Securities Law Blog

Last month, both the New York Stock Exchange (NYSE) and the Nasdaq Stock Market (Nasdaq) withdrew proposals that sought to ease the listing rules for blank check companies, also known as special purpose acquisition companies or 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 Securities and Exchange Commission (SEC) had sought additional analysis for both proposals. The round-lot requirements are intended to ensure that public companies have a sufficient investor base to permit stable trading while limiting price volatility. The SEC requested additional information from the Exchanges to confirm that the proposals would not upset this balance. Neither Exchange offered an explanation as to why it withdrew its proposal.

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 an 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, which is usually 18 to 24 months. A 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.

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 amount of round-lot shareholders required from 400 to 300, 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.

It would appear that even without the proposed Exchange rules that would have reduced the administrative burden on SPAC sponsors, SPACs continue to 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.