protections in SPAC initial public offerings (IPOs) and de-SPAC transactions to harmonize the reporting rules for de-SPAC transactions with traditional IPOs. For example, additional disclosures about the sponsor of the SPAC, potential conflicts of interest in the de-SPAC transaction, potential sources of additional dilution with certain specific disclosures required in the prospectus, cover page, and summary of registration statements as well as moving information about the private operating company filed by the de-SPAC after the closing into the de-SPAC registration statement.
- SPACs and SPAC sponsors (including affiliates and promoters), and the targeted private operating companies will be subject to new liability and regulatory standards in the SPAC IPO and in the de-SPAC transaction. For example, the SEC proposed a “blank check company” definition, indicating that the Private Securities Litigation Reform Act of 1995 (PSLRA) safe harbor for financial projections and other forward-looking statements would not be available for SPACs. The proposed rules also include a new safe harbor regulation that states that the SPAC will not be deemed subject to regulation under the Investment Company Act of 1940 (40 Act) and provides additional guidance if the SPAC cannot meet that safe harbor test.
The recent slowdown in SPAC listings is likely a combination of macro market volatility and SPAC sponsors weighing the impact of new legislation. The SEC’s proposed rule regarding underwriter liability for the SPAC sponsor in the de-SPAC transaction resulting in additional time and cost to get a deal done is an onerous provision that increases the pressure to identify target candidates early. The 40 Act safe harbor provision pressures SPACs to close a deal within 24 months of the SPAC IPO. Specific to D&O insurance, it is reasonable to expect underwriting skepticism, which could impact premium and capacity for SPAC transactions. Over the longer term, D&O underwriters are likely to view the increased regulatory requirements as a risk decelerator which could improve D&O pricing for SPACs, which has been otherwise significantly elevated. Additionally, the due diligence which will be required to protect the SPAC sponsor from underwriter liability under the proposed new rules will likely result in improved quality of the transaction – another positive attribute for the D&O underwriting. Over the long term, better deals could come to market, which should give insurers comfort in terms of deploying capital into the segment. Aon’s FSG team will continue to monitor the evolution of the rules and adoption as well as market impact over the coming months.
Aon is not a law firm or accounting firm and does not provide legal, financial or tax advice. Any commentary provided is based solely on Aon’s experience as insurance practitioners. We recommend that you consult with your own legal, financial and/or tax advisors on any commentary provided by Aon. The information contained in this document and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity.