Securities Industry Commentator by Bill Singer Esq

FINRA Arbitrators Hit Commonwealth Financial with Compensatory and Punitive Damages in Defamation Case (BrokeAndBroker.com Blog)

BREAKING NEWS: Supreme Court Rejects "Look-Through" Approach in Confirming/Vacating Arbitration Awards
Denise A. Badgerow, Petitioner, v. Greg Walters, et al. (Opinion, United States Supreme Court)

Massachusetts Superior Court Denies Secretary of State Galvin's Motion Against Robinhood

Robinhood Financial, LLC. v. William F. Galvin, Secretary of the Commonwealth (Decision/Order)

SEC Division of Examinations Announces 2022 Examination Priorities / Enhances Focus on Private Funds, ESG, and Operational Resiliency

SEC Holds Fidelity Transfer Services In Default and Orders Cease-and-Desist (No -- not "that" Fidelity but apparently another Fidelity)

In the Matter of Fidelity Transfer Services, Inc. and Ruben Sanchez (SEC Opinion)

Former Comptroller And Compliance Specialist At Investment Adviser Firm Pleads Guilty To Conspiring To Defraud Clients (DOJ Release)

Brooklyn Man Pleads Guilty to Insider Trading and Tax Evasion (DOJ Release)

Suburban Chicago Woman Sentenced to a Year in Federal Prison for Insider Trading (DOJ Release)

Court Finds El Paso Man and His Firm Liable for Defrauding Forex and Cryptocurrency Clients of More Than $7.2 Million (CFTC Release)

FINRA Fines and Suspends Aegis Capital Rep for Unsuitable Trading and Unauthorized Discretion

In the Matter of Scott Neil Hananel, Respondent (FINRA AWC)

SEC Proposes Rules to Enhance Disclosure and Investor Protection Relating to Special Purpose Acquisition Companies, Shell Companies, and Projections

Statement on the Proposal to Enhance Investor Protections in SPACs by SEC Commissioner Allison Herren Lee

Statement on the SPACs Proposal by SEC Commissioner Caroline A. Crenshaw

Damning and Deeming: Dissenting Statement on Shell Companies, Projections, and SPACs Proposal by SEC Commissioner Hester M. Peirce

Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors

FINRA Referral Letter Cited In Federal Insider Trading Appeal (BrokeAndBroker.com Blog)

FINRA Arbitration Claimant Asks Federal Court to Appoint Counsel (BrokeAndBroker.com Blog)

Arousing the Wrath of the Great and Powerful SEC and FINRA (BrokeAndBroker.com Blog)

NOTE: For prior history READ: "Federal Court Affirms Federal Jurisdiction In FINRA Arbitration Appeal" (BrokeAndBroker.com Blog/ September 17, 2020)

http://www.brokeandbroker.com/5437/badgerow-ameriprise-arbitration/

The Federal Arbitration Act authorizes a party to an arbitration agreement to petition a federal court for various forms of relief. But the Act's authorization of such petitions does not itself create the subject-matter jurisdiction necessary for a federal court to resolve them. Rather, the federal court must have an "independent jurisdictional basis" to do so. Hall Street Associates, L. L. C. v. Mattel, Inc., 552 U. S. 576, 582. In Vaden v. Discover Bank, 556 U. S. 49, this Court assessed whether there was a jurisdictional basis to decide an FAA Section 4 petition to compel arbitration by means of examining the parties' underlying dispute. The Court reasoned that specific language in Section 4 instructed a federal court to "look through" the petition to the "underlying substantive controversy." Id., at 62. If the dispute underlying a Section 4 petition falls within the court's jurisdiction-for example, by presenting a federal question-then the court may rule on the petition to compel arbitration.

In this case, the question presented is whether that same "look-through" approach to jurisdiction applies to applications to confirm or vacate arbitral awards under Sections 9 and 10 of the FAA. Petitioner Denise Badgerow initiated an arbitration proceeding against her employer's principals (collectively, Walters), alleging that she was unlawfully terminated. After arbitrators dismissed Badgerow's claims, she filed suit in Louisiana state court to vacate the arbitral award. Walters removed the case to Federal District Court and applied to confirm the award. Badgerow then moved to remand the case to state court, arguing that the federal court lacked jurisdiction to resolve the parties' requests-under Sections 10 and 9 of the FAA, respectively-to vacate or confirm the award. The District Court applied Vaden's look-through approach, finding jurisdiction in the federal-law claims contained in Badgerow's underlying employment action. The District Court acknowledged that Sections 9 and 10 of the FAA lack the distinctive text on which Vaden relied, but it applied the look-through approach anyway so that "consistent jurisdictional principles" would govern all kinds of FAA applications. The Fifth Circuit affirmed.

Held: Vaden's "look-through" approach to determining federal jurisdiction does not apply to requests to confirm or vacate arbitral awards under Sections 9 and 10 of the FAA. Pp. 4-16.

(a) Congress has granted federal district courts jurisdiction over two main kinds of cases: suits between citizens of different States as to any matter valued at more than $75,000 (diversity cases), 28 U. S. C. §1332(a), and suits "arising under" federal law (federal-question cases), §1331. Normally, a court has federal-question jurisdiction whenever federal law authorizes an action. But because this Court has held that the FAA's provisions do not themselves support federal jurisdiction, a federal court must find an independent basis for jurisdiction to resolve an arbitral dispute. In this case, neither application reveals a jurisdictional basis on its face. So to find an independent basis for jurisdiction, the District Court had to look through the Section 9 and 10 applications to the underlying substantive dispute, where a federal-law claim satisfying §1331 indeed exists. 

In Vaden, this Court approved the look-through approach for a Section 4 petition by relying on that section's express language. That language provides that a party to an arbitration agreement may petition for an order to compel arbitration in a "United States district court which, save for [the arbitration] agreement, would have jurisdiction" over "the controversy between the parties." "The phrase 'save for [the arbitration] agreement,' " the Court stated, "indicates that the district court should assume the absence of the arbitration agreement and determine whether [the court] 'would have jurisdiction . . .' without it" by looking through to the "underlying substantive controversy" between the parties. 556 U. S., at 62. 

Sections 9 and 10 of the FAA contain none of the statutory language on which Vaden relied. So under ordinary principles of statutory construction, the look-through method should not apply. "[W]hen Congress includes particular language in one section of a statute but omits it in another section of the same Act," this Court generally takes the choice to be deliberate. Collins v. Yellen, 594 U. S. ___, ___. That holds true for jurisdictional questions, as federal "district courts may not exercise jurisdiction absent a statutory basis." Exxon Mobil Corp. v. Allapattah Services, Inc., 545 U. S. 546, 552. Because a statutory basis for look-through jurisdiction is lacking in Sections 9 and 10, the Court cannot reach the same result here as in Vaden. Pp. 4-9.

(b) Walters presents a two-part argument to justify exercising jurisdiction here. Walters first claims that Section 4's language does not authorize look-through jurisdiction, but is only a capacious venue provision designed to give applicants a broad choice among federal courts possessing jurisdiction. Walters next construes Section 6-which requires any FAA application to "be made and heard in the manner provided by law for the making and hearing of motions"-to provide the basis for an FAA-wide look-through rule. 

Walters's reading of Section 4 does not comport with how Vaden understood Section 4 or with the actual text of that provision, which never mentions venue, and refers only to jurisdiction. And Walters's Section 6 argument fares no better. Courts do not possess jurisdiction to decide ordinary motions by virtue of the look-through method. So Congress would not have prescribed that method by telling courts, as Section 6 does, to treat FAA applications like motions. Pp. 9-12. 

(c) Walters also makes several policy arguments preaching the virtues of adopting look-through as a uniform jurisdictional rule. Walters claims that a uniform rule will promote "administrative simplicity"; that the look-through approach will be "easier to apply" than a test grounding jurisdiction on the face of the FAA application itself; and that the look-through rule will provide federal courts with more comprehensive control over the arbitration process. Brief for Respondents 27, 28. But "[e]ven the most formidable policy arguments cannot overcome a clear statutory directive." BP p.l.c. v. Mayor and City Council of Baltimore, 593 U. S. ___, ___. And anyway, Walters oversells the superiority of his proposal. First, uniformity in and of itself provides no real advantage here because courts can easily tell whether to apply look-through or the normal jurisdictional rules. Second, the use of those ordinary rules, in the context of arbitration applications, is hardly beyond judicial capacity. And third, there are good reasons why state, rather than federal, courts should handle applications like the ones in this case. Pp. 12-16. 

975 F. 3d 469, reversed and remanded. 

KAGAN, J., delivered the opinion of the Court, in which ROBERTS, C. J., and THOMAS, ALITO, SOTOMAYOR, GORSUCH, KAVANAUGH, and BARRETT, JJ., joined. BREYER, J., filed a dissenting opinion. 

The Securities and Exchange Commission's Division of Examinations today announced its 2022 examination priorities, including several significant areas of focus and many perennial risk areas. The Division will focus on private funds, environmental, social and governance (ESG) investing, retail investor protections, information security and operational resiliency, emerging technologies, and crypto-assets. The Division publishes its examination priorities annually to provide insights into its risk-based approach, including the areas it believes present potential risks to investors and the integrity of the U.S. capital markets.

"The Division's 2022 examination priorities identify key risk areas that we expect registrants to address, manage, and mitigate with vigilance," said SEC Chair Gary Gensler. "Investment advisers, broker-dealers, self-regulatory organizations, clearing firms, and other registrants are critical market participants, and examinations against our laws and rules are fundamental to instilling the trust necessary for our markets to thrive."

"In this time of heightened market volatility, our priorities are tailored to focus on emerging issues, such as crypto-assets and expanding information security threats, as well as core issues that have been part of the SEC's mission for decades - such as protecting retail investors," said Division of Examinations' Acting Director Richard R. Best. "Our priorities cover a broad landscape of potential risks to investors that firms should consider as they review and strengthen their compliance programs."

The following are a selection of the Division's 2022 priorities:

Private Funds - The Division will focus on registered investment advisers (RIAs) who manage private funds. Examinations will review issues under the Advisers Act, including an adviser's fiduciary duty, and will assess risks, including a focus on compliance programs, fees and expenses, custody, fund audits, valuation, conflicts of interest, disclosures of investment risks, and controls around material nonpublic information. The Division will also review private fund advisers' portfolio strategies, risk management, and investment recommendations and allocations, focusing on conflicts and disclosures around these areas.  In addition, EXAMS will review the practices, controls, and investor reporting around risk management and trading for private funds with indicia or signs of systemic importance.

ESG - The Division will continue its focus on ESG-related advisory services and investment products, including mutual funds, exchange-traded funds, and private fund offerings. Examinations will typically focus on whether RIAs and registered funds are accurately disclosing their ESG investing approaches and have adopted and implemented policies, procedures, and practices designed to prevent violations of the federal securities laws in connection with their ESG-related disclosures, including review of their portfolio management processes and practices. Examinations also will review the voting of client securities in accordance with proxy voting policies and procedures, including whether the votes align with their ESG-related disclosures and mandates, and whether there are misrepresentations of the ESG factors considered or incorporated into portfolio selection.

Retail Investors and Working Families - The Division will continue to address standards of conduct issues for broker-dealers and RIAs to ensure that retail investors and working families are receiving recommendations and advice in their best interests. Specifically, these examinations will focus on how registrants are satisfying their obligations under Regulation Best Interest and the Advisers Act fiduciary standard to act in the best interests of retail investors and not to place their own interests ahead of retail investors'. Examinations will include assessments of practices regarding consideration of investment alternatives, management of conflicts of interest, trading, disclosures, account selection, and account conversions and rollovers. 

Information Security and Operational Resiliency - The Division will review broker-dealers', RIAs', and other registrants' practices to prevent interruptions to mission-critical services and to protect investor information, records, and assets. Examinations will continue to review whether firms have taken appropriate measures to safeguard customer accounts and prevent account intrusions; oversee vendors and service providers; address malicious email activities, such as phishing or account intrusions; respond to incidents, including those related to ransomware attacks; identify and detect red flags related to identity theft; and manage operational risk as a result of a dispersed workforce. In addition, the Division will again be reviewing registrants' business continuity and disaster recovery plans, with particular focus on the impact of climate risk and substantial disruptions to normal business operations.

Emerging Technologies and Crypto-Assets - The Division will conduct examinations of broker-dealers and RIAs that are using emerging financial technologies to review whether the unique risks these activities present were considered by the firms when designing their regulatory compliance programs. RIA and broker-dealer examinations will focus on firms that are, or claim to be, offering new products and services or employing new practices to assess whether operations and controls in place are consistent with disclosures made and the standard of conduct owed to investors and other regulatory obligations; advice and recommendations, including by algorithms, are consistent with investors' investment strategies and the standard of conduct owed to such investors; and controls take into account the unique risks associated with such practices. Examinations of market participants engaged with crypto-assets will continue to review the custody arrangements for such assets and will assess the offer, sale, recommendation, advice, and trading of crypto-assets.

The published priorities are not exhaustive and will not be the only areas the Division focuses on in its examinations, risk alerts, and outreach. While the priorities primarily drive the Division's examinations, the scope of any examination is determined through a risk-based approach that includes analysis of a given entity's history, operations, services, products offered, and other risk factors.

The collaborative effort to formulate the annual examination priorities starts with feedback from examination staff who are uniquely positioned to identify the practices, products, services and other factors that may pose risk to investors or the financial markets. Division staff also takes into account input and advice from the Chair and other Commissioners, staff from other SEC divisions and offices, and other federal financial regulators.

On July 10, 2019, we issued an order instituting administrative proceedings ("OIP") against Fidelity Transfer Services, Inc. ("Fidelity" or the "Firm") and Ruben Sanchez, its only known officer, pursuant to Sections 17A(c) and 21C of the Securities Exchange Act of 1934 and Section 9(b) of the Investment Company Act of 1940. 1 We instituted proceedings to determine whether Fidelity and Sanchez violated Exchange Act provisions relating to the registration of transfer agents and the furnishing of required books and records to Commission staff and, if so, whether remedial action was warranted. The Division of Enforcement subsequently effected service of the OIP on Fidelity but informed us that it was unable to do so with respect to Sanchez, and the matter has since proceeded only as to Fidelity. We sua sponte dismiss this proceeding as to Sanchez. 

After Fidelity did not answer the OIP, we issued an order to show cause why it should not be found in default. Fidelity failed to respond to the show cause order or to the Division's subsequent motion for an order finding it in default and determining the proceeding against it.

We thereafter directed the Division to file a supplemental brief in support of its motion for sanctions. On January 15, 2021, the Division filed a supplemental brief that responded to our order. Fidelity did not respond to the order or to the Division's supplemental brief. We now find Fidelity to be in default, deem the OIP's allegations to be true, revoke Fidelity's registration as a transfer agent, and impose a cease-and-desist order on Fidelity.

Beginning in 1982, May was the president of ECP and provided financial advisory services to numerous clients. In 1993, BELL joined ECP, where she held various titles including comptroller and chief compliance officer.  ECP worked with a broker dealer ("Broker Dealer-1"), of which May became a registered representative in 1994.  In its role as a broker dealer, Broker Dealer-1 facilitated the buying and selling of securities for clients of Broker Dealer-1's registered representatives, including clients of May.  Broker Dealer-1 and associated clearing firms maintained securities accounts for ECP's clients and, through those accounts, held ECP's clients' money, executed their securities trades, produced account statements reflecting activity in the clients' accounts, and forwarded these account statements to ECP's clients. 

In order to obtain money from the Victims' securities accounts with Broker Dealer-1, May advised the Victims, among other things, that they should use money from those accounts to have ECP, rather than Broker Dealer-1, purchase bonds on their behalf.  He further represented that by purchasing bonds through ECP directly, the Victims could avoid transaction fees.  Because May lacked the authority to withdraw money directly from the Victims' accounts with Broker Dealer-1, he persuaded the Victims to withdraw the money themselves and to forward that money to an ECP "custodial" account (the "ECP Custodial Account"), so that he could use the money to purchase bonds on their behalf. 

With BELL's assistance, May guided the Victims, first, to withdraw their money from their Broker Dealer-1 accounts, and second, to send that money to the ECP Custodial Account by wire transfer or check.  At times, May falsely represented that the funds being withdrawn from Victims' Broker Dealer-1 accounts were the proceeds of prior bond purchases May had made.  After the Victims sent their money to the ECP Custodial Account, May and BELL did not use the money to purchase bonds.  Instead, BELL and May transferred the money to ECP's "operating" account and spent it on business expenses, personal expenses, and to make payments to certain Victims in order to perpetuate the scheme and conceal the fraud. 

Specifically, in some cases, BELL and May used Victims' funds to make purported bond interest payments to other Victims.  In other cases, May used Victims' funds to make payments to other Victims who wished to withdraw funds from their accounts.  BELL and May also created phony "consolidated" account statements that they issued through ECP and sent to the Victims.  These "consolidated" account statements purported to reflect the Victims' total portfolio balances and included the names of bonds May falsely represented that he purchased for the Victims and the amounts of interest the Victims were supposedly earning on the bonds.  In order to create the phony consolidated account statements, May provided BELL with bond names and false interest earnings, and BELL created ECP computerized account statements and had them distributed to the Victims.

To keep track of the money that the co-conspirators were taking from the Victims, BELL processed the Victims' payments for the purported bonds, entered them in a computerized accounting program, and, through that program, kept track of how BELL and May received and spent the Victims' stolen money.  In this way, from the late 1990's through March 9, 2018, BELL and May induced Victims to forward them more than $11,400,000.

In February 2016, Peltz obtained MNPI from an insider at Ferro Corporation ("Ferro") about a potential takeover offer (the "Ferro Takeover Bid"). Peltz used that MNPI to:

• Profitably trade in Ferro in the brokerage accounts of two co-conspirators,
• Tip other individuals, each of whom also profitably traded on MNPI about the Ferro Takeover Bid, and
• Tip a reporter, who wrote an article making public the news of the Ferro Takeover Bid, which resulted in an increase in the price of Ferro's stock.

Peltz and the Ferro insider each received significant financial benefits from other co-conspirators shortly after Peltz traded in those co-conspirators' brokerage accounts, and Peltz continued to receive large payments from co-conspirators, as well as other benefits, as payment for his trading activity. Peltz directed that these payments be made to corporate and nominee bank and credit card accounts, in order to conceal his income from the IRS. Despite receiving such payments, in 2017 Peltz falsely swore under penalty of perjury to the IRS that he had been unemployed since December 2015 and had no income.

Grevas admitted in a plea agreement that she made $286,960 in illegal profits from the purchase and sale of securities in a Washington state-based pharmaceutical company, which was a target for acquisition and later acquired by a foreign pharmaceutical company that employed Grevas's husband.  Grevas used material, non-public information about the expected acquisition to purchase shares in the Washington company ahead of a public announcement of the acquisition on Sept. 16, 2019.  After the announcement, the Washington company's stock price increased and Grevas sold the shares for the profit.

[C]ommencing in September 2020, the defendants fraudulently solicited at least $7.2 million from at least 322 clients, promising to use the funds to trade foreign exchange and cryptocurrency in individual managed accounts. The order finds that the defendants did not trade their clients' funds as represented, and instead used them to pay for Tinoco's personal expenses, such as the travel costs for chartering a private jet, the purchase of a luxury mansion and other real estate, and the purchase or lease of luxury automobiles. Some of the funds were also used to pay bogus "investment profits" to clients in a manner akin to a Ponzi scheme. 

Because Hananel decided which stocks to trade in the firm accounts of Customers A through F and when to trade them, and exercised discretionary authority in connection with 571 of the trades in the accounts, Hananel controlled the volume and frequency of trading in, and therefore exercised de facto control over, the six customers' accounts. 
From July 2014 through December 2018, Hananel's short term trading in the firm accounts of six customers was excessive and unsuitable given the customers' investment profiles, generating significant losses and trading costs in the form of commissions, markups and markdowns:

1. Customers A and B, a married couple and senior citizens, held a joint account with Aegis. From July 2014 through December 2018, Hananel's trading in Customer A and B's joint account generated an annualized cost-to-equity ratio of 55.61 and an annualized turnover rate of 21.98. Customers A and B paid commissions and trading costs of $109,084, and incurred losses of $44,641. 
   
   
2. Customer C was a senior citizen. From July 2014 through February 2017, Hananel's trading in Customer C's account generated an annualized cost-to-equity ratio of 28.91 and an annualized turnover rate of 21.92. Customer C paid commissions and trading costs of $110,066, and incurred losses of $332,002. 
   
   
3. Customer D was a senior citizen. From July 2014 through December 2018, Hananel's trading in Customer D's account generated an annualized cost-to-equity ratio of 32.99 and an annualized turnover rate of 22.41. Customer D paid commissions and trading costs of $600,198, and incurred losses of $893,673.
    
4. Customers E and F, a married couple, held a joint account with Aegis. From July 2014 through December 2018, Hananel's trading in Customer E and F's joint account generated an annualized cost-to-equity ratio of 26.57 and an annualized turnover rate of 16.86. Customers E and F paid commissions and trading costs of $653,770, and incurred losses of $832,860. 

Therefore, Hananel violated FINRA Rules 2111 and 2010.

. . .

Between January 2015 and September 2017, Aegis's written supervisory procedures prohibited registered representatives from exercising discretion in a customer's account unless the registered representative received prior written approval from the customer and the firm. 

Hananel did not obtain prior written authorization from Customers A, B, C, D, E or F to exercise discretion in their Aegis accounts. However, Hananel exercised discretionary trading authority in the customers' Aegis accounts when he placed a total of 571 trades between January 2015 and September 2017 without discussing the specific trades on the dates of the transactions with the customers. None of the customers' accounts were approved for discretionary trading by the Firm. 

Therefore, Hananel violated NASD Rule 2510(b) and FINRA Rule 2010.

The last two years have seen an unprecedented surge in the use of special purpose acquisition vehicles (SPACs) as an alternative means of going public. Indeed the amount of capital raised by SPAC initial public offerings (IPOs) in 2021 was more than $160 billion, a fifteen fold increase over 2018.[1] The rise of SPACs, and the corresponding innovation around their use, raises specific investor protection concerns, especially for retail investors. Today the Commission responds to those concerns by proposing a package of amendments designed to promote transparency and accountability in the SPAC market.

In its simplest formulation, a SPAC is a shell company that raises capital in the public markets with the intention of identifying and merging with a target private operating company.[2] In practice, SPAC transactions are often exceedingly complex and governed by regulations designed for more traditional IPO structures. The complexity and the novelty of the SPAC structure have yielded a host of questions, including whether shareholders have adequate insight into the compensation, incentives, and potential conflicts related to the SPAC sponsors, whether the absence of traditional investor protections and liability, or at least uncertainty about their application at the de-SPAC stage, leaves shareholders vulnerable, and generally whether retail shareholders may be left holding the bag on an ill-advised or underperforming business after sponsors have collected their compensation and insiders have cashed out their shares.[3]

Today's proposal addresses these concerns through, among other things, new disclosure requirements to enhance transparency and clarified liability provisions to enhance accountability.

Enhanced transparency. The proposal would require additional disclosures regarding the de-SPAC transaction, including whether the SPAC sponsors believe the de-SPAC transaction is fair to unaffiliated shareholders. It further would require additional disclosure on sponsor compensation, conflicts of interest, and the potential for dilution of share value. With respect to dilution, the nature of SPACS, offering as they do compensation and various rights to third parties along the path to the de-SPAC, presents heightened risks, especially for shareholders who do not redeem their shares before the completion of the business combination.[4] I hope commenters will weigh in on whether the proposed content and presentation of these disclosures will meet investor needs.

Enhanced accountability. The proposal would deem the target private operating company in a de-SPAC transaction to be a co-registrant thereby subjecting it to traditional signing liability. It would further propose a definition of "blank check company" that would encompass SPACs so that the safe harbor for forward-looking statements under the Private Securities Litigation Reform Act of 1995 (PSLRA) would not be available to SPACs or to target private operating companies. It also proposes a new rule to clarify that SPAC IPO underwriters are underwriters in the de-SPAC and therefore subject to underwriter liability. On this last point, I note that, in addition to the SPAC IPO underwriter, there are a number of participants in the de-SPAC transaction that may also be subject to statutory underwriter liability if they participate in the distribution. Because underwriter liability is a key mechanism to help ensure adequate due diligence and materially complete and accurate disclosures for investors, I hope to hear from commenters on whether there is adequate certainty as to which de-SPAC participants are statutory underwriters, and whether and how to mitigate the risk that participants will structure their participation to avoid such liability.

Lastly I'll note that the amendments also include a proposed safe harbor under the Investment Company Act. I have some concerns regarding whether we've taken the right approach here. It's not clear to me whether SPACs that meet the conditions of the proposed safe harbor should nevertheless be exempted from the investor protections of the Investment Company Act. I think we would especially benefit from robust comments on this important issue.

* * *

Today's proposed amendments are tailored to address investor protection gaps in the existing regime, which should increase investor confidence in SPACs and help ensure their continuing viability as a pathway to the public market.

I want to thank the staff for their careful and thoughtful work in crafting today's proposal. I'm pleased to support it, and I look forward to public comment. Thank you.

= = =

[1] Special Purpose Acquisition Companies, Shell Companies, and Projections, Release No. 33-11048 (March 30, 2022) (providing that, in IPOs, SPACs raised "more than $83 billion in such offerings in 2020 and more than $160 billion in such offerings in 2021" compared to "$13.6 billion in initial public offerings in 2019 and a total of $10.8 billion in initial public offerings in 2018.") [Proposing Release]; see also John C. Coates, SPAC Law and Myths (last rev. Feb. 14, 2022) ("In the first half of 2021, 62% of all initial public offerings were SPAC offerings, compared to 53% in 2020, and less than 25% in the prior four years.").

[2] A SPAC is designed to take a private company public through its acquisition by a registered shell company. It proceeds in two basic stages. First, a registered public offering that raises funds to be put in trust for the acquisition of a private company. Second, the acquisition itself, or business combination, sometimes called the de-SPAC, where shareholders in the first stage IPO vote on the acquisition of the target private company. If the SPAC fails to complete the business combination within two years, it liquidates, and the sponsors forfeit their potentially lucrative "promotes." See Proposing Release at 9-10.

[3] See Proposing Release at 13-14 (identifying concerns raised by commentators, including "sponsor compensation and other costs and their dilutive effects on a SPAC's shareholders," potential conflicts of interest inherent in conditioning sponsor compensation on completing the de-SPAC that "could lead sponsors to enter into de-SPAC transactions that are unfavorable to unaffiliated shareholders," listing rules under which SPAC shareholders can "vote[] in favor of proposed de-SPAC transactions while still redeeming their shares prior to the closing of the transactions," and studies showing that "returns are relatively poor for investors in companies following a de-SPAC transaction."); see also Michael Klausner, Michael Ohlrogge & Emily Ruan, A Sober Look at SPACs, 39 Yale J. on Reg. 1 (2022) ("We find that the SPAC structure-designed to support a circuitous two-year process from IPO to merger-entails costs that are subtle, opaque, and far higher than have been previously recognized. We further find that nearly all investors in SPAC IPOs redeem or sell their shares by the time of a SPAC's merger, leaving a new group of shareholders to bear the costs embedded in SPACs as they merge. Furthermore, the SPAC structure results in misaligned interests between its sponsor and the holders of SPAC shares at the time of a merger.").

[4] See Proposing Release at 36 ("There are a number of potential sources of dilution in a SPAC's structure, including dilution resulting from shareholder redemptions, sponsor compensation, underwriting fees, outstanding warrants and convertible securities, and PIPE financings. This dilution may be particularly pronounced for the shareholders of a SPAC who do not redeem their shares prior to the consummation of the de-SPAC transaction and who may not realize or appreciate that these costs are disproportionately borne by the non-redeeming shareholders."); see also Klausner, et al., supra note 3 ("We find that the median SPAC delivers only $5.70 per share in net cash in its merger, which means a total of $4.30 per share has been extracted by the sponsor, the IPO investors, the underwriter, and various advisors. In order for both holders of SPAC shares at the time of the merger and target shareholders to come out ahead on the deal, a merger must produce a surplus in value that fills the hole created by these costs. We find that, in most SPACs, this does not happen.").

I'd like to thank the staff, my fellow Commissioners, and the Chair. The staff's work is, as always, the reason we are here today and I am grateful for, and deeply rely, on their expertise, acumen, and dedication.

A special purpose acquisition vehicle ("SPAC") is a company that has no commercial operations and is formed solely to raise capital so it can acquire a private operating company and take that private company public.  These vehicles are not new. They have existed for decades.[1] But in 2020 and 2021, we witnessed a sudden SPAC boom with more than $80 billion raised in 2020 and more than $160 billion raised in 2021. In 2019, by comparison, SPACs raised less than 9% of what they raised in 2021.[2] And while I am, of course, supportive of companies having greater access to the public markets through a variety of avenues, the current SPAC boom highlighted a process with significant conflicts of interest and a host of misaligned incentives. The result is a process that can extract fees and compensation at the expense of shareholders.[3] And, a process that may overvalue the prospective public company to the detriment of the public markets and investors.[4] I am hopeful that today's proposal will lead to rules that help mitigate some of the issues with SPACs while preserving an alternative and viable path for companies to go public.

To understand some of the concerns the SPAC markets raise for regulators, it's important to think about the way SPACs work. Generally speaking, SPACs have two key transactions. First, a SPAC sells shares in a shell company to raise funds for a transaction with a yet-to-be identified private operating company.[5] This shell company, as noted above, does not have operations, but does have a group of professionals who are responsible for organizing and managing the SPAC.[6] The second transaction is a "de-SPAC," where the shell company merges with a private company, that has operations and prospects for future success, to form a public company listed on a national securities exchange.[7] If the SPAC does not identify and consummate a merger, the funds raised at the SPAC IPO are returned to shareholders.[8]

A typical SPAC is a complex structure. It can include several sophisticated participants with differing and sometimes competing incentives,[9] contingent compensation and fee structures, [10] offerings with a mix of equities and derivatives in the form of warrants or rights,[11] rights that allow investors to redeem their shares but still vote in favor of a merger,[12]  and later-stage capital infusions.[13] Those characteristics can, and often do, raise conflict of interest concerns, among others.[14] For example, sponsors do not retain their compensation unless a de-SPAC is completed.[15] Similarly, SPAC IPO underwriter compensation, in part, is contingent upon completion of the de-SPAC.[16] Meaning that if a de-SPAC does not occur, people forfeit their compensation and may prefer a sub-optimal deal over no deal at all.[17]

The proposal seeks to address these issues in at least two ways. First, the proposal contemplates enhanced reporting and disclosures so investors are better informed about the complexities of this method for accessing public markets, and the factors that impact the value of their SPAC investment.[18]  For example, the proposal, among other things, would require tabular disclosures relating to the potential for dilution,[19] a required summary of various key terms in the prospectus,[20] detailed disclosure regarding the sponsor's experience and material relationships with other entities, [21] disclosure about financing negotiated before the de-SPAC,[22] and enhanced disclosures relating to projections.[23]   

Second, the proposal amends existing rules, offers guidance, and contemplates new rules. One example, among others, is to bring some protections afforded to investors in traditional IPOs to de-SPACs.  More specifically, the proposal would provide assurance that the Private Securities Litigation Reform Act ("PSLRA")[24] and section 11 underwriter liability apply to de-SPACs. [25] This is important because underwriter liability and potential PSLRA liability help to ensure the SPAC and its advisors engage in quality due diligence and carefully considered disclosure.[26] Companies at the de-SPAC stage may make disclosures involving forward-looking statements about the prospective merged company's future performance. To the degree companies and individuals can't be held accountable for those statements, it is possible that some of those projections will be a bit more positive, and potentially less accurate, than they ought to be.  Clarifying that liability attaches serves to ensure that these forward looking statements are as accurate and careful as they would be in other similar contexts.

All this said, the proposal also includes a "safe harbor" from the Investment Company Act, which necessarily implies SPACs might otherwise be operating as investment companies.[27] Among other things, the conditions would require de-SPACs to happen within a specific timeframe.[28] I am curious whether the period of time allotted provides appropriate protections for investors.

Thank you again to the staff, particularly the staff in the Divisions of Corporation Finance, Office of the Chief Accountant, Division of Economic and Risk Analysis, the Division of Investment Management, and Office of the General Counsel for all you're hard work, and I look forward to reviewing all the comments on this proposal.

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[1] See, e.g., Special Purpose Acquisition Companies, Shell Companies, and Projections, Release Nos. 33-11048; 34-94546; IC-34549 at 9 (proposed Mar. 30, 2022) [hereinafter the Release].

[2] See, e.g., Release at 8, n. 7, n. 8.

[3] See Michael Klausner, Michael Ohlrogge & Emily Ruan, A Sober Look at SPACs, 39 Yale J. on Regul. 228, 247 (2022) (noting that sponsor compensation via a "promote" creates two dysfunctional incentives - the sponsors stand to make money even if they enter into a "value destroying" transaction and the incentive to merge is "overwhelming" because if there is no merger the SPAC must liquidate and the sponsors will lose their initial investment and that sponsor compensation via the promote). 

[4] Recent academic research suggests that the costs embedded in SPAC structure are subtle, opaque and are higher than the cost of an IPO. See Klausner et al. at 246 (defining costs in a SPAC IPO and de-SPAC as value extracted by parties other than the SPAC shareholders and the target and its shareholders and finding that "the costs embedded in the SPAC structure are far higher than costs associated with traditional IPOs" because such costs reduce the amount of cash per share that a SPAC will contribute in its merger, additional costs stem from the dilution from the sponsor's promote, warrants given to SPAC-IPO investors, underwriting fees, and redeeming shareholders). While traditional IPOs raise some dilution concerns, choosing a SPAC over an IPO for cost-savings may be illusory or cost-shifting rather than eliminating. See, e.g., Allison Nathan, Top of Mind: The IPO SPAC-tacle, 95 Goldman Sachs Macro Research at 4 (Jan. 28, 2021) (interviewing Professor Jay Ritter who notes that "given the dilution risk from the sponsor promote as well as other aspects of the SPAC structure, it is unclear whether SPACs are cheaper on average than a conventional IPO, and they're certainly not cheaper for all IPOs"). 

[5] See Release at 9-15.

[6] See id.

[7] See Release at 9.

[8] See Release at 10.

[9] See, e.g., John Coates, SPAC Law and Myths ("SPACs build in divergences (i.e., conflicts) of interests among (a) sponsors (who effectively control the SPAC in the period leading up to the deal, and who by design are able to benefit from doing deals that harm other pre-de-SPAC investors), (b) the target, which sits at the bargaining table and negotiates with the sponsor (and possibly with PIPE investors), (c) PIPE investors, who invest on terms that differ from terms offered to other shareholders (typically investing at a discount), and (d) the public shareholders and other shareholders. Add to this mix the significant overhang of contingent equity in the form of warrants, the terms of which differ across public warrants, private warrants, and (in some SPACs) other warrants, and the possibility - often a reality - that many voting shareholders will redeem and exit the SPAC shortly after they vote on a deal, creating a close analogue of "empty voting."").

[10] Release at, 98-99 ("While SPAC IPO underwriting fees-those fees the SPAC IPO underwriters earn for their efforts in connection with the initial offering of SPAC shares to the public-generally range between 5% and 5.5% of IPO proceeds, a significant portion (typically 3.5% of IPO proceeds) is deferred until, and conditioned upon, the completion of the de-SPAC transaction.").

[11] Warrants allow holders to purchase in the future at set price, but does not impose an obligation to do so. See Release at n. 15, 187-87.

[12] See, e.g., Release at 175 ("[I]n cases where the SPAC is structured so that the shareholders are able to vote in favor of a merger but also redeem their shares, this could present a moral hazard problem, in economic terms, because these redeeming shareholders would not bear the full cost of a less than optimal choice of target."); Usha Rodrigues & Michael Segemoller, Redeeming SPACs (Research Paper No. 2021-09) (noting that SPAC shareholders can vote for a business combination even while redeeming shares "in effect, they can vote for an acquisition while walking out the door…permit[ting] corporate transactions that do not accurately reflect the true economic preferences of shareholders" and noting that retail investors investing in SPACs alongside hedge fund investors "renders these [retail] investors uniquely vulnerable"). Further, research indicates that 54.2% of SPAC shares are redeemed on average, and news reports recent redemptions reaching more than 80%. Id.

[13] See, e.g., Release at section IX.B.2.c

[14] See, e.g., Release at 33-34 (identifying some conflicts of interest as the contingent nature of SPAC sponsor's compensation where the sponsors and its affiliates have "significant financial incentives to pursue a [de-SPAC] even though the transaction could result in lower returns for public shareholders than liquidation of the SPAC or an alternative transaction"; SPAC sponsors hold financial interests in or have obligations to other entities; or when the de-SPAC target is a private company affiliated with the sponsor, the SPAC, the SPAC's founders, officers, or directors; SPAC's officers who work at other companies); Klausner et al. at 232 (finding that SPAC structure is "designed to support a circuitous two-year process from IPO to merger-entails costs that are subtle, opaque, and far higher than previously recognized."); Rodriguez et al. at 4-5 ("[e]very major player in the SPAC is incentivized to find a target and take it public, even if it is a value-destroying transaction. The SPAC's founders, termed sponsors, receive a significant payoff it-and only if-they complete an acquisition. The investment banks pocket deferred underwriting fees if-and only if-an acquisition occurs. The SPAC IPO investors, largely hedge funds, hold warrants that have value if-and only if-they complete an acquisition. The target firm itself-and private investors that often invest during the merger-has decided that the transaction is beneficial (in terms attractive to it… not necessarily to the retail SPAC investors). Thus, all the major players in the SPAC are deeply incentivized to see the deal pushed forward. In other words, SPACs lack a gatekeeper. And that means SPAC targets can be let loose on the market even if they are not ready for prime time.").

[15] See Klausner et al. at 247 (noting that sponsor compensation via the promote creates two dysfunctional incentives - the sponsors stand to make money even if they enter into a value destroying transaction and the incentive to merge is "overwhelming" because if there is no merger the SPAC must liquidate and the sponsors will lose their initial investment);

[16] See, e.g., Release at 98-99, n. 203.

[17] See, e.g., supra notes 9, 14, 15, 16.

[18] See Release at sections II, IV.B, V.

[19] See id. at section II.D.

[20] See id. at section II.E.

[21] See id. at section II.B.

[22] See id. at section II.F

[23] See id. At section V.B.

[24] The benefit of the PSLRA safe harbor is the ability to make forward-looking statements without the potential for liability to private-rights of action under the PSLRA. See Release at section II.E. The PSLRA notes that statements related to "initial public offerings" are not eligible for the safe-harbor, presumably because at the initial launch stage, forward looking statements are of heightened importance as there is no corporate history or current performance to assess. See id. Thus, traditional IPOs and SPAC IPOs are not able to benefit from the safe harbor, however, it is a separate question as to whether de-SPACs are able to use it. See id. It is important to note that the PSLRA does not provide safe harbor from the SEC's ability to enforce the securities laws. See Coates at 6. While it is important to give management the ability to speak frankly about future performance without fear of unnecessary litigation, the de-SPAC stage is when the operations that will underlie the future public company are evaluated and disclosed. During the first stage, the SPAC IPO, there are no such operations to evaluate - there are no cash flows, revenues, or a financial track record to assess because the operating company has not yet been identified. Today's release amends the relevant rules so that forward looking statements made at the de-SPAC stage would not be covered by the safe harbor.

[25] See Release at 15, n. 34 (noting "the lack of a named underwriter in [de-SPAC] transactions that would typically perform traditional gatekeeping functions, such as due diligence, and would be subject to liability under Section 11 of the Securities Act for untrue statements of material facts or omissions of material facts"); Coates at 7 ("One of the possible advantages (to sponsors and target managers) of the SPAC's two-stage structure is that by separating the initial offering - with conventional underwriters involved - from the de-SPAC - when no formal underwriters are involved, SPACs have had at least the promise of lowering the overall legal exposure of the investment banks working on the deals.") See also Release at 104 (SPAC IPO underwriters typically are not retained to act as firm commitment underwriters in the de-SPAC transaction, they nevertheless typically participate in activities that are necessary to that distribution. For instance, it is common for a SPAC IPO underwriter (or its affiliates) to participate in the de-SPAC transaction as a financial advisor to the SPAC, and engage in activities necessary to the completion of the de-SPAC distribution such as assisting in identifying potential target companies, negotiating merger terms, or finding investors for and negotiating PIPE investments.  Furthermore, receipt of compensation in connection with the de-SPAC transaction could constitute direct or indirect participation in the de-SPAC transaction.") 

[26] See, e.g., Release at 84-85 (noting that some market participants "are of the view that the PSLRA safe harbor for forward-looking statements is available in de-SPAC transactions…thus may not exercise the same level of care in preparing forward-looking statements, such as projections, as in a traditional initial public offering"); Usha et al. at 5 (noting that because the chief gatekeeper in an IPO, the investment bank, faces liability under section 11, banks scrutinize a company's initial disclosure documents for accuracy "but because the de-SPAC is technically not an IPO, banks do not fact the same liability").

[27] See Release at 137 ("We are concerned that SPACs may fail to recognize when their activities raise the investor protection concerns addressed by the Investment Company Act. To assist SPACs in focusing on, and appreciating when, they may be subject to investment company regulation, we are proposing Rule 3a-10."

[28] See id.

Thank you, Chair Gensler, Renee [Jones], Charles [Kwon], and Jessica [Wachter] for the presentation. The Commission's 2022 budget request includes additional resources to address "an unprecedented surge in non-traditional IPOs by special purpose acquisition companies."[1] If we adopt the rule that we are voting on today, we will not need additional resources to deal with Special Purpose Acquisition Companies ("SPACs"). The proposal-rather than simply mandating sensible disclosures around SPACs and de-SPACs, something I would have supported-seems designed to stop SPACs in their tracks. The proposal does not stop there; it also makes a lot of sweeping interpretations of the law that are not limited in effect to the SPAC context. Accordingly, I dissent.

The latest SPAC boom, which began in 2020 and continues today, has generated a number of legitimate disclosure concerns. We and others, including our Investor Advisory Committee,[2] have asked whether investors are getting the type of information they need to understand conflicts of interest, sponsor compensation, and dilution. Over the past two years, the Division of Corporation Finance staff have poured countless hours into reviewing SPAC IPO and de-SPAC transactions. In addition to improving disclosures in individual transactions, the staff's tireless efforts have shed light on ways our rules could be bolstered to generate better disclosures across the board. I could have supported a proposal that was rooted in the Division's good work and focused on addressing disclosure concerns.

Today's proposal does more than mandate disclosures that would enhance investor understanding. It imposes a set of substantive burdens that seems designed to damn, diminish, and discourage SPACs because we do not like them, rather than elucidate them so that investors can decide whether they like them. The typical SPAC would not meet the proposal's parameters without significant changes to its operations, economics, and timeline. Among other substantive changes[3] to how SPAC transactions are conducted, the proposal would:

• Require a SPAC to state whether it "reasonably believes that the de-SPAC transaction and any related financing transaction are fair or unfair to unaffiliated security holders of the [SPAC]."[4] While this disclosure requirement technically does not require a SPAC board to hire third parties to conduct analyses and prepare a fairness opinion, the proposed rules clearly contemplate that this is the likely outcome of the new requirement. For example, the proposal would require disclosure of whether "an unaffiliated representative" has been retained to either negotiate the de-SPAC transaction or prepare a fairness opinion[5] and would elicit disclosures about "any report, opinion, or appraisal from an outside party relating to . . . the fairness of the de-SPAC transaction."[6] For state law reasons, fairness opinions are common in many merger transactions, but (as the economic analysis acknowledges) they are not standard in de-SPAC transactions.[7]
  
  
• Deem target companies to be co-registrants at the de-SPAC stage. That target companies have to take the steps necessary to enter the public markets does not justify redefining what it means to be a registrant. Our analysis for doing so is not persuasive, and the significant new disclosure obligations included in this proposal obviate the need for doing so.
  
  
• Eliminate the availability of the Private Securities Litigation Reform Act ("PSLRA") safe harbor for forward-looking statements in de-SPAC transactions. The widespread use of projections in de-SPAC transaction disclosures suggests that market participants generally believe the PSLRA safe harbor is available for forward-looking statements in de-SPAC transactions and that such projections are useful for investors. Through a regulatory sleight of hand, the proposal would eliminate the safe harbor. Specifically, the proposal would change the existing definition of "blank check company" for purposes of the PSLRA-the definition Congress looked to when it wrote the PSLRA-to include SPACs by removing the "penny stock" condition. Look over there, Congress, while we rewrite the statute!
  
  
• Impose underwriter liability on SPAC IPO underwriters by deeming many of them to be underwriters at the de-SPAC stage. The proposal would deem a SPAC IPO underwriter to be an underwriter in the de-SPAC transaction if it "takes steps to facilitate the de-SPAC transaction, or any related financing transaction, or otherwise participates (directly or indirectly) in the de-SPAC transaction."[8] While this section describes at great length court cases and Commission guidance on the determination of underwriter status, it contains only a brief analysis of how those cases apply here. Per the release, activities that are sufficient to establish that the SPAC IPO underwriter is participating in the distribution of the target company securities are: "assisting in identifying potential target companies, negotiating merger terms, . . . finding investors for and negotiating PIPE investments" and "receipt of compensation in connection with the de-SPAC transaction."[9] While the desired outcome of the proposal is for underwriters to conduct due diligence at the de-SPAC stage, the Commission acknowledges that this may not be possible.[10] A more likely result is that SPAC underwriters will do everything possible to avoid being captured by the rule, such as demanding all compensation up front, a result that may not benefit SPAC investors.
  
  
• Establish a non-exclusive safe harbor for SPACs under the Investment Company Act of 1940. While a safe harbor sounds good at first, one has to ask to what end? Does any investor in a SPAC think she is buying an investment company? Would a SPAC's adherence to the conditions of the safe harbor, some of which will add expense or decrease the SPAC's negotiating leverage and increase conflicts,[11] benefit investors or harm them? Is the inclusion of such a safe harbor and the language that accompanies it a way to deem many past and present SPACs unregistered investment companies?[12] After all, SPACs have existed for decades, so it is odd that, this late in the game, the Commission has concluded that such a safe harbor is necessary. The proposed safe harbor appears more focused on protecting our ability to enforce the Investment Company Act of 1940 than protecting investors. Our existing disclosure review process is up to the task of preventing investment companies from masquerading as SPACs.[13]

The Commission is not just proposing changes to SPACs, but is also proposing changes to shell company business transactions. Proposed Securities Act Rule 145a would deem any business combination of a reporting shell company involving an entity that is not a shell company to involve a sale of securities to the reporting shell company's shareholders. Proposed revisions to Item 10(b) of Regulation S-K to expand and update the Commission's views on the use of projections also will affect business combinations other than just SPACs. I hope that market participants other than SPACs that may be affected by these other changes will hear this message, will review the release, and will provide comments on it. The Commission needs to do a better job of drawing attention to releases that have broader market effect than their headlines may suggest to ensure robust public participation in the comment process.

Underlying this proposal may be a concern that the SPAC boom is producing public companies that are not good for investors.[14] It is not our place to decide that SPACs are good or bad. By arming investors with enhanced disclosure, we empower them to decide whether a particular SPAC is a good investment. SPAC sponsors, under the light of enhanced disclosure, might decide they need to offer more favorable terms to investors. In other words, we need to do the disclosure work and let the markets sort out whether and if substantive changes are needed in the SPAC and de-SPAC process. Some of those changes already may be happening under the existing disclosure regime.[15]

The proposal does not adequately account for the potential cost of damming up the SPAC river. Since 2020 SPACs brought many new companies into our public markets-a welcome trend after decades of decline in the number of public companies. As I have previously argued, we could use this moment to ask whether the SPAC revival of recent years reveals shortcomings with the traditional IPO process and to consider ways to calibrate properly the rules governing IPOs, SPACs, and direct listings.[16] Instead, today's proposal assumes that the traditional IPO process works just fine as is, that it provides the optimal level of investor protection, and that it generates the right number and the right type of public companies. I look forward to hearing from commenters not only about SPACs, but about whether the traditional IPO process could be improved.

I would like to thank the hard-working staff of the Division of Corporation Finance, Division of Investment Management, Division of Economic and Risk Analysis, the Office of General Counsel, and others across this agency that worked on the proposal. As always, I appreciate your efforts, expertise, and engagement.

= = =

[1]SEC, Fiscal Year 2022 Congressional Budget Justification Annual Performance Plan at 4, https://www.sec.gov/files/FY%202022%20Congressional%20Budget%20Justification%20Annual%20Performance%20Plan_FINAL.pdf.

[2] SEC Investor Advisory Committee,Recommendations of the Investor Advisory Committee regarding Special Purpose Acquisition Companies(Sept. 9, 2021)https://www.sec.gov/spotlight/investor-advisory-committee-2012/20210909-spac-recommendation.pdf.

[3] As in our recent cybersecurity and climate proposals, some substantive changes are disguised as disclosure requirements.

[4] Proposed Item 1606(a) of Regulation S-K.

[5] Proposed Item 1606(d) of Regulation S-K.

[6] Proposed Item 1607 of Regulation S-K.

[7] The economic analysis acknowledges that "only 15% of de-SPAC transactions disclosed that they were supported by fairness opinions." See Proposing Release at 198.

[8] Proposed Securities Act Rule 140a.

[9] Proposing Release at 98.

[10] See Proposing Release at 100 (asking "[d]oes the SPAC IPO underwriter have the means and access necessary . . . to perform due diligence at the de-SPAC transaction stage? . . . Could such access be reasonably obtained in the course of the negotiation of the underwriting agreement for the SPAC [IPO] or otherwise?").

[11] For example, the SPAC must announce a de-SPAC transaction no later than 18 months after the effective date of the SPAC's registration statement for its IPO and complete the transaction no later than 24 months after the effective date. See Proposed Investment Company Act Rule 3a-10(a)(3)(ii)-(iii). The economic analysis finds that approximately 59% announced a transaction by 18 months and 65% completed the transaction by 24 months. See Proposing Release at 210. This condition will also exacerbate conflicts of interest that arise when sponsors of SPACs are under compensation-driven pressure to find target companies within a short time frame. While a time-limit may be appropriate, SPAC investors should be able to override it. Another condition that would impose costs and micro-manage boards without a clear benefit requires the SPAC's board of directors to adopt an appropriate resolution evidencing that the company is primarily engaged in the business of seeking to complete a single de-SPAC transaction. See Proposed Investment Company Act Rule 3a-10(a)(5)(iv).

[12] See Proposing Release at 137-38 ("We believe that certain SPAC structures and practices may raise serious questions as to their status as investment companies. While a SPAC would not be required to rely on the safe harbor, we have designed the proposed conditions of the safe harbor to align with the structures and practices that we preliminarily believe would distinguish a SPAC that is likely to raise these questions from one that would not.").

[13] See e.g., SEC Comment Letter re: Pershing Square Tontine Holdings Ltd. Schedule TO-Is filed on July 8, 2021 (July 16, 2021), https://www.sec.gov/Archives/edgar/data/0001811882/000000000021008861/filename1.pdf.

[14] The release raises, for example, concerns "that returns are relatively poor for investors in companies following a de-SPAC transaction." Proposing Release at 14.

[15] See generally 2022 WilmerHale M&A Report at 12, https://www.wilmerhale.com/en/insights/publications/2022-manda-report (explaining how SPAC terms "have generally become more investor-friendly than they were in 2020 and early 2021"); Chris Metinko, As SPACs Slow, Terms Change and the Market Widens for Targets, Crunchbase News (July 29, 2021), https://news.crunchbase.com/news/as-spacs-slow-terms-change-and-the-market-widens-for-targets/; Preston Brewer, Analysis: SPAC Deal Terms & IPO Market Are Changing Fast, Bloomberg Law (Aug. 6, 2020), https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-spac-deal-terms-ipo-market-are-changing-fast.

[16] Commissioner Hester M. Peirce, Inside Chicken: Remarks Before Fordham Journal of Corporate and Financial Law Conference (Oct. 22, 2021), https://www.sec.gov/news/speech/peirce-remarks-fordham-journal-102221.

• Securities Industry Commentator
• Bill Singer