On September 21, 2020, the Securities and Exchange Commission (the SEC) issued new guidance limiting the ability of the entity resulting from a combination between a private operating company and a reporting shell company (the Combined Entity), such as a special purpose acquisition company (SPAC), to satisfy the eligibility requirements for registering securities on short-form registration statements on Form S-3 during the 12 calendar months following the business combination. The guidance is included in a new Compliance and Disclosure Interpretation (C&DI) that can be found here. (See C&DI 115.18)
SPACs, or so called “blank-check companies,” have seen a surge in popularity in the current turbulent economic climate. SPACs are entities formed to raise capital through an initial public offering (IPO) for the purpose of taking an existing private company public via an acquisition. For more background on the resurgence of SPACs, please see our recent client update found here.
Historically, there has been uncertainty as to whether the Combined Entity would be allowed to use the SPAC’s pre-combination reporting history for purposes of determining eligibility to use Form S-3, which requires the issuer to have been a reporting company for at least 12 months. The question is an important one because if the Combined Entity is unable to use the SPAC’s pre-combination reporting history, it will most likely need to wait a full 12 months post-combination to use the SEC’s streamlined, short-form registration process on Form S-3 in order to access the capital markets for registered follow-on offerings. The Form S-3 has a number of benefits, including the ability to incorporate by reference documents filed subsequent to the Form S-3 (often referred to as “forward incorporation by reference”) in order to automatically update the registration statement with new material information. Although registration using a Form S-1 would still be available during this period, the Form S-1 requires significantly more disclosure (similar to that in an IPO), resulting in more time and expense incurred by the issuer to prepare the filing, typically takes longer than a Form S-3 to be reviewed by the SEC and declared effective, and is typically not conducive for periodic “off the shelf” offerings.
With the issuance of this guidance, the SEC made clear that the Combined Entity may not use Form S-3 in scenarios in which the Combined Entity is either a “new entity” or “successor registrant.” In either of these cases, the Combined Entity must rely on registering securities via the more burdensome Form S-1 for the 12 months following the combination. The guidance further clarified that in cases in which the Combined Entity is neither a new entity nor a successor registrant, the Combined Entity would have less than 12 months of post-combination reporting history and therefore the SEC would be “unlikely” to accelerate effectiveness of a registration on Form S-3, citing the SEC’s need to give “due regard to the adequacy of the information respecting the issuer theretofore available to the public,… and to the public interest and the protection of investors.” As a result, absent further guidance from the SEC on this point, SPACs should expect that the use of Form S-3 will be unavailable for the Combined Entity for the 12 months following the combination in this scenario as well.
This result is significant for SPACs considering combinations with private operating companies, as they will now need to consider the increased costs and time associated with raising additional capital using a Form S-1 in planning the capital structure for the Combined Entity during the first 12 months following the combination. Once the Combined Entity has been a reporting company for at least 12 months, it will then be eligible to use Form S-3 similar to other registrants, provided the entity meets each of the remaining eligibility requirements.
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