Best Practice Newsletter – January 2024

SEC Issues New SPAC Rules–

On Jan. 24, 2024, the Securities and Exchange Commission adopted final rules to enhance disclosures in initial public offerings (IPOs) by special purpose acquisition companies (SPACs) and in subsequent business combination transactions between SPACs and target companies (de-SPAC transactions).

SPACs are shell companies with no tangible assets other than the monies raised from investors, and are formed to find an acquisition target. A de-SPAC transaction is one in which that target, usually a private company, goes public by merging into the SPAC.

The SEC has been concerned about the lack of investor protections in SPAC transactions and made SPACS, also known as blank check or shell companies, a priority in early 2022, when the new rules were first proposed.

The SEC’s concern was triggered by a frenzy in SPAC activity in both 2020 and 2021, when more than 860 SPACs raised a record $246 billion, according to SPAC Insider, a data service which tracks SPAC activity.

The final rules, among other things:

 ● Require additional disclosures about SPAC sponsor compensation, conflicts of interest, dilution, the target company, and other information that is important to investors in SPAC IPOs and de-SPAC transactions;

 ● Require, in certain situations, the target company in a de-SPAC transaction to be a co-registrant with the SPAC (or another shell company) and thus assume responsibility for the disclosures in the registration statement filed in connection with the de-SPAC transaction;

 ● Deem any business combination transaction involving a reporting shell company, including a SPAC, to be a sale of securities to the reporting shell company’s shareholders; and

 ● Better align the regulatory treatment of projections in de-SPAC transactions with that in traditional IPOs.

In addition, the Commission is providing guidance to assist SPACs in assessing when they may meet the definition of an investment company under the Investment Company Act of 1940 and regarding statutory underwriter status under the Securities Act of 1933 in connection with de-SPAC transactions.

The rules will become effective 125 days following publication in the Federal Register.

For complete details on the adopted rules, please see:

https://www.sec.gov/files/rules/final/2024/33-11265.pdf

Short Sellers Cash-in On Whistleblower Program

Short sellers looking for extra cash are finding a new revenue source in the SEC’s Whistleblower program, with some reaping millions if their tips lead to enforcement actions.

Accounting Today magazine reports that the practice is widespread, with short sellers “quietly sharing their research about sketchy accounting and other misdeeds with the SEC’s whistleblower office in hopes of making some extra money.”

Although the whistleblower program is open to all, including corporate insiders and investors, Accounting Today says that four out of every 10 bounties were awarded to non-insiders, according to SEC data. One big-named short seller raked in $14 million for a single lead that led to an SEC fine.

So pervasive are short sellers’ activity in the program that “They’ve flooded the agency with over 18,000 formal tips in the 2023 fiscal year. For perspective, that 12-month tally is double the total of all SEC enforcement actions over the past 10 years.”

Short sellers are drawn to the program because if the SEC investigates and levies a fine, the short seller can collect up to 30% of the proceeds when the monetary sanctions exceed $1 million. That’s on top of any profit they might make by betting on the stock’s decline.

Founded in 2011, the Whistleblower program has paid out more than $1.3 billion in over 300 cases successfully prosecuted by the SEC.

To read about the latest Whistleblower awards, please see:

https://www.sec.gov/news/press-release/2023-257

A Small Fish Threatens Administrative Agency Powers

The 1984 landmark Supreme Court decision in Chevron USA v. National Resources Defense Council (NRDC) gave government administrative agencies sweeping new powers.

 In short, the Supreme Court ruled that where the text of a law is silent or ambiguous, courts must, unless unreasonable, defer to the regulatory agencies’ interpretation. This became known as the Chevron Deference principle. Several cases now before the Supreme Court may narrow or overthrow that 40-year principle, possibly limiting the powers of administrative agencies such as the SEC, FTC, CFPB, and others.

The 2023-2024 Supreme Court docket includes several cases challenging administrative agency powers, with the latest two cases argued before the court this month involving a small fish, the herring. In Loper Bright Enterprises, Inc., v. Raimondo, and Relentless Inc. v. Dept. of Commerce, attorneys argued that Chevron Deference led to agency overreach, and imposed regulations on their businesses even though the laws were obscure.

 With this session’s docket, the Supreme Court may make historical changes. Will it do so with scalpel in hand, or wielding an Ax? We should know by the end of June.

For an overview of the Chevron decision, please see:

https://supreme.justia.com/cases/federal/us/467/837/

For an overview of the pending Loper and Relentless cases, please see:

https://www.supremecourt.gov/docket/docketfiles/html/public/22-451.html