by T. GormanPosted on Posted in SECActions

SPAC IPOs are all the rage – at least until now. During the first quarter of this year, for example, there were 298 IPOs involving SPACs. That compares to just 91 traditional IPOs during the same period, according to a report by accounting firm PWC (here). In contrast, during 2020 there were 487 traditional IPOs while only 341 involved SPACs. In the fourth quarter of last year, however, the number of IPOs involving SPACs began to rapidly climb, according to the numbers PWC compiled.

Now the number of IPOs has declined, particularly those involving SPACs, according to a report published by CNBC on April 22, 2021 on its website (here). The reason is unclear. It may be that the Commission is focusing on SPACs because of the use of projections in the offering materials or for other matters. SPACs are, of course, what at one time was called “blank check companies” – shells selling shares. Under that label there was no rush to purchase shares. But the new SPAC tag seems to have changed all of that.

As the number of SPAC IPOs climbed to a new high at the end of 1Q21, the Division of Corporation Finance issued a Staff Statement on Select Issues Pertaining to Special Purpose Acquisition Companies, dated March 31, 2021 (here).

The Corp Fin release is divided into three segments focusing first on the limitations of the entities and then their obligations under the Exchange Act and exchange listing standards, all of which require significant preparation, particularly for private companies as consideration of the points in the release demonstrate.

Restrictions: Restrictions apply to shell companies but not others. These include, for example, a requirement that financial statements for the acquired business be filed within four business days of deal completion – the typical 71 day extension is not available. Similarly, the combined company cannot incorporate Exchange Act Reports into an S-1 registration statement for three years. The combined company will also not be eligible to use Form S- 8 for the registration of compensatory securities offering until at least 60 days after the firm has filed current Form 10information. And, for three-years the new entity will be an “ineligible issuer” under Securities Act Rule 405, meaning it cannot, among other things, be a seasoned issuer, use a free writing prospectus or rely on the safe harbor of Rule 163A from Securities Act Section 5(c) for pre-filing communications.

Exchange Act obligations: The Act imposes a number of obligations on the SPAC before the business combination. Those include the books and records obligations as well as the internal control requirements. The former dictate that the firm maintain books, records and accounts in reasonable detail that “accurately and fairly reflect the issuer’s transactions and disposition of its assets,” according to the release. The control requirement mandates that the entity maintain a system of internal accounting controls sufficient to provide a reasonable assurance about management’s control, responsibility and authority over the issuer’s assets.

The Act also imposes other obligations on the firm. Those include annual or interim reporting and certain disclosure requirements. Tin addition, new accounting standards must be adopted. It is essential that the new firm have the necessary expertise to implement these requirements.

Listing standards: If the merged entity is listed on a national securities exchange, it will need to be prepared to comply with the standards of the New York Stock Exchange LLC or The NASDAQ Stock Market LLC. Equally important is the requirement that the standards be maintained. Otherwise, the new firm will face delisting.

The qualitative standards in the exchange requirements dictate that the company have sufficient public float, an investor based and sufficient trading interest to ensure depth and liquidity to promote fair and orderly markets. These requirements also focus on items such as the number of round lot holders, publicly held shares, the market value of the shares and the price.

The qualitative standards incorporated into listing standards are concerned with corporate governance. The requirements typically mandate that a majority of the directors be independent, that there be an independent audit committee that includes directors with specialized expertise and that independent directors oversee executive compensation and the director nominating process. There must also be a code of conduct applicable to all directors, officers and employees.

Finally, if the firm fails to satisfy the listing standards it may receive a notice of non-compliance. The company will then have to file a report on Form 8-K. Non-compliance with the notice may present a material risk which requires additional disclosure.

Comment

Since the SPAC is a shell or blank check company, and the merger partner is often a private firm, the Release focuses on the question of preparation for the significant limitations and obligations the new issuer will face. Those limitations and obligations require significant preparation. It is essential that those involved in the transactions assess these points. At the same time, those purchasing shares would do well to consider the significant obligations imposed on the new firm as they consider projections for its future and they consider purchasing shares.

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by T. GormanPosted on Posted in SECActions

ESG has been the topic de jure for some time at the Commission. Now that Gary Gensler has been confirmed as Chairman, it is reasonable to expect that these topics will be high on agenda for the agency.

The Division of Examinations has, in recognition of investor trends in these area, added metrics tied to ESG into its exam process. Based on its experiences, the Division issued Risk Alert, detailing observations on the manner in which registrants are implementing ESG investments and areas where improvements are required. Risk Alert, The Division of Examinations’ Review of ESG Investing, April 9, 2021 (here).

The Alert

A number of investment advisers have adopted investment programs keyed to ESG metrics in view of the significant investor interest. The focus of each program varies. Some, for example, concentrate on ESG factors while others adopt specific global frameworks. This provides investors with a variety of options. In assessing these programs it is important to consider the basics — actual portfolio management practices in view of the disclosed investing process or goals. Appropriate internal controls and transparency are, as always, critical.

Overview

In conducting exams, the Division assesses the overall portfolio approach and management. Three points were key: Management; performance advertising and marketing; and compliance programs.

· Management: The Division assesses the advisory’s policies and procedures and use of ESG terminology together with the related due diligence and other processes for selecting, investing and monitoring investments in view of the disclosed objectives. This included an assessment of proxy voting and if it is consistent with the ESG disclosures.

· Performance advertising and marketing: The Division also made an assessment of the advisory’s filings and marketing. This included the websites, reports to sponsors of global ESG frameworks, client presentations and similar matters.

· Compliance: The Division reviews the compliance written policies and procedures and their implementation. Oversight is examined.

Observations – deficiencies

During the examinations the Division observed situations in which the advisory failed to have processes in place as to ESG investing that were reasonably designed and/or implemented to assure compliance. Frequently these deficiencies were present despite claims that the advisory had in place the proper controls. Examples include:

· Portfolio management: In certain instances, the management practices were inconsistent with the disclosures made by the firm. This occurred, for example, in situations where the advisory claimed that it was implementing a global ESG framework when in fact a failure to adhere to those standards and/or inconsistencies with them were observed.

· Controls: In a number of instances the Division observed “weaknesses in policies and procedures governing implementation and monitoring of the advisers’ clients’ or funds’ ESG-related directives,” according to the Alert. This occurred, for example, in connection with so-called negative screens – investing in securities that were prohibited such as those involving alcohol, tobacco or firearms. In other instances, client preferences were not adequately effectuated. These situations typically arose from challenges with the implementation and monitoring of the practices despite marketing claims to the contrary.

· Proxy voting: The Division observed situations in which the firm advertised and made certain representations regarding proxy voting. In some instances, there were inconsistencies between those representations and the actual internal controls monitoring them. For example, in some situations there were public statements that ESG related proxy proposals would be independently evaluated internally in each case. Yet internal guidelines did not provide for the type of monitoring discussed in public statements.

· Inconsistent statements: Inconsistent statements and/or materially incomplete statements regarding ESG investing were observed in a variety of areas. Claims that the ESG focused funds had favorable risk and return metrics were made in some instances where the related expenses and reimbursements received from a fund-sponsor were not disclosed creating inconsistencies. In other situations, there were claims that the adviser made substantial contributions to the development of ESG products when in fact the role was minimal.

· Controls and compliance: In a number of instances the firm had inadequate controls to ensure that ESG related disclosures and marketing practices were consistent with the firm’s performance. In other instances, compliance programs were not adequate to address the relevant ESG metrics. The former occurred, for example, in situations were the firm claimed to be adhering to a global ESG framework but lacked the internal policies and procedures to either effectively implement those metrics or reasonably assure compliance. The latter occurred, for example, where those at the firm implementing the program had inadequate training and knowledge of the ESG metrics to properly implement policies and procedures.

Observations – Effective Practices

In many instances firms established effective practices that accurately informed investors about the firm’s approaches to ESG investing. Examples include:

· Clear, tailored disclosures: A number of firms crafted clear and precise disclosures that informed investors about its ESG investment practices. These included, for example, situations in which the approach adopted by the advisory to ESG investing was properly presented in various communications and was implemented internally through the necessary policies, procedures and controls. In other instances where, for example, the firm made investments that were inconsistent with the adoption of a global ESG framework, the firm provided investors with clear disclosure of this fact with side-by-side presentations.

· Policies and Procedures: The firm adopted reasonable policies and procedures that were designed to cover each key aspect of the ESG investing program. This included detailed investment policies and procedures implemented by specific documentation to be completed as to the investment process and factors considered.

· Compliance Staff: Effective ESG investing programs integrated the compliance personnel into their related processes and were knowledgeable about the firms practices in the area.

Comment

Investor enthusiasm for ESG continues to grow, creating increasing demand for investing programs. As a result, ESG investment programs are expanding rapidly. This demand and growth has spawned a variety of frameworks, metrics and concepts tied to ESG investing. While the ideas here may be new, the nuts and bolts of creating an ESG program are not. The successful programs are built on clear, precise disclosures for investors, the creation of effective and properly implement internal controls and the education of compliance staff on the key metrics of the program.

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