As promised, Carol Anne Huff, from Kirkland & Ellis, is back again with a follow-up post on the recently accelerated approval of the Nasdaq’s proposed rule changes and the potential impact to the SPAC universe. We’re less than a month away from these changes taking effect, so read below to see what we can expect from Nasdaq (and potentially NYSE) SPACs going forward.
SPACs with Low Public Float May Face Difficulty Maintaining Nasdaq Listing
By: Carol Anne Huff, Kirkland & Ellis LLP*
The Nasdaq Stock Market’s more stringent liquidity standards will become operative on August 5, 2019, making it more difficult for SPACs to maintain a Nasdaq listing when closing a business combination. The SEC approved Nasdaq’s proposed rule changes on July 5, 2019. As of yet, the NYSE has not filed a similar rulemaking proposal, although it is likely that the exchange was waiting for the SEC to act on Nasdaq’s proposal before considering its own rulemaking. NYSE listed SPACs will need to wait and see whether it follows suit.
SPACs must meet Nasdaq’s initial listing standards at the time of closing their business combinations. Although both NYSE and Nasdaq have in the past sought rule changes to allow SPACs a grace period post-closing to demonstrate compliance, the SEC disapproved the rulemaking that would have provided for relief for SPACs. The SEC release approving Nasdaq’s new liquidity standards reiterated the SEC’s position that, absent an explicit exception, the initial listing standards apply at the time of initial listing. For SPACs that are not forming a new holding company and merely continuing an existing listing, the SPAC will continue to benefit from continued listing while Nasdaq’s normal delisting process runs its course.
Because Nasdaq’s new liquidity standards seek to better measure available float at the time of listing, companies can no longer count shares that are subject to contractual lockup, such as founder shares, shares subject to vesting and transfer restrictions, and shares not freely tradeable due to SEC restrictions, such as shares issued in private placement transactions. In addition, round lot holders will need to hold unrestricted public shares with a minimum value of $2,500.
SPACs with higher levels of redemptions will need to work to maximize the number of shares that will count as “unrestricted publicly held shares” at the time of closing the business combination. In addition to working with their investment banking advisors to increase round lot holders, SPACs can consider the following options to increase the number of unrestricted publicly held shares.
Increasing the Number of Unrestricted Publicly Held Shares
Beginning on August 5th, SPACs listed on the Nasdaq Capital Market will need at least 1 million unrestricted publicly held shares (with a value of either $15 million or $5 million, depending on which listing standard is used) that are not subject to contractual lock-up restrictions and that are held by holders that include at least 300 “round lot” holders with stock valued at at least $2,500.
As I discussed in Part II of my prior article, SPACs have some options when it comes to increasing the number of unrestricted publicly held shares.
- Registering stock issued to target stockholders on Form S-4
Form S-4 is available for registering shares issued in a business combination where the target stockholders will be voting on the transaction. The extent to which this is helpful in increasing unrestricted public shares will depend on whether the target has a relatively large number of non-affiliate stockholders (or indirect non-affiliate holders to whom stock can be distributed, as discussed below).
- Having an effective resale registration statement for PIPE holders available at closing
It has become market practice for companies to agree contractually with PIPE investors to file a registration statement within 30 days following closing of the PIPE and to have the registration statement declared effective within a specified number of days, e.g. 90 days post-closing. In cases where the PIPE includes a meaningful number of non-affiliated investors, SPACs can consider filing a resale registration statement prior to closing and seeking to have it declared effective at closing. Nasdaq has indicated that shares registered for resale on a shelf registration statement would count as “unrestricted”.
- Distributing stock from an entity to its partners or members to increase the number of holders
Entities, including sponsor vehicles and holding companies or funds receiving shares as consideration in the business combination, can distribute shares to non-affiliated partners or members to increase the number of shares held by non-affiliates. With respect to shares that were initially issued in a private placement, SPACs would need to have an effective resale registration statement at closing for these shares to count as “unrestricted”.
- Releasing lock-up restrictions on shares held by non-affiliates
Although it has become market practice for target stockholders to agree to a lockup of some duration, this is a matter of contract between the parties. If necessary to close a transaction, removing lock-ups from some of the shares held by non-affiliated target stockholders is an option.
Legend Removal Likely to Become a Larger Issue
The SEC release states that Nasdaq will consider a security restricted until any restrictive legends are removed, even if a safe harbor (such as Rule 144) is available that permits the sale of the security at an earlier date. Although Rule 144 is not available for SPACs for one year following filing the “super 8-K” at closing (and therefore not particularly helpful), this guidance is relevant in the case of a shelf registration statement as well. Issuers should consult with Nasdaq to ensure that required steps are taken to ensure shelf-registered shares are counted as unrestricted, including delivery of any required legal opinions to the transfer agent to permit the removal of legends upon the resale of shelf-registered securities.
*Carol Anne Huff is a partner at Kirkland & Ellis LLP and regularly advises clients on transactions involving special purpose acquisition companies.