SEC Approves Nasdaq Request to List SPAC Securities

The SEC has approved new interpretative material to Nasdaq Rule 4300 allowing the initial listing of securities of special purpose acquisition companies (SPACs). Release No. 34-58228. Due to their unique structure, SPACs do not have any prior financial history like operating companies. Thus, allowing SPACS to list is a reversal of Nasdaq’s historic policy of denying initial listings of securities of companies without a specific business plan or that have indicated that their plan is to engage in a merger or acquisition with unidentified companies. But the SEC approved the listing of SPACs because Nasdaq will impose special corporate governance listing standards that the SEC said ensured the protection of investors. For example, the Commission noted that each business combination must be approved by a majority of the SPAC’s independent directors, which should ensure a fair and impartial decision.

SPACs raise capital in an IPO to enter into future undetermined business combinations through mergers or other similar business combinations. In the IPO, SPACs typically sell units consisting of one share of common stock and one or more warrants to purchase common stock. The units are separable at some point after the IPO. Management of the SPAC typically receives a percentage of the equity at the outset and may be required to purchase additional shares in a private placement at the time of the IPO.

The Nasdaq interpretation would allow the listing of securities of SPACs under existing initial listing standards, provided certain conditions are satisfied. For example, in addition to the independent directors’ requirement, at least 90 percent of the gross proceeds from the IPO and any concurrent sale by the SPAC of equity securities must be placed in a deposit account, which can be a trust account, an escrow account, or a separate bank account established by a registered broker or dealer.

Moreover, within 36 months of the effectiveness of the IPO registration statement, the SPAC must complete business combinations having an aggregate fair market value of at least 80 percent of the value of the deposit account8 at the time of the agreement to enter into the initial business combination. Also, until the SPAC has completed business combinations of at least 80 per cent of the fair market value of the deposit account, shareholders voting against the business combination must have the right to convert their shares into cash if the business combination is consummated. In addition, following each business combination, the resulting entity must meet Nasdaq’s initial listing standards to remain listed on the exchange.

In approving the Nasdaq proposal, the SEC noted that the investor protection requirements would provide additional safeguard for investors who invest in SPAC securities. The Commission particularly emphasized the requirement that SPACs allow shareholders to convert their shares to cash if they vote against a business combination. The SEC believes that this conversion right will help to ensure that shareholders who disagree with management’s decision with respect to a business combination have adequate remedies.

The SEC also feels that requiring satisfaction of Nasdaq’s initial listing standards following each business combination will ensure that trading in the securities of the combined entity is consistent with the maintenance of fair and orderly markets and investor expectations.

In a comment letter, the North American Securities Administrators Association opposed the Nasdaq proposal due to the historical abuses of blank check companies. But the SEC was assuaged by the fact that Nasdaq pledged to evaluate the reputation of the SPAC’s sponsors and underwriters to determine whether initial listing is appropriate. Moreover, the SEC again mentioned the conversion rights for shareholders who vote against a business combination.