The House Financial Services Committee recently released draft legislation expressly prohibiting special-purpose acquisition ("SPACs") from using the "safe harbor" provisions of the Private Securities Litigation Act ("PSLRA") to protect themselves against liability for inaccuracies in projections and other forward-looking statements. If the draft legislation becomes law, parties to a SPAC business combination, as well as directors and officers, may be subject to additional liability for incorrect projections and other forward-looking statements used in the transaction. This may also lead to increased insurance premiums for director and officer liability insurance policies.
The "safe harbor" in the PSLRA bars private actions based on a false statement or material omission with respect to "forward-looking statements" (e.g., statements containing certain financial projections, describing the issuer's future plans and objectives, or predicting the issuer's future economic performance). The safe harbor was intended to incentivize the disclosure of potentially valuable investor information as to a company's future outlook.
Currently, the safe harbor is subject to a number of exceptions, notably in this instance that its protection does not extend to "blank check companies." The proposal before Congress effectively seeks to deem SPACs "blank check companies" for purposes of the PSLRA, and in doing so addresses a comment made by John Coates, Acting Director of the Division of Corporate Finance at the Securities and Exchange Commission, in his public statement issued on April 8, 2021. As Acting Director, Coates explained:
The PSLRA's exclusion for blank check companies overlaps the exclusion for penny stock issuers. Securities Act Rule 419 (which predated passage of the PSLRA) limits its definition of "blank check company" to one that issues "penny stock." Most SPACs, however, avoid meeting the definition of penny stock issuer and are therefore neither a "blank check company" nor a "penny stock issuer" as those terms are defined. The Commission has not substantively amended the definition of "blank check company" since the passage of the PSLRA, but of course, it could consider doing so in the future.
And here we are, with a proposed "substantive[] amend[ment]" in Congress to exclude all SPACs from the PSLRA's safe harbor protections.
At one level, the impact of eliminating the safe harbor may be less than feared. As we previously discussed, the applicability of the PSLRA safe harbor has never been a prerequisite to include forward-looking projections in registration statements for IPOs or otherwise. Many traditional IPOs, such as those for master limited partnerships and Yieldcos, have historically included projections in their registration statements (though commonly only one year's projections). Nor does the safe harbor protect against false or misleading statements made with actual knowledge that the statement was false or misleading. Additionally, distinct from the PSLRA safe harbor, the common law "bespeaks caution doctrine" remains a potential shield against disclosure liability for forward-looking statements that are later found to be incorrect if they were sufficiently tempered with meaningful cautionary language. Finally, the safe harbor does not apply to enforcement actions brought by the SEC.
However, in more practical terms, if the PSLRA's safe harbor expressly became unavailable to SPACs, we expect that SPACs, their targets and underwriters may be more hesitant to share financial projections (or shorten the projection period) and other forward-looking statements with investors even when that information is valuable to investors. As a result, categorically excluding SPACs from the safe harbor liability protections may lead to increased litigation by the plaintiffs' bar and reduced investor information, while providing marginal incremental protection to investors.
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