SPAC PIPES AND MNPI COMPLIANCE (or, acronyms run amok)
The majority of insider trading compliance questions this year, by a wide margin, have been related to SPAC PIPE offerings. SPACs have been a hot topic for some time now and it has become quite common for a SPAC to raise additional money through a PIPE to finance the acquisition of the target company (the so-called “de-SPAC transaction”). In connection with the PIPE, a potential investor enters into confidentiality agreement in order to learn the identity of the SPAC, the target company, and information about the target company’s business. That information is generally MNPI, hence the compliance questions.
Just like a regular PIPE, an investor usually learns of a potential SPAC PIPE when contacted by a broker. Brokers will ask the investor to enter into a confidentiality and no-trading agreement in order for the broker to disclose the identity of the SPAC and the identity of the company the SPAC is considering acquiring. When the confidentiality agreement is entered into and the identities disclosed, the investor needs to restrict any trading in the publicly-traded securities of the SPAC (the target companies are private). The investor is, of course, free to buy shares in the PIPE from the SPAC – since the SPAC has the same information as the investor – but the investor cannot trade in the public markets since it is in possession of material, nonpublic information. But when can the investor remove the SPAC from its restricted list and trade in the public markets?
A good confidentiality agreement from a broker (and the terms of the subscription agreement for the PIPE) will set forth in writing when the confidentiality obligation is lifted and the information is no longer considered material and/or nonpublic. Clarity is generally helpful so it is a good idea to have the cleansing events or dates specified in writing. Those events are generally (1) when the SPAC makes a public filing disclosing the de-SPAC transaction and the information about the target company that was made available to the PIPE investors; and (2) if the contemplated transaction with the target is abandoned. In the first instance, the important consideration is whether public disclosure has been made of all the information material to the SPAC’s publicly traded securities that was provided to the investor in the PIPE process. If so, then the investor is “cleansed” and free to trade in the public markets (from an MNPI point of view regarding the information learned in the PIPE process – there could still be contractual or other limitations on the ability to trade). Could it happen that the SPAC fails to publicly disclose all material information provided to the PIPE investor? Yes, in which case the investor would remain restricted – but most SPACs are very mindful of their obligation to make proper disclosure and this should rarely occur.
In the second instance noted above, the abandonment of the de-SPAC transaction, the important consideration is generally one of materiality (unless the abandoned acquisition is publicly disclosed – in which case there is usually no issue with taking the security off the restricted list since the information is public). The general idea is that the identity of a company the SPAC did not to acquire is not material, and likewise the fact that the accompanying de-SPAC and PIPE transactions will not be happening at that time is not material information. That is a reasonable conclusion generally, but materiality is very much a creature of particular circumstances and so thought needs to be given to the question of whether any of what was learned in the PIPE diligence process remains material and nonpublic given the totality of circumstances.
The basic insider trading compliance concepts surrounding PIPEs are not new. However, the context of a PIPE in conjunction with a de-SPAC transaction is new to many and warrants careful attention to get it right. If unsure, make sure to consult with your legal or compliance advisors.
The above is a general discussion of this topic and not legal advice for your situation. Always reach out to your legal or compliance advisors about your unique circumstances when it comes to insider trading compliance.