CURRENT MONTH (May 2021)
Securities Regulation
SPAC Act Introduced in the Senate
By Carlos Juarez, Mayer Brown
On April 29, 2021, Sen. John Kennedy (R) introduced the Sponsor Promote and Compensation (SPAC) Act (the “bill”), which would require the SEC to issue rules requiring enhanced disclosures for blank check companies, including SPACs, during the IPO and pre-merger stages.
Specifically, the SPAC Act calls for rules requiring the disclosure of:
- the amount of cash per share expected to be held by the blank check company immediately prior to the merger under various redemption scenarios;
- any side payments or agreements to pay sponsors, blank check company investors, or private investors in public equity for their participation in the merger, including any rights or warrants to be issued post-merger and the dilutive impact of those rights or warrants; and
- any fees or other payments to the sponsor, underwriter, and any other party, including the dilutive impact of any warrant that remains outstanding after blank check company investors redeem shares pre-merger.
Further, the bill would require the SEC’s rules provide for more explicit disclosure for the benefit of retail investors. The bill would compel the SEC to take action within 120 days of the bill’s passage.
The introduction of the SPAC Act follows increased regulatory scrutiny surrounding the IPO alternatives, which has included the SEC’s Investor Alert cautioning investors against celebrity-sponsored SPACs, the SEC Staff’s statement on accounting and reporting considerations for warrants issued by SPACs, and additional SEC Staff statements concerning SPACs.
SEC Commissioner Shares Views on Materiality of Climate and ESG Disclosures
By Alan J. Wilson, WilmerHale
SEC Commissioner Allison Herren Lee recently shared some keynote remarks at the 2021 ESG Disclosure Priorities Event hosted by the American Institute of CPAs & the Chartered Institute of Management Accountants, Sustainability Accounting Standards Board, and the Center for Audit Quality. Speaking to an audience of accountants, auditors, attorneys and other professionals, Commissioner Lee centered her remarks around the following four “myths and misconceptions about ‘materiality’” that she believes have surfaced in the current debate around climate and ESG disclosures:
- Myth #1: ESG matters (indeed all matters) material to investors are already required to be disclosed under the securities laws. Describing this as the “most prevalent” myth, Commissioner Lee discussed disclosure duties under the securities laws and noted that “absent a duty to disclose, the importance or materiality of information alone simply does not mandate its disclosure.” In the context of climate or other sustainability disclosure requirements, Commissioner Lee observed that the current securities laws include few explicit disclosure requirements, with the result being that climate and ESG information may not be disclosed, even though it could be material in some instances.
- Myth #2: Where there is a duty to disclose climate and ESG matters, we can rest assured that such disclosures are being made. Expanding upon perceived limitations of a principles-based disclosure framework, Commissioner Lee discussed instances when lawyers, auditors and managers reach incorrect materiality determinations, whether because of economic or psychological incentives or different perspectives than investors. She concluded, “A disclosure system that lacks sufficient specificity and relies too heavily on a broad-based concept of materiality will fall short of eliciting information material to reasonable investors.”
- Myth #3: SEC disclosure requirements must be strictly limited to material information. Noting that this myth rivals the first in terms of prevalence, Commissioner Lee illustrated the role of materiality in the securities laws and explained that, as a legal matter, the SEC is not required to establish the materiality of each specific piece of information that must be disclosed. Fundamentally, the SEC’s “statutory rulemaking authority under Section 7 of the Securities Act of 1933 gives the SEC full rulemaking authority to require disclosures in the public interest and for the protection of investors.” Neither that section nor Sections 12, 13 and 15 of the Securities Exchange Act of 1934 are qualified by “materiality.” Commissioner Lee pointed to examples of disclosure requirements that may not be material to every company, such as disclosures of related party transactions, environmental proceedings, share repurchases and executive compensation.
- Myth #4: Climate and ESG are matters of social or “political” concern, and not material to investment or voting decisions. This final myth, which strikes at the crux of the debate around climate and ESG disclosures, is one Commissioner Lee has addressed on several prior occasions. She offered the following summary (emphasis added):
First, the idea that investor concerns with scientifically supported risks like those associated with climate change is grounded in “politics” turns fact-based analysis on its head. If anything, it’s the insistence that science and data must or should be ignored that appears questionable. Second, the fact that a topic may have political or social significance does not foreclose its being material, either qualitatively or quantitatively. To the contrary, we are increasingly seeing all manner of market participants embrace ESG factors as significant drivers of decision-making, risk assessment, and capital allocation precisely because of their relationship to firm value. Finally, investors, the arbiters of materiality, have been overwhelmingly clear in their views that climate risk and other ESG matters are material to their investment and voting decisions.
Commissioner Lee’s remarks continue the ongoing dialogue about the SEC’s next steps regarding climate and ESG matters and offer helpful insights into the Commissioner’s views regarding materiality more broadly. Further discussion on these topics is likely to follow in the coming months as the SEC considers public comments submitted in response to the request for comment on climate change disclosure.
SEC Staff Issues Guidance on EDGAR Filing of Form C for Crowdfunded Offerings
By Rani Doyle, EY*
The SEC Staff issued additional guidance on EDGAR filings for crowdfunded offerings stating that, effective May 10, 2021, it had amended Form C to reflect the new $5 million maximum offering size limit for crowdfunded offerings. This follows prior guidance issued in March 2021, and relates to the SEC’s final rules on improving access to capital in the private markets.
PCAOB Proposes Rules Implementing Holding Foreign Companies Accountable Act
By Thomas W. White, Retired Partner, WilmerHale
The Holding Foreign Companies Accountable Act (HFCAA) was enacted in December 2020 to address, among other things, the inability of the Public Company Accounting Oversight Board to conduct inspections and investigations of registered public accounting firms located in certain foreign jurisdictions (most prominently, China). The Act requires the Securities and Exchange Commission to identify “covered issuers” that are audited by foreign public accounting firms that the PCAOB has determined it is “unable to inspect or investigate completely” due to a position taken by a foreign jurisdiction. The SEC is required to prohibit trading of the securities of a covered issuer’s securities after the PCAOB has been unable to inspect or investigate completely the issuer’s auditor for three consecutive years.
On May 13, 2021, the PCAOB issued a proposed rule to govern its determinations under the HFCAA. The rule contains various technical and procedural provisions, but the key substantive provision is the enumeration of factors that will govern the PCAOB’s determinations whether it is unable to inspect or investigate a foreign registered firm completely. The PCAOB will assess whether a foreign jurisdiction’s position impairs its ability to conduct inspections or investigations in one or more of the following respects:
- the PCAOB’s ability to select engagements, audit areas, and potential violations to be reviewed or investigated;
- the PCAOB’s access to, and ability to retain and use, documents or information possessed or controlled by a foreign firm or its associated persons that the PCAOB considers relevant to an inspection or investigation; and
- the PCAOB’s ability to conduct inspections and investigations in a manner consistent with the Sarbanes-Oxley Act and the PCAOB’s rules, as it interprets and applies them.
The PCAOB may consider any documents or information it deems relevant in making the foregoing assessment, including foreign laws, agreements (or absence thereof) with foreign authorities, and the PCAOB’s experience with respect to the foreign authorities.
The proposed rule is open for public comment until July 12, 2021. Any final PCAOB rule will be subject to SEC approval.
