Witnesses at a May 24, 2021, House Financial Services subcommittee hearing broadly agreed on the need for reforms to liability protections for forward-looking statements by special purpose acquisition companies (SPACs), a key regulatory disparity highlighted by the recent SPAC surge.
During the hearing, the Subcommittee on Investor Protection, Entrepreneurship and Capital Markets debated a bill that would exclude SPACs from a more than two-decade-old safe harbor for forward-looking statements designed to shield companies from private securities lawsuits.
SPACs are shell companies that raise money in initial public offerings (IPOs), using that capital to acquire a private company and take it public without a traditional IPO. The process of combining into a single publicly traded entity is referred to a “de-SPAC” transaction.
The draft bill debated by the subcommittee would tweak the safe harbor in the 1995 Private Securities Litigation Reform Act (PSLRA) to specifically prevent SPACs from taking advantage of it. IPOs and blank-check companies are already excluded from those protections.
At the hearing, witnesses in both written testimony and in their responses to lawmakers stressed the importance of putting SPAC statements on the same footing as IPOs, where companies can face serious liability for misstating or omitting material facts in their registration statements.
“If you are interested in a company, you are interested what happened in the past, but you are probably as or more interested in what should happen in the future, what do the CEO and the CFO think the prospects of the business are,” said Usha Rodrigues, a Georgia Law School professor and chair of Corporate Finance and Securities Law at the school, in response to a question from Rep Juan Vargas, a California Democrat.
“That’s why Congress in 1995 said ‘ok, under the [PSLRA] you have this safe harbor, and we can protect you if you want to say ‘hey, here is what we think is going to happen down the road.’”
But those protections do not extend to IPOs, she noted, “because IPOs are this special world where the company is first coming out into the public markets, and so we have really strict liability standards, we’re going to make sure that everything there is accurate, there isn’t any material misstatement.”
When a SPAC goes public, “they’re just an empty shell,” she said. Instead, the acquisition of the target company is effectively its IPO, at which point the SPAC can today “say whatever they want about the company’s prospects in a way that traditional IPO can’t, and that’s just not fair.”
Andrew Park, senior policy analyst for Americans for Financial Reform, agreed with Rodrigues, noting the importance of the accuracy of forward looking statements and pointing to corporate COVID-19 statements last year as an example. Stephen Deane, the CFA Institute’s senior director of legislative and regulatory outreach, in his testimony argued that “the disparate regulatory treatment of forward-looking statements makes for an unlevel playing field,” despite a SPAC merger and an IPO being functionally equivalent.
Andreessen Horowitz Investing Partner Scott Kupor called for Congress and the SEC to establish an appropriate disclosure and liability regime for SPACs.
“I’m not taking a position on what the appropriate liability regime should be, but I absolutely agree with [Vargas’s] position that we should have a level playing field,” he said. “We should not have regulatory arbitrage that determines which path makes most sense for companies.”
With more than 300 SPAC listings so far this year, the SEC has rushed to issue statements clarifying certain requirements around accounting, disclosure, and other areas.
John Coates, acting director of the SEC’s Division of Corporation Finance, in an April 8 statement, addressed the question of whether de-SPAC participants could take advantage of those protections from private litigation under the PSLRA.
“Any answer to that question should note the limits of the safe harbor in the PSLRA,” Coates said. “The safe harbor only applies in private litigation, and does not prevent the Commission from taking appropriate action to enforce the federal securities laws. Even if the safe harbor clearly applies, its procedural and substantive provisions do not protect against false or misleading statements made with actual knowledge that the statement was false or misleading.”
Coates added that a “company in possession of multiple sets of projections that are based on reasonable assumptions, reflecting different scenarios of how the company’s future may unfold, would be on shaky ground if it only disclosed favorable projections and omitted disclosure of equally reliable but unfavorable projections, regardless of the liability framework later used by courts to assess the disclosures.”
This article originally appeared in the May 26, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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