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US SEC rules to boost energy transition SPACs volumes

27 April 2022 Keiron Greenhalgh

Draft US Securities and Exchange Commission (SEC) rules are set to revitalize use of energy transition special purpose acquisition companies (SPACs) after regulatory uncertainty punctured the bubble around one of 2020 and early 2021's hottest financing tools, industry observers say.

A SPAC is a publicly listed shell company—one that only exists on paper—designed to acquire a private company and turn it into a public company. The backers then raise money and invest it.

In an interview with Net-Zero Business Daily, S&P Global Market Intelligence Head of ESG Advisory Michael Taschner said the new rules could bolster the volume of capital being raised by companies in the energy transition ecosystem through SPACs. He added that the regulations are highly unlikely to decrease volumes.

SPAC activity in the energy transition space in the coming couple of years is going to be robust, added Bill Nelson, head of law firm Shearman & Sterling's Texas operations, as the ecosystem surrounding the financial product continues to mature and SPACs become a safer option.

Unveiled on 30 March, the regulations would require additional disclosures about SPAC sponsors, conflicts of interest, and sources of dilution, the SEC said. The rules and amendments would require additional disclosures regarding business combination transactions between SPACs and private operating companies, including disclosures relating to the fairness of these transactions, it said.

The regulations would address issues relating to projections made by SPACs and their target companies, including the Private Securities Litigation Reform Act safe harbor for forward-looking statements and the use of projections in SEC filings, it added.

Law firm Sidley Austin broke the rules' impact down into five sections:

  • New specialized disclosure requirements for SPACs;
  • Aligning disclosures and legal obligations between de-SPAC transactions—which is after the acquisition target has been identified and agreed to the purchase, shares in the company can be sold to the public in a new listing as an initial public offering (IPO)—and traditional IPOs;
  • Business combinations involving shell companies (including SPACs) and related financial statement requirements;
  • Projections in SEC filings; and
  • New safe harbor for SPACs under the Investment Company Act of 1940.

The SEC said, that if adopted, the proposed rules would more closely align the required financial statements of private operating companies in transactions involving shell companies with those required in registration statements for an IPO.

There are no guarantees, but the hope is that the rules will also cut down on redemptions, said Nelson, where the SPAC has to buy back shares from investors.

Final rules are expected to be adopted by the end of 2022, lawyers at Sidley Austin and Vinson & Elkins say.

However, there may be challenges, the Sidley attorneys say, noting one SEC member, Commissioner Hester Peirce, argued that the rule proposal "seems designed to stop SPACs in their tracks."

The proposal, in Peirce's view, goes too far and would require a typical SPAC to make "significant changes to its operations, economics, and timeline" to comply with the rules. In addition, she argued in a dissent following a vote by the regulator on the proposed rules, that a proposal to eliminate safe harbor protection for de-SPAC transactions exceeds the SEC's authority.

Balloon burst

Capital markets had been anticipating the rules following comments from SEC. As corporate governance specialist Institutional Shareholder Services noted a day after the rules were released, uncertainty had chilled US SPAC activity in the first quarter of 2022, especially compared with Europe.

That uncertainty began in 2021, according to law firm White and Case. More than half of the total IPO value raised in 2021 from SPACs involved entities that listed in the first quarter of the year, data from the law firm's Daniel Nussen and Elliott Smith show. There were 314 SPAC listings in Q1, raising $100.3 billion, they said. In contrast, the next three quarters in total saw 367 listings, raising $72 billion. Of the 25 largest SPACs that listed in 2021, all but two occurred in Q1 and none took place in the second half, they added.

A large part of that uncertainty came from the SEC's growing interest in the investment vehicle, though not necessarily in clean energy SPACs. Between March through May 2021, the regulator's staff published a number of public statements relating to SPACs, including an investor alert about celebrity involvement and an investor bulletin from the agency's Office of Investor Education and Advocacy.

The proposed regulations pave the way for investors to view SPACs with a requisite amount of trust, which is particularly important for investors following the reaction to the initial deluge of debuts in 2020 and 2021, Taschner said. Such trust is also important when it comes to attracting institutional investors seeking alternative investment opportunities, he added.

Investors can be more comfortable using their savings on SPAC-related IPOs as a result of the rules, agreed Shearman's Nelson in an interview with Net-Zero Business Daily 26 April. Currently, there is an enormous amount of money chasing well-structured opportunities, added Nelson's colleague Dan Feldman, head of the law firm's global Energy Innovation team.

Access for disruptors

The new rules, if implemented, do not appear likely to interfere with the way that SPACs allow inventors and disruptors to access capital markets, Taschner said. The appeal is that early investors can get a return on their time and ingenuity, where once they might not have expected a return, or at least such a quick return. For inventors, SPACs are an obvious tool for collecting risk capital, especially for those who have passed through the start-up stage, he said.

But getting new technology up and running or entering a fast-changing field such as EVs or hydrogen-based trucks requires a lot of money, and until now, investors have been faced with projections and financial statements that weren't as detailed as is the case for other investments, Dorsey & Whitney Partner Thomas Gorman told Net-Zero Business Daily. Sometimes, an investor was faced with "buying one guy's version of what he wants to do."

Gorman, who also runs the SEC Actions blog, said the rules' disclosure requirements will fix many of those concerns, especially when it comes to shell companies. The SEC is "putting more guardrails" around SPACs, he said, adding that the agency is "not going to take these things out, but they're going to put rules in place to protect investors." The creation of standardized transparency increases trust, added Taschner.

Still, SPACs need to be interesting to investors—and disrupters of incumbent transportation and food models exemplify this attraction, said Taschner.

That's important, he said, because the overall volume of capital available for investment in the energy transition is as high as it has never been before, he said. The whole investment market is looking for alternative investments, and the returns they are expected to provide, he added.

Some energy transition SPACs with stronger track records have forged ahead, even as uncertainty pervaded the sector.

Gas fermentation company LanzaTech, which was founded in 2005, announced plans 8 March to go public via a merger with AMCI Acquisition Corp. II. The transaction implies an enterprise value of about $1.8 billion, the Chicago-based company said. LanzaTech's technology converts gases, which can be derived from industrial waste, biomass, and other sources, into fuels and chemicals. The company says its commercialized technology has the potential to enable decarbonization in many of the world's most carbon-intensive industries.

And in December, small modular nuclear reactor specialist NuScale Power entered a deal with Spring Valley Acquisition Corporation. NuScale, which was launched in 2007, plans to deploy its first reactor at the US Department of Energy's Idaho National Laboratory. The merger is set for a vote by NuScale shareholders by the end of April.

In July 2021, EV startup Lucid Motors merged with Churchill Capital Corp IV (CCIV), with the deal closing officially on 23 July. Lucid is seeking to compete with luxury EV front-runner Tesla. Some $2.1 billion of the company's cash comes from CCIV, the rest of its $4 billion pot of funding comes from Saudi Arabia's sovereign wealth fund and investment managers including Fidelity.

Investing in the energy transition and the sustainable food industry through efficient SPACs goes very much hand-in-hand with the "tsunami" of environment, social, and governance (ESG) investment underway, said Taschner. SPACs create solutions for the environment and for inventors, he said.


Carbon capture and storage (CCS) plus direct air capture are likely to attract the attention of SPACs in the coming months and years, said Taschner. CCS is evolving heavily, he said, and developers will need substantial levels of capital for infrastructure and manpower.

Another energy transition area likely to receive support from SPAC backers is energy storage, according to April research by S&P Global Commodity Insights' Clean Energy Technology team. Recent investments, acquisitions, and SPAC mergers have helped to cultivate a small cohort of well-funded providers of alternative technologies that are best positioned to tackle the daunting challenge of competing with lithium-ion batteries in the energy storage segment, say S&P Global analysts Sam Wilkinson and Sam Huntington.

Among the companies Wilkinson and Huntington cite are Energy Vault, which merged with a SPAC and listed on the New York Stock Exchange in February. Energy Vault offers storage for power from renewable electricity using gravity and intends to repurpose coal ash from power plants and decommissioned wind turbine blades to produce the composite bricks it utilizes.

The many uses of hydrogen are also ripe for SPACs, observers say. Transportation companies Nikola and Hyzon Motors already merged with SPACs. Shearman's Nelson said it is evident there are a substantial number of players with experience in the energy industry and in SPACs who are looking at the opportunities the boom in applications of hydrogen has provided and seeing it as worth their time and interest. Hydrogen is a "natural place for investors to want to play in," added Feldman.

Posted 27 April 2022 by Keiron Greenhalgh, Senior Editor

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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