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SPAC rules could reassure D&O insurers, dampen investor enthusiasm for vehicles


Proposed U.S. Securities and Exchange Commission disclosure rules for special purpose acquisition companies may deter some SPAC-related transactions but leave directors and officers liability insurers feeling more comfortable offering coverage for the risks, even as demand for the transactions has significantly slowed.

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 there has been a significant slowdown in SPAC and de-SPAC activity this year, in part because of the anticipated regulations but also because of factors including stock market volatility and over issuance.

A major participant, investment banker Goldman Sachs, said in a statement, “We are reducing our involvement in the SPAC business in response to the changed regulatory environment.”

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 SPACs’ liability safe harbor under the Private Securities Litigation Reform Act of 1995 for forward-looking statements, a benefit that has not been available to traditional IPOs.

The proposed 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.

SEC’s proposed SPAC regulations

Major provisions of the U.S. Securities and Exchange Commission’s proposed rules and amendments on special purpose acquisition companies would:

  • Enhance disclosures and provide additional investor protections in SPAC initial public offerings and in de-SPAC transactions.
  • Address the treatment of business combination transactions involving a reporting shell company and amend the financial statement requirements applicable to transactions involving shell companies.
  • Provide additional guidance on the use of projections in SEC filings to address concerns about their reliability.
  • Assist SPACs in assessing when they may be subject to regulation under the Investment Company Act of 1940.

Source: U.S. Securities and Exchange Commission

Most observers say they do not expect the final rules, comments on which were due by the end of May, 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.

“They’re really just trying to level the playing field,” with traditional IPOs, said Pam Greene, Boston-based partner, head of North America corporate governance and ESG consulting, at Aon PLC.

“I would anticipate that the deSPAC space may see more scrutiny as it relates to private company targets,” which would be required to be co-registrants under the proposed changes, said Andrew Pendergast, New York-based managing director and SPAC practice leader for NFP Corp.

Eric Senatore, New York-based executive vice president for Sompo International, which has been active in the market, said the rules create additional hurdles, including increased time and costs, and a greater risk of liability. “The original IPO may become the only way a company can become public,” he said. 

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 SE. 

There may be other implications as well.

Andrew Doherty, New York-based national executive and professional risk solutions practice leader for USI Insurance Services LLC, said more disclosures 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.”

The rules will create additional materials upon which to base lawsuits, said Yelena Dunaevsky, vice president, transactional insurance, at Woodruff Sawyer & Co. in New York. “Litigation has been fairly brutal over the last few months” and will continue “depending on how the rules play out,” she said.