Disclosure Risk in DE-SPAC Transactions: What Companies Should Watch

Our firm continues to advise sponsors, target companies, and investors across a wide range of SPAC transactions. In the current market environment, one of the most significant and recurring challenges we see is managing disclosure risk in de-SPAC transactions. As regulatory scrutiny has increased and investor expectations have evolved, disclosure has become a central focus in both transaction execution and post-closing risk management.

Unlike traditional IPOs, de-SPAC transactions involve a merger between a public SPAC and a private operating company, often combined with forward-looking statements about the target’s business. This structure creates unique disclosure challenges, particularly given the heightened attention from regulators and the growing risk of shareholder litigation. In practice, disclosure issues are among the most common sources of post-closing disputes and enforcement actions.

Projections and Forward-Looking Statements

One of the most sensitive areas in de-SPAC transactions is the use of financial projections. Unlike in traditional IPOs, where projections are generally limited or excluded, de-SPAC transactions have historically relied on projections to support valuation and investor communication.

However, regulators and courts have increasingly scrutinized projections, particularly where assumptions are overly optimistic or not sufficiently supported. Companies should ensure that projections are based on reasonable assumptions, internally consistent, and supported by documented analysis. It is also important to clearly disclose the key assumptions and risks underlying those projections, rather than presenting them as definitive forecasts.

Inconsistent messaging between internal materials, PIPE investor presentations, and public filings can create additional risk. All communications should be carefully coordinated to ensure alignment and avoid potential claims that investors were misled.

Risk Factors and Balanced Disclosure

Risk factor disclosure is another critical component of de-SPAC transactions. Generic or boilerplate risk factors are no longer sufficient. Instead, companies are expected to provide tailored, transaction-specific disclosures that clearly describe the risks facing the combined company.

This includes risks related to the target’s business model, financial condition, customer concentration, regulatory environment, and industry dynamics. In addition, companies should carefully disclose transaction-specific risks, such as potential dilution, redemption levels, and reliance on additional financing.

Balanced disclosure is key. Overly promotional language without adequate discussion of risks can increase exposure to regulatory scrutiny and litigation. A well-drafted risk factor section should present a clear and realistic picture of both the opportunities and the uncertainties associated with the transaction.

Consistency Across Disclosures

A common issue in practice is inconsistency across different disclosure documents and communications. De-SPAC transactions often involve multiple workstreams, including proxy statements or registration statements, investor presentations, PIPE marketing materials, and internal board materials.

Any inconsistencies among these materials, whether in projections, business descriptions, or risk disclosures, can create significant legal risk. Regulators and plaintiffs’ attorneys frequently compare these materials to identify discrepancies.

To mitigate this risk, companies should implement a coordinated disclosure process that ensures all materials are reviewed together and reflect a consistent narrative. This includes aligning financial information, business strategy descriptions, and key assumptions across all documents.

Governance, Process, and Documentation

In addition to the substance of disclosure, the process behind the disclosure is equally important. Regulators increasingly focus on how decisions are made, including how projections are developed, how risks are evaluated, and how conflicts of interest are addressed.

Maintaining clear records of board deliberations, management discussions, and advisor input can be critical in defending against potential claims. Well-documented processes can demonstrate that decisions were made in good faith and based on reasonable information.

Litigation and Enforcement Risk

De-SPAC transactions have been the subject of increasing litigation, particularly in cases where post-closing performance does not meet expectations. Claims often focus on alleged misstatements or omissions in disclosures, including projections, risk factors, and conflicts of interest.

Even where claims ultimately lack merit, the cost and distraction of litigation can be significant. As a result, companies should approach disclosure not only as a regulatory requirement but also as a key component of risk management.

Conclusion

In today’s SPAC market, disclosure is no longer a secondary consideration, it is a central element of transaction execution and post-closing risk. As regulatory expectations continue to evolve, companies must take a disciplined and coordinated approach to disclosure, ensuring that all materials are accurate, balanced, and consistent.

Our firm regularly advises clients on SPAC transactions, including disclosure strategy, regulatory compliance, and risk management. If you have questions regarding disclosure in de-SPAC transactions or are preparing for a SPAC business combination, our securities law team would be happy to discuss how we can assist. 

Contact Person: Jan Louise Henry, Esq. and Zhiqi Zheng, Esq.