SEC Raises Questions on SPACs Use of Form S-3 Registration Statements

Carol Anne Huff, is back again with a timely look at registration statements.  Specifically, the registration statements that are used by de-SPAC’d companies to register shares post-combination close, including the shares underlying the public warrants.  Read on to learn more about the potential changes afoot with the SEC’s interpretation of these filings and how it will affect SPACs going forward.

SEC Raises Questions on SPACs Use of Form S-3 Registration Statements

By: Carol Anne Huff, Arnold and Porter*

The Securities and Exchange Commission has begun issuing comments to former SPACs as part of the process of reviewing registration statement filings that may indicate a change in the Staff’s position on when former SPACs can use short-form registration statements on Form S-3. This change in interpretation could require some former SPACs to wait a full 12 months post-business combination to use this important short-form registration statement.

Form S-3 is typically used by SPACs post-business combination for the shelf registration statement that registers the issuance of common stock upon exercise of their warrants and registers the resale by PIPE investors and the sponsor of any privately-placed securities.   Use of Form S-3 is greatly preferable to using the SEC’s Form S-1 long-form registration statement.  Form S-1 requires substantial disclosure (similar to that in an IPO or a Form S-4 for business combination) and it generally takes longer for the Staff to declare a Form S-1 effective.  If reviewed, the SEC can take up to 30 days to review Form S-1 filings.

Use of Form S-3 is conditioned on the issuer having been a reporting company for at least 12 months. Since at least the mid-2000’s, the SEC has allowed SPACs to include their pre-business combination reporting history for purposes of determining whether the 12-month period has been met.  As a result, most SPACs are “S-3 eligible” at the time they complete their business combination. Historically, issues were raised by the Staff only when a new reporting entity was formed. In this context, questions can sometimes arise as to whether the newly-formed company is “successor” to the SPAC’s reporting history.   Because the SEC has not issued any guidance, it remains unclear under what circumstances, if any, the SEC will continue to permit former SPACs to count their pre-business combination reporting history in meeting the 12-month requirement.

Some former SPACs that have filed Form S-3 registration statements in the past two months have since been required to refile on Form S-1, delaying the time required for these filings to become effective.  This can be problematic, particularly if a SPAC is running into a contractual deadline to put up a shelf registration statement for PIPE investors. In addition, until registered for resale, privately-placed shares would remain “restricted securities” and not count for purposes of NASDAQ’s public float and round lot holder requirements.

Some SPACs may also run into issues in connection with redeeming warrants if they are delayed in having their registration statements declared effective.   To the extent a former SPAC is in a position to redeem its warrant (i.e. the common stock has traded over $18.00 for 20 of the prior 30 trading days), it will not be able to force exercise of the warrants for cash without an effective registration statement to permit the issuance of the common stock for cash.  In this circumstance, a SPAC might seek to rely on an SEC exemption that permits cashless exercise and redeem the warrants using the cashless exercise feature available in many SPAC warrant agreements.

The Staff has informally indicated that its consideration of this and other issues is ongoing.  Although no timetable has been set and SEC rulemaking can be a slow process, the Staff has informally indicated that there could be formal guidance issued at some point.

While it is unfortunate for SPACs that in some cases the SEC is treating the closing of the business combination similar to an IPO for S-3 eligibility purpose, this change in thinking could work in SPACs’ favor. Starting the reporting “clock” on SPACs at the time of the initial IPO is disadvantageous to SPACs in other circumstances. For example, because it often takes over a year to complete a business combination, SPACs can find themselves having used up the phase-in periods designed to allow newly public companies to transition to full compliance with requirements such as Sarbanes-Oxley.

In addition, the SEC treats the length of the time the SPAC has been in existence as relevant to the number of years of audited financial statements that must be filed for the operating company, often resulting in target companies needing to file three rather than two years of audited financial statements in the proxy statement/ S-4 registration statement for the business combination. We can only hope that the Staff’s fresh look involves revisiting these and other rules that treat former SPACs less favorably than companies going public through an IPO, including limitations on use by SPACs of the Rule 144 resale safe harbor.

*Carol Anne Huff is a partner at Arnold & Porter and regularly advises clients on transactions involving special purpose acquisition companies.