“Statement Regarding SPAC Matter,” is the latest from SEC Commissioner Hester Peirce. Seems completely anodyne, doesn’t it? But, as they say, looks can be deceiving. Instead, it’s a withering criticism of the SEC’s failure to declare a SPAC registration statement effective in time to allow a de-SPAC merger to go forward, implicitly suggesting at the end that the SEC may have displayed a lack of good faith in its Kafkaesque process (her metaphor, not mine), which had the effect of stringing the registrant along for many months until it was too late to go forward and liquidation was the only possible result. Peirce presumes the failure to declare effectiveness was based on the SEC’s “newfound hostility to SPAC capital formation.” Of course, as none of the correspondence with the SEC has been posted, we really have no independent information about what happened or precisely why the registration statement was not declared effective; it’s certainly possible that the deal was more thorny than the norm. Peirce calls SEC “inaction on a request for acceleration of the effective date of a registration statement…highly unusual.” But then, so is her statement.
Alberton Acquisition Corporation is a British Virgin Islands SPAC that went public in 2018 and, in October 2020, entered into a de-SPAC merger agreement with SolarMax Technology, a Nevada corporation that is an “integrated solar energy company” with operations in the U.S. and China. Along the way, Alberton received several delisting notices from Nasdaq for various failures—to hold an annual meeting, to timely file a 10-Q and, most relevant here, for failure, as a SPAC, to complete a business combination within 36 months of the effectiveness of its IPO registration statement. Alberton received two extensions from Nasdaq to complete its merger with SolarMax, the last terminating on April 26, 2022. In an 8-K filed on March 8, Alberton reported that it was told by Nasdaq that “April 26, 2022 represents the full extent of the Panel’s discretion to grant continued listing while the Company is non-compliant. As a result, if the merger is not completed and the Company does not demonstrate compliance with the applicable Nasdaq listing requirements by April 26, 2022, the Panel will issue a final delist determination and the Company will be suspended from trading on Nasdaq.” Then, in an April 14 press release, Alberton disclosed that SolarMax had given notice that it intended to terminate the merger agreement “because it reasonably believed that the proposed merger… would not be completed by April 26, 2022.” Alberton explained that, as of April 13, 2022, its S-4 registration statement had not been declared effective by the SEC and, if Alberton could not “commence mailing of a definitive proxy statement on April 14, 2022, [Alberton] will not be able to consummate the Merger by April 26, 2022 and will be forced to dissolve and liquidate.” Unfortunately, as noted above, none of the correspondence with the SEC related to the S-4 has been posted, so we have no independent insight as to why the SEC did not declare the S-4, originally filed on December 30, 2020, effective on a timely basis.
In her statement, Peirce said that she was troubled by the SEC’s failure to declare the registration statement effective, typically a “routine step.” And, Peirce notes, because no action was taken by the SEC, “there is no obligation to explain why the registration statement was not declared effective.” Peirce nevertheless posits that the only logical explanation for this failure is the SEC’s “newfound hostility to SPAC capital formation.” She notes first that the SPAC shareholders approved four extensions of the timeline to complete a de-SPAC transaction and that SPAC filed eight amendments to its S-4, including the last one on April 4. Throughout that same time period, the SEC staff made a number of statements regarding SPACs, such as its statement about proper accounting for warrants (see this PubCo post), which led to many restatements, including a restatement by Alberton. (Note that Alberton also restated its financials because of its incorrect categorization of certain shares as permanent equity. See this PubCo post.) In addition, SEC Chair Gary Gensler issued a statement regarding China-based companies. Most significantly, she said, last month, the SEC proposed new rules regarding SPACs, which included a proposed non-exclusive safe harbor under the Investment Company Act of 1940.
In its proposal, the SEC suggested that “some SPACs have sought to operate in novel ways that suggest a need for SPACs and their sponsors to increase their focus on evaluating when a SPAC could be an investment company and thus subject to the requirements under the Investment Company Act of 1940.” To help “refocus” SPACs on that issue, the SEC proposed a new non-exclusive safe harbor from the definition of “investment company.” The conditions of the safe harbor would include, among others, that the SPAC:
- “Maintain assets comprising only cash items, government securities, and certain money market funds;
- Seek to complete a de-SPAC transaction after which the surviving entity will be primarily engaged in the business of the target company; and
- Enter into an agreement with a target company to engage in a de-SPAC transaction within 18 months after its initial public offering and complete its de-SPAC transaction within 24 months of such offering.”
(See this PubCo post.)
Peirce then quoted remarks from the Director of the Division of Investment Management, suggesting that the safe harbor would offer some certainty to SPACs that satisfied the conditions of the safe harbor, but, for SPACs that did not satisfy those conditions, “we would expect that those SPACs should be consulting closely with their advisors and considering carefully their compliance obligations. And finally, I would just say, certainly for those SPACs that also fall outside the safe harbor, I would expect that the staff would also be taking a look at them.”
Peirce also highlighted the Director’s statement that the proposal was the first time that the issue of whether SPACs were investments companies had been “specifically addressed” by the SEC. Peirce appeared to view that history as key: “After all,” she observed,
“SPACs have been around for a long time, and the Commission has not suggested that it thinks that any of them, let alone many of them, are investment companies. Without affording some notice, the Commission cannot turn on a dime and start treating SPACs that do not meet an arbitrarily determined timeline as investment companies. Because of the timing—less than a month after the release of the SPAC proposal, one cannot help wondering, however, whether this SPAC might be a victim of the parameters of a non-exclusive safe harbor that have not yet been adopted. After all, the SPAC has been going back and forth with staff in our Division of Corporation Finance for months. With the end of the road finally in sight, when the SPAC sought to have its registration statement go effective, it did not get the response that virtually everyone gets at this stage of the process. That appears to be the death knell of the SPAC, which robs the investors of the opportunity to decide whether they approve the merger agreement.”
You might recall some litigation in 2021, in which the plaintiff, represented by two law professors—including former SEC Commissioner Robert Jackson—contended that the company, a SPAC organized by a billionaire hedge-fund investor, was really an investment company that should have been registered under the Investment Company Act of 1940 and that its sponsor was really an investment adviser that should have been registered under the Investment Advisers Act of 1940. Had they registered, so the argument went, they would have been subject to substantial regulation regarding the rights of the SPAC’s shareholders and the form and amount of the SPAC managers’ compensation. According to the complaint, under the ICA, “an Investment Company is an entity whose primary business is investing in securities. And investing in securities is basically the only thing that [the SPAC] has ever done.” The complaint sought “a declaratory judgment, damages, and rescission of contracts whose formation and performance violate” the ICA and IAA. Although the hedge fund investor objected that the claims in the complaint were without merit, it was reported that he still elected to make significant changes to the SPAC to avoid the time-sink that litigation could entail—not to mention the monkey wrench that litigation could throw into the search for a de-SPAC merger partner.
The contention that the SPAC was an Investment Company under the ’40 Act was also met with a joint statement, signed by over 55 major law firms, including Cooley, pushing back on the plaintiff’s claims and asserting that there was no legal or factual basis for the allegation that SPACs were investment companies. According to the statement, SPACs’ investment of their IPO proceeds in short-term treasuries and qualifying money market funds does not make them investment companies under the ICA as professed in the litigation. Rather, the statement observes, “[u]nder the provision of the 1940 Act relied upon in the lawsuits, an investment company is a company that is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. SPACs, however, are engaged primarily in identifying and consummating a business combination with one or more operating companies within a specified period of time.” Pending either a de-SPAC merger or the failure to complete a de-SPAC merger within a specified timeframe, “almost all of a SPAC’s assets are held in a trust account and limited to short-term treasuries and qualifying money market funds.” The statement continues: “Consistent with longstanding interpretations of the 1940 Act, and its plain statutory text, any company that temporarily holds short-term treasuries and qualifying money market funds while engaging in its primary business of seeking a business combination with one or more operating companies is not an investment company under the 1940 Act. As a result, more than 1,000 SPAC IPOs have been reviewed by the staff of the SEC over two decades and have not been deemed to be subject to the 1940 Act.” (See this PubCo post.)
In the end, Peirce expressed concern that other SPACs would suddenly face “existential questions from the Commission at the eleventh hour. If so, why not let them know earlier in the process that there is a problem?” Implicitly comparing the experience of SPAC registrants to that of visitors to Prague’s Franz Kafka International Airport (voted “most alienating”) in this video from The Onion (worth watching) cited in a footnote, she remarks that it “is not a good look for the Commission to run a SPAC through the gauntlet of addressing disclosure comments only to say, ‘Oh, and by the way, now you are too old to be anything other than an investment company.’ We must always engage registrants in the same good faith that we expect of them. A failure to do so would undermine the credibility of this agency.”