The regulatory package covers close to 600 pages, although arguably the biggest change would be the removal of “safe harbor” protections that currently allow companies being acquired by SPACs to provide more forward-looking projections than are allowed for traditional ipo issuers.
Cutting to the chase: Ellenoff believes there will be practically no impact on SPAC deals as a result of the SEC's actions.
Chairman Gary Gensler ahead of the vote said the commission's goal was to level the playing field so SPAC rules more closely follow rules for other companies pursuing an IPO. He was among the three commissioners who voted in favor of the new regulations.
“Some of the more aggressive proposals in the draft they backed away from because they never had statutory authority to approve them,” Ellenoff said. “Unlike other periods of SEC commissioners, these 3 democratic appointees are willing to pursue policy without historical precedent just to send a message to the industry. It's not just SPACs, they did it with Crypto as well. They don't have statutory authority and the two dissenting commissioners said as much in their remarks. They got slapped down pretty hard in the crypto cases. If you're a lifetime public servant at the SEC and you try to avoid the partisanship you try to be more intellectually honest and have probably pushed internally for a more balanced approach than was originally sought in the proposed rules.”
SEC commissioners serve five-year terms.
“They walked back the most extreme of the proposals they had,” Ellenoff said. “That doesn't mean they gave up on the issues but at least withdrew the new proposed rules in favor of just trying to confuse the issues and add guidance to support their positions.”
For example, Rule 140A was going to impose gatekeeper liability on broker-dealers involved in the deSPAC transaction process. “And it didn't really matter what their role was under the proposed rule, which was really very expansive,” Ellenoff said. “So they withdrew that and then they concocted an argument that there is an analogous underwriter liability around deSPAC transactions under rule 145a arguing that the business combination itself is a distribution of securities– and I think that's hogwash and without a historical basis.”
As Ellenoff explained, the SEC took rules that SPACs have been operating under since 1993 “and they said, no matter what you may have believed to be true, even if we the SEC has previously signed off on it, we're now creating uncertainty for you. That uncertainty gives regulators discretion on enforcing the rules. That's what regulators like.” I don't believe that they'll generally seek to use this new found discretion all that often but in cases with egregious facts and circumstances, it'll be somewhat useful for the agency.
Given the historic analysis around underwriter liability no broker-dealer has ever been held to be liable for their professional advice involving a business combination, he added.
“Obviously the party line vote on such a sensitive issue is troubling after 30 years since the SECs enabling statute of the SPAC industry,” Ellenoff said. “It's hard to accept the majorities' view that this wasn't intended to disadvantage the SPAC program.”
Although Chairman Gensler said he was being agnostic in his support for the new regulations, “that seems contrary to the actual rules they approved as was pointed out by Commissioners Pierce and Uyeda,” said Ellenoff.
“Nobody took issue with the disclosure rules,” he added. “They did not need a new proposed rule to accomplish that. This practice could have been changed at any time over the last 30 years. To suggest that they are somehow in need of new rules to cause greater disclosure – that's a false narrative.”
As it relates to gatekeeper liability, the new rules are not going to affect whether the industry proceeds or not, Ellenoff said, nor does he believe this will dissuade broker-dealers' involvement in SPAC deals.
Going forward, to placate this administration of the SEC, broker-dealers will only work with their best clients, Ellenoff suspects. Someday in the future when the SEC is run by somebody else more focused on capital formation most broker-dealers will be back, he said.
“You can't look at (the huge deal and IPO volume in) 2021 and extrapolate that it's anything but an aberration. You didn't have an aggregate of 600 SPACs issued in a decade before that.”
Ellenoff acknowledged that a fair number of companies should have stayed private during the SPAC boom of recent years, “but I don't want regulators deciding whether a company should go public through a SPAC or a traditional ipo,” he said. “That should be the company's decision.”
He noted that the SEC did not change the rules for IPOs or direct listings, which did not have great performance in the post-euphoria period.
“I suggest what happens in 2024 will be much more like 2019, 2018, 2017,” Ellenoff said. “Which is to say, there will be fewer than 100 deals this year.”
He also foresees more private equity-like business combinations with more mature business models.
“We will be in a much more careful, less-risk environment so sponsors will do better,” he said. “This will not be because of the SEC but in spite of them.”
Ellenoff pointed out that SEC Commissioner Hester Peirce had said before the vote that the regulator had a prime opportunity to improve the program, “but they didn't,” Ellenoff said. “All they did was cherry pick regulations. They could have given SPACs the same privileges as IPOs. It's a missed opportunity.”