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Proposed U.S. Securities and Exchange Commission disclosure rules for special purpose acquisition companies may deter some SPAC-related transactions but make directors and officers liability insurers more comfortable offering coverage for the risks, experts say.
SPACs, also called blank check companies, are publicly traded shell companies formed to raise capital to acquire private companies, which they usually have two years to do after their initial public offering.
A deSPAC transaction occurs when a private company merges with a SPAC. In the next step, the merged entity operates as a public company.
The transactions are often seen as less costly alternatives to traditional IPOs, though some critics say they can also be used to circumvent regulatory scrutiny.
The growth of SPACs last year was explosive, with 613 formations completed, but has since slowed dramatically. This is attributed at least in part to the anticipated SEC proposal as well as over issuance. However, there are still hundreds of SPACs seeking a target company, observers say.
The 372-page SEC proposal published in late March would require additional disclosures and remove the liability safe harbor for SPACS under the Private Securities Litigation Reform Act of 1995 with regard to making forward-looking statements, which traditional IPOS have not had available to them. The proposed new rules would require additional disclosures about SPAC sponsors, conflicts of interest, sources of dilution and additional information about business combination transactions between SPACs and private operating companies.
Most observers say they do not expect the final rules, which will be issued sometime after the comment period closes at the end of this month, to differ much from the proposal.
“It’s unlikely to go through exactly as is,” but the SEC “may not be easily swayed” to make major changes, said Larry Fine, New York-based management liability coverage leader for Willis Towers Watson PLC.
The proposed rules “do add significant disclosures and transaction complexity for SPACS and could discourage prospective SPAC sponsors and it could throw some cold water on any deSPAC transactions,” said Kevin LaCroix, executive vice president in Beachwood, Ohio, for RT ProExec, a division of R-T Specialty LLC.
Removing the safe harbor provision would “strongly discourage private companies from going the deSPAC route vs. going the traditional IPO route,” said Derek Lakin, New York-based senior vice president and national SPAC practice co-leader for Lockton Cos. LLC. It will “take away one of the main advantages of doing the SPAC,” he said.
However, strong proposed transactions will still be able to move forward, said Machua Millett, Boston-based SPAC leader at Marsh LLC.
Many believe the rules may encourage D&O underwriters to write coverage for SPAC-related businesses.
Tim Fletcher, Los Angeles-based CEO of Aon PLC’s financial services group in the U.S., said that over the long term, “you’re going to see better deals come to market,” which will “give insurers comfort in terms of deploying capital” into the segment.
If insurers see that the rules have a positive effect on the quality and level of disclosure in the deals, they may be more comfortable underwriting SPACs, said Anton Lavrenko, New York-based regional head, financial institutions and private equity North America, with Allianz Global Corporate & Specialty.
Andrew Doherty, New York-based national executive and professional risk solutions practice leader for USI Insurance Services LLC, said that more disclosure may result in increased errors and omissions liability for investment bankers.
“That’s always been a difficult line of coverage,” he said.
Henry P. Van Dyck, a partner with Faegre, Drinker, Biddle & Reath LLP in Washington and a former financial crime prosecutor with the Justice Department, who often worked in parallel with the SEC, said the proposal portends “likely increased future enforcement actions” by the SEC.
Fresh capacity has brought some stability to the market, but many directors and officers insurance buyers are still seeing rate increases and reduced limits, according to a report published Wednesday by Allianz Global Corporate & Specialty SE.