CURRENT MONTH (December 2024)
Old SEC’s Parting Shot at SPACs
By Yelena Dunaevsky, Esq., SVP & Partner, Transactional Insurance, Woodruff Sawyer
In 2023 and 2024 the U.S. Securities & Exchange Commission (SEC) leveled several charges against Special Purpose Acquisition Company (SPAC) advisors. In what feels like a parting shot at the incoming administration, on December 12, 2024, the SEC lobbed another charge against Cantor Fitzgerald (Cantor), a leading SPAC investment bank and book runner, whose chairman and CEO, Howard Lutnick, is Donald Trump’s nominee for the U.S. Department of Commerce.
The point of contention is what the SEC believes to be Cantor’s failure to adequately disclose Cantor’s discussions with potential merger targets for two of its SPACs. The SEC charged Cantor with violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Section 14(a) of the Exchange Act and Rule 14a-3 thereunder, alleging that Cantor’s two SPACs made materially false and misleading statements in their registration statements on Forms S-1 and S-4. The SEC order finds that at the time of each SPAC’s IPO, Cantor personnel, acting on behalf of the SPACs, had commenced negotiations with a small group of potential target companies for the SPACs, but that Cantor caused the SPACs in their SEC filings to deny having had contact or substantive discussions with potential business combination targets prior to their IPOs. Without admitting or denying the SEC’s findings, Cantor agreed to cease and desist from violations of the charged provisions and to pay the $6.75 million in civil penalties.
Although the SEC brought similar charges against Donald Trump’s Digital World Acquisition Corp. in July 2023 and Northern Star Investment Corp. II in January 2024, not all commissioners at the SEC agree with these charges. On December 12, 2024, Commissioner Mark T. Uyeda published a dissenting statement stating that “the alleged misstatements and omissions are not material” and that he does not view the facts in the Cantor case “as demonstrating investor harm.”
In his dissent, Commissioner Uyeda points out that treating the disclosure of potential merger discussions and history of merger negotiations by the SPAC respondents in the same context as if that disclosure had been made by an operating company makes no sense. While a merger is a rare activity for an operating company and certainly not part of its day-to-day business, the sole purpose of a SPAC is to go out and seek potential merger targets. This activity is very much part of a SPAC’s day-to-day business. Failure to disclose half-baked merger opportunities and back-of-the-napkin type merger discussions should not rise to the level of materiality that would cause violations of securities laws. Undoubtedly, SPAC investors would only encourage the SPAC team to engage in a variety of merger opportunity discussions, since if a SPAC fails to find a suitable merger target, those investors lose the ultimate goal of their investment. It’ll be interesting to see if Paul Atkins, the incoming SEC chair, will reverse course on this and other SPAC-related points of contention.
