By: C. Todd Gibson
Last year, a number of lawsuits were filed against SPACs and their sponsors challenging (in part) their status under the U.S. Investment Company Act of 1940 (“1940 Act”) arguing that SPACs are essentially unregistered investment companies. A brief filed by two professors supported this notion on the basis that SPACs typically hold government securities until a target company is acquired (and thus, such SPACs are investment companies required to be registered). In an unusual move to provide SPAC market participants with some comfort on this issue, a number of law firms joined together refuting this position in a joint public statement outlining legal practioners’ historic view that SPACs are not investment companies.
In response to the “uncertainty” regarding the status of SPACs, on March 30th, the SEC, with one dissenter, proposed various rules under federal securities laws to clarify various requirements for SPAC offerings, including a new “safe harbor” for SPACs under the 1940 Act, proposed as Rule 3a-10. Conditions to the safe harbor include limits on SPAC pre-acquisition investments, limits on SPAC activities (including its directors and officers) to seeking a single de-SPAC transaction, and announcement of a business combination within 18 months of the SPAC’s IPO. Although proposed Rule 3a-10 may offer some comfort to SPACs, the vast majority of legal experts that practice in this area believe this is not an issue requiring a safe harbor. There is also the risk that the creation of a safe harbor could be viewed that it is exclusive (which is generally not the case, see e.g., private offerings and Regulation D). The proposed Rule, available here, will certainly generate a lot of comment and will be followed closely by the SPAC market.