Securities Law Blog

On October 12, 2018, the Securities and Exchange Commission (SEC) issued a notice of filing of a modified proposal by the New York Stock Exchange (NYSE) seeking to ease certain listing standards for blank check companies, also known as special purpose acquisition companies or SPACs. The NYSE is seeking to reduce the minimum number of shareholders required for continued listing from 300 to 100 holders. In addition, the proposed rules would enable the NYSE to exercise discretion in allowing companies a reasonable period of time following a business combination to demonstrate compliance with all applicable quantitative listing standards.

SPACs are shell entities that raise money through initial public offerings in order to acquire a company and take it public. At the time of the IPO, the SPAC has no business operations or tangible assets. It offers investors an experienced management team and investment criteria pursuant to which the SPAC will seek to identify attractive targets for acquisition. Most SPACs specify a time frame in which they expect to complete a transaction, usually 18 to 24 months. The failure to complete an acquisition within the specified time frame will generally lead to the liquidation of the SPAC and the return to the shareholders of their investment. Both the NYSE and Nasdaq require that at least 90% of the proceeds from the IPO and any private placement be deposited in a trust account until completion of a business combination or liquidation.

As we reported in our July 6, 2018 post, both the NYSE and the Nasdaq Stock Market (Nasdaq) previously withdrew proposals that sought to ease the listing rules for SPACs.  The proposals would have, among other things, reduced the minimum number of round lot holders (holders of 100 or more shares) required for initial listing from 300 to 150.  Each Exchange also wanted to eliminate the continued listing requirement of at least 300 round-lot holders that applies until the SPAC makes one or more acquisitions.  Nasdaq first submitted its proposal in September 2017 and the NYSE submitted its proposal in November 2017.

The NYSE has stated that SPACs often have difficulty complying with the 300 shareholder requirement for continued listing due to the limited number of retail investors who invest in SPACs.  Shareholders are more often institutional investors who tend to hold their shares until an acquisition is announced. Given that shareholders have the right to redeem their shares for a pro rata share of the funds that are held in trust until the completion of a business combination transaction, the trading price of the stock of SPACs tends to be more stable than the trading price of the stock of operating companies.  Accordingly, the NYSE argues that despite the lower number of shareholders of SPACs, such smaller shareholder base has not resulted in distortions in the trading prices of the stocks of SPACs.

For recently completed business combinations, the NYSE has argued that additional discretion regarding the timing to demonstrate compliance with the quantitative listing standards is necessary due to difficulties unique to SPACs in being able to immediately identify the number of round lot shareholders as shares are typically held in street name and because SPAC shareholders usually have the right to request redemption of their shares until immediately before consummation of a business combination.  Accordingly, the NYSE proposes enabling SPACs a reasonable amount of time to demonstrate compliance with the quantitative listing standards, including the minimum shareholder requirement. Under the proposed rules, if the SPAC is unable to demonstrate that it meets the applicable quantitative requirements after such reasonable time period, the NYSE would commence delisting proceedings and immediately suspend trading in the company’s shares. Such severe measures should provide sufficient incentive for post-combination SPACs to establish processes to demonstrate compliance with the NYSE’s listing standards.

Nasdaq had traditionally been the exchange of choice for SPACs and the exchange surpassed its 100^th SPAC listing earlier this year. The NYSE amended its rules for SPAC listings in 2017 to reduce the minimum number of round-lot shareholders required from 400 to 300 holders, placing its requirements on even footing with Nasdaq.

SPACs reached their height in popularity in 2007, during which 66 SPACs raised a total of $12 billion. SPAC activity came to an almost complete halt during the recession years, but has re-emerged in recent years and is gaining momentum. 2017 saw SPACs rise to their highest level since before the financial crisis and 2018 continues to see steady momentum.  In June 2018 alone, six SPACs raised more than $2 billion.

SPACs remain an attractive way to pre-fund acquisitions, particularly given that they continue to draw reputable private equity executives and fewer companies are willing to spend the time and expense of going public via the traditional IPO path as compared to prior years.

The SEC is currently accepting comments concerning the proposed rule.  Following its review of any comments, the SEC has the option to either approve or reject the rule change or launch proceedings to determine whether the proposed rule should be disapproved.