On March 30, 2022, the SEC proposed much-anticipated regulations governing Special Purpose Acquisition Companies (“SPACs”), which provide an alternative route for a company to be traded on a national exchange without undertaking the cumbersome process of an initial public offering (“IPO”). The proposal would in many ways make creating SPACs similar to launching IPOs. The over-300-page proposal includes regulations such as expanding disclosure requirements and clarifying the applicability of a safe harbor for forward-looking projections.

There is one issue in the proposal, however, that stands out – underwriter or “matchmaker” liability. The proposed Securities Act Rule 140a (“Rule 140a”) imposes underwriter liability in the de-SPAC stage, , which has prompted debate over the commission’s authority to impose such liability. In a new article, we weigh in on that debate and conclude that the SEC does, in fact, have the necessary authority.

Under current SPAC rules, underwriters involved in the initial SPAC IPO have avoided liability in the de-SPAC stage. This means that underwriters can take a SPAC public and then bow out of the remainder of the SPAC process, thereby avoiding any liability exposure to the merger and de-SPAC process. Practically, this means that underwriters can do minimal due diligence on the merger target. Rule 140a, changes that.

Rule 140a attaches liability to the initial SPAC underwriters for the merger stage, meaning that banks that help SPACs find initial shareholders must facilitate the transition of the SPAC target going public via the merger. The SEC’s hope is that the proposed rule “should better motivate SPAC underwriters to exercise the care necessary to ensure the accuracy of the disclosure in these transactions by affirming that they are subject to Section 11 liability for that information.” The proposed rule will likely dissuade underwriters that assist a SPAC to go public from ignoring the rest of the process by reinforcing “that the liability protections in de-SPAC transactions involving registered offerings have the same effect as those in underwritten initial public offerings.”

In our article, we argue that the commission’s proposal is likely to withstand scrutiny under the Supreme Court’s recent decision in West Virginia v. EPA because the SEC has congressional authority under the Securities Act of 1933 and the Securities Exchange Act of 1934 to protect investors, facilitate capital formation, and maintain fair and orderly markets; regulation of market participants, including SPACs, falls squarely within that congressional mandate.

The majority opinion in that case, written by Chief Justice Roberts and addressing  EPA  regulations of carbon-dioxide emissions, holds essentially that agencies can regulate their respective sectors pursuant to  clear congressional authorization. The holding has direct application to a variety of agencies and can be used to determine the SEC’s authority to promulgate the proposed SPAC rules, specifically Securities Act Rule 140a.

We argue that the proposed rules, if adopted, will have important practical implications for companies, banks, law firms, and other participants in the securities industry. In providing for greater liability of SPAC sponsors and underwriters, the rules strengthen investor protection, which should make investors more confident when putting their money into SPACs.

The proposed regulations are also an important step toward reining in the “Wild West” mentality surrounding SPACs of late. While some critics may say the regulation will kill the appeal of SPACs as shortcuts to going public, it is possible that, to the contrary, the additional protections will invigorate the SPAC market. At the end of the day, regulators like the SEC are responsible for striking a balance between safeguarding retail investors and allowing for innovative start-up companies to enter the public market. The SEC’s proposed rule on SPACs strikes that balance.

This post comes to us from Professor Karen E. Woody at Washington and Lee University Law School and Lidia Kurganova, an associate at Weil, Gotshal & Manges LLP. It is based on their recent article, “The SEC’s SPAC Solution,” available here.