Are SPACs Shell Companies?
Posted by Laura Anthony, Esq. on July 05, 2020
Are SPACs Shell Companies? SPACs are, by nature, “shell companies” as defined by the federal securities laws. Accordingly, SPACs have all the same limitations as other shell companies, including, but not limited to: A SPAC is an ineligible issuer that is not entitled to use a free writing prospectus in its IPO or subsequent offerings within three years of completing a business combination. After completing the IPO and until it completes a business combination, the SPAC must identify its shell company status on the cover of its Exchange Act periodic reports. A SPAC cannot use a Form S-8 to register any management equity plans until 60 days after completing a business combination. A SPAC may not file an S-3 in reliance on Instruction 1.B.6 (the baby shelf rule) until 12 months after it ceases to be a shell and has filed “Form 10” information (i.e., the information that would be required if the company were filing a Form 10 registration statement) with the SEC reflecting its status as an entity that is no longer a shell company. See HERE on S-3 eligibility. Also, recently the SEC has been issuing comment letters where the company is filing an S-3 relying on Instructions 1.B.1 (full shelf) or 1.B.3 (re-sale) following a SPAC deal, suggesting they want those entities to wait 12 months as well. Historically, the SEC would include the SEC filings of the SPAC in the general requirement that the company have a class of securities registered for 12 months prior to use of S-3, but it seems they are changing their view and want the operating business to be public for the full 12 months. I wouldn’t be surprised if we see a rule change aligning all S-3 use with the current shell company requirements in Instruction 1.B.6. Holders of SPAC securities may not rely on Rule 144 for resales of their securities after the SPAC completes a business combination until one year after the company has filed current “Form 10” information with the SEC reflecting its status as an entity that is no longer a shell company and so long as the SPAC remains current in its SEC reporting obligations. Although all forms of going public have pros and cons, in a SPAC deal or other reverse merger, you have a motivated buyer. SPACs are required to liquidate if they do not complete a business combination within the legally specified time period, and the sponsor will lose their investment. In a reverse merger, the current public company must continue to fund SEC reporting requirements, EDGAR fees, transfer agent fees and the usual fees associated with being public, in addition to facing shareholder pressure to either make the current business work, or find an opportunity that has the potential to bring them future value. For companies that are looking to go public without the traditional IPO, and especially those looking for growth through M&A activity, now is a great time to look at SPACs and reverse merger opportunities.