New SEC rules could dampen SPAC activity

COLORADO SPRINGS – Proposed Securities and Exchange Commission rules that would make special purpose acquisition company mergers more like traditional initial public offerings could have a significant impact on space sector financing.

“I would imagine SPACs will be a lot more narrowly used,” Jim Lee, Maxar Technologies senior vice president and general counsel, said April 4 during the 37th Space Symposium Space Law Workshop.

In 2021, 12 space startups raised nearly $4 billion through SPAC deals.

“Most of that is not debt,” Lee said. “It’s cash on the balance sheet.”

Proposed SEC rules published March 30 would align SPAC disclosure and liability rules more closely with those of traditional IPOs. Companies would need to disclose, for example, who would profit from the SPAC deals and at what share price.

In some cases, SPAC sponsors profit if a company’s share price exceeds $3 after the IPO.

“If you’re a stockholder in that SPAC, obviously you’re not making money until you cross $10,” Lee said. “So that’s a pretty obvious conflict that a lot of people didn’t understand to be a conflict.”

Under the proposed SEC rules, SPAC underwriters also would be liable for material misstatements of fact, just like the underwriters of traditional IPOs.

Prior to the SEC proposal, space-related SPAC activity was slowing. Tomorrow.io cancelled plans for a SPAC merger in early March. When Terran Orbital went public in late March, company executives emphasized the firm’s national security and defense work.

Many space companies that went public through SPAC mergers in 2021 are trading well below their $10 IPO price.

“I think there are actually some SPACs that are somewhat devalued and they’re trading lower than they should because there’s a SPAC stink on them that they can’t get off of them,” said Monica Palko, York Space Systems chief legal and administrative officer.

As a result, CEOs who did not conduct roadshows before IPOs to explain the promise of their companies are going on roadshows now to tell investors, “We’re not like those other SPACs. We have revenue. We have contracts,” Palko said.

Overall, it’s important for companies to carefully consider both the advantages and disadvantages of SPACs.

“A SPAC is a tool just like a shovel,” Palko said. “You can use a shovel to dig a garden or you can use a shovel to bludgeon someone to death. A SPAC is a legitimate way to go public, but it should really never be viewed as a shortcut to going public.”