Corp Fin Director Questions Application of PSLRA to De-SPAC Transactions

By | April 9, 2021

John Coates, Acting Director, Division of Corporation Finance, issued a statement questioning the application of the safe harbor for forward looking information in the Private Securities Litigation Reform Act (PSLRA) to a de-SPAC transaction.  A de-PAC transaction occurs when a SPAC, which is already public, acquires a private company which results in the private company being publically owned.

Mr. Coates takes issue with the often repeated claim by some but not all SPAC enthusiasts that an advantage of SPACs over traditional IPOs is lesser securities law liability exposure for targets and the public company itself. This asserted lesser liability is focused on using projections and other valuation materials of a kind that is not commonly found in conventional IPO prospectuses because such materials are thought to benefit from the safe harbor for forwarding looking information provided by the PSLRA.  The PSLRA does not provide such protection for IPOs because of a statutory exclusion but some believe that since a SPAC is already public the safe harbor is available.

Mr. Coates notes that the term “initial public offering” is not defined in the PSLRA. He also asserts that the economic essence of an initial public offering is the introduction of a new company to the public.  According to Mr. Coates, a de-SPAC transaction is also the introduction of a new company to the public.  It therefore follows to Mr. Coates that a de-SPAC transaction is also an initial public offering as contemplated by the PSLRA and therefore the safe harbor for forward looking information may not be available.

Mr. Coates views are his own, not those of the Commission, and may or may not be accepted by a court.

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