SPAC Merger Business Projections: Safe Harbour Protection for Forward-Looking Statements

The SEC’s Division of Corporation Finance issued Staff Legal Bulletin No. 14M (CF) on 29 March 2025, a regulatory clarification that has materially altered the liability landscape for forward-looking financial projections in de-SPAC transactions. Prior to this bulletin, sponsors and target companies faced a binary risk: either qualify projections for the Private Securities Litigation Reform Act (PSLRA) safe harbour by satisfying the “meaningful cautionary language” standard, or forfeit protection entirely. Bulletin 14M explicitly codifies the SEC Staff’s view that projections included in a registration statement on Form S-4 or F-4 for a business combination with a special purpose acquisition company (SPAC) are not automatically deemed “forward-looking statements” for PSLRA purposes if they contain historical financial information presented in a pro forma format. This distinction is critical because the PSLRA safe harbour under Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 does not cover statements made in an initial public offering (IPO) registration statement. A de-SPAC merger, while technically a second-step transaction, involves the issuance of securities registered on Form S-4, which the Staff now explicitly treats as analogous to an IPO registration statement for the purpose of the safe harbour exclusion. For Hong Kong-based sponsors, target companies incorporated in the Cayman Islands or BVI, and cross-border investment banks structuring these transactions, the bulletin removes the presumption of safe harbour protection that many market participants had relied upon since the SEC’s 2021 SPAC guidance. The practical consequence is that every financial projection included in a de-SPAC registration statement must now be evaluated against the stricter standard of Section 11 liability, unless the projection is clearly identified as forward-looking and accompanied by meaningful cautionary language tailored to the specific projection.

The PSLRA Safe Harbour: Scope and Limits in the SPAC Context

The PSLRA safe harbour, codified at 15 U.S.C. § 77z-2 for the Securities Act and 15 U.S.C. § 78u-5 for the Exchange Act, provides a liability shield for forward-looking statements that are accompanied by meaningful cautionary language or are immaterial. The statutory exclusion for statements made in an IPO registration statement, however, has been interpreted by the SEC Staff to apply to de-SPAC transactions. Bulletin 14M does not create new law but rather clarifies existing statutory interpretation that had been inconsistently applied by practitioners.

The IPO Registration Statement Exclusion

Section 27A(b)(2)(D) of the Securities Act explicitly excludes from the safe harbour “a forward-looking statement that is made in connection with an initial public offering.” The SEC Staff in Bulletin 14M confirms that a registration statement on Form S-4 or F-4 filed in connection with a business combination between a SPAC and a target company constitutes a registration statement for an offering of securities that is functionally equivalent to an IPO. This interpretation is grounded in the fact that the SPAC has no operating history at the time of the merger, and the target company’s business is being presented to public investors for the first time through the de-SPAC process. The Staff notes that the exclusion applies regardless of whether the SPAC itself conducted an IPO previously. For Hong Kong issuers listing via a SPAC merger on the NYSE or Nasdaq, this means that projections included in the proxy statement/prospectus must be scrutinised under Section 11 strict liability standards, not the more forgiving PSLRA safe harbour.

Meaningful Cautionary Language: A Heightened Standard

Even for forward-looking statements that are not subject to the IPO exclusion, the safe harbour requires “meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement.” The SEC Staff in Bulletin 14M emphasises that boilerplate language—such as “actual results may vary” or “future performance is uncertain”—does not satisfy this standard. The cautionary language must be specifically tailored to the projection. For example, a revenue projection for a biotech target based on a single drug approval must caution that the FDA or equivalent regulatory body (e.g., China’s NMPA) may not approve the drug, and that such non-approval would render the revenue projection materially misleading. The Staff also requires that cautionary language be placed in close proximity to the forward-looking statement, not buried in a general risk factor section. This is a direct challenge to the common practice in de-SPAC filings of including a generic “forward-looking statements” disclaimer at the beginning of the document.

Financial Projections in SPAC Mergers: The New Compliance Framework

Bulletin 14M establishes a four-part test for determining whether a projection qualifies for any residual safe harbour protection. Hong Kong sponsors and target companies must treat this test as a compliance checklist.

Step One: Identify the Statement as Forward-Looking

The registration statement must explicitly identify each projection as a “forward-looking statement” within the meaning of the PSLRA. This is not satisfied by a blanket statement at the beginning of the document. Each projection—whether presented in a table, graph, or narrative—must be individually labelled. The SEC Staff recommends using a legend such as “This projection is a forward-looking statement within the meaning of Section 27A of the Securities Act of 1933.” For projections presented in USD for a Hong Kong-incorporated target, the currency and exchange rate assumptions must also be clearly stated.

Step Two: Provide Meaningful Cautionary Language

The cautionary language must identify specific factors that could cause actual results to differ. The Staff provides the following non-exhaustive list of factors that warrant specific caution: regulatory approvals, market adoption rates, competitive responses, currency fluctuations, supply chain disruptions, and changes in tax law. For a Hong Kong-based target with operations in the PRC, cautionary language must address the risks associated with the VIE structure, PRC regulatory approvals from the CSRC or MIIT, and the potential impact of the Holding Foreign Companies Accountable Act (HFCAA). The Staff explicitly states that “cautionary language that merely repeats generic risk factors from the business section is not meaningful.”

Step Three: Demonstrate that the Projection is Immaterial

If the projection is immaterial, the safe harbour may still apply even without cautionary language. However, the Staff cautions that immateriality is a high bar. A projection that is central to the investment thesis of the de-SPAC transaction—such as revenue projections for the next three fiscal years, EBITDA targets, or user growth metrics—is presumptively material. The Staff notes that immateriality cannot be established by simply stating that the projection is “not material” or “for illustrative purposes only.” For a Hong Kong sponsor evaluating a target, any projection that appears in the executive summary, the summary of projections, or the fairness opinion is likely material.

Step Four: No Actual Knowledge of Falsity

The safe harbour does not protect forward-looking statements that were made with actual knowledge that they were false or misleading. This is a scienter-based standard. Bulletin 14M does not change this element, but it does remind sponsors and target companies that due diligence must extend to the assumptions underlying the projections. The Staff expects that the sponsor, the target’s management, and the financial advisor will have conducted a reasonable investigation into the basis for each projection. For a Hong Kong sponsor acting as a financial advisor in a de-SPAC, this means that the due diligence on projections must be documented in the same manner as due diligence on historical financial statements under HKEX Listing Rule 11.03 (for Main Board listings) or the equivalent SFC Code of Conduct for sponsors.

Practical Implications for Hong Kong Sponsors and Cross-Border Structures

The regulatory shift introduced by Bulletin 14M has direct consequences for the structuring and documentation of de-SPAC transactions involving Hong Kong-based parties.

Sponsor Liability and Due Diligence Standards

Hong Kong sponsors that act as financial advisors or placement agents in de-SPAC transactions now face a higher due diligence burden. The SFC’s Code of Conduct for Sponsors (Chapter 21 of the SFC’s Licensing Handbook) requires sponsors to exercise reasonable care and skill in verifying the accuracy of information in listing documents. Bulletin 14M effectively extends this standard to projections in de-SPAC filings. Sponsors must now verify not only the arithmetic accuracy of projections but also the reasonableness of the underlying assumptions. This includes reviewing the target’s internal budgeting processes, comparing projections to historical performance, and stress-testing key assumptions against market data. For a Hong Kong sponsor that fails to do so, the risk of Section 11 liability is substantial. The SEC has already brought enforcement actions against SPAC sponsors for misleading projections, including the 2023 action against Stable Road Acquisition Corp. (SEC Administrative Proceeding No. 3-20985), where the SEC alleged that the sponsor failed to disclose that the target’s revenue projections were based on a contract that had not been finalised.

Fairness Opinions and Financial Advisors

Financial advisors that issue fairness opinions in de-SPAC transactions must now explicitly address the reliability of projections. The SEC Staff in Bulletin 14M expects that fairness opinions will include a statement regarding whether the advisor has independently verified the projections or relied on management’s representations. For Hong Kong-based advisors, the HKMA’s Supervisory Policy Manual on “Fairness Opinions” (SPM IC-1) requires that advisors disclose any limitations on their review. Bulletin 14M effectively requires that such limitations be disclosed in the proxy statement/prospectus itself, not just in the advisor’s internal files. The practical impact is that fairness opinions will likely become more expensive and time-consuming, as advisors must conduct independent verification of at least the key assumptions underlying the projections.

VIE Structures and PRC Regulatory Risk

For Hong Kong targets that use a VIE structure to operate in the PRC, Bulletin 14M imposes additional disclosure requirements. The SEC Staff has long required that VIE structures be clearly described in registration statements, including the risks that the contractual arrangements may not be enforceable under PRC law. Bulletin 14M extends this to projections. If a target’s revenue projections assume that the VIE structure will remain legally enforceable, the cautionary language must explicitly address the risk that the PRC government could invalidate the VIE structure, as occurred in the 2021 Didi Global Inc. delisting. The Staff also expects that projections will include a sensitivity analysis showing the impact on revenue and net income if the VIE structure were to be invalidated. For Hong Kong sponsors, this means that the due diligence must include a legal opinion from PRC counsel on the enforceability of the VIE structure, and that opinion must be summarised in the registration statement.

Actionable Takeaways for Hong Kong Market Participants

1. Reassess all existing de-SPAC filings to ensure that each financial projection is individually identified as a forward-looking statement and accompanied by cautionary language tailored to the specific projection, not boilerplate risk factors.
2. Conduct independent verification of at least the three most material assumptions underlying each revenue and EBITDA projection, and document this verification in a due diligence memorandum that meets the standards of the SFC’s Code of Conduct for Sponsors.
3. Include a sensitivity analysis in the registration statement for targets with VIE structures or significant PRC regulatory exposure, showing the impact on projections if the VIE structure were invalidated or if PRC regulatory approvals were denied.
4. Engage PRC legal counsel to provide a formal enforceability opinion on the VIE structure and include a summary of that opinion in the proxy statement/prospectus, with specific reference to the impact on forward-looking projections.
5. Update engagement letters with financial advisors to explicitly require that fairness opinions address the reliability of projections and disclose any limitations on independent verification, consistent with the HKMA’s Supervisory Policy Manual IC-1.