Nasdaq Compliance Challenges in SPACs: Navigating Risk and Investor Protection in a Regulated Landscape

In the wake of the SPAC boom and subsequent market corrections, regulatory scrutiny has intensified, reshaping the landscape for investors and sponsors alike. Nasdaq, a key player in SPAC listings, has taken decisive steps to tighten compliance frameworks, while the SEC has ramped up enforcement to address systemic risks. This article examines the evolving compliance challenges in SPACs, evaluates investor protection measures, and highlights the implications for market participants.

Nasdaq's Stricter Rules: A New Era of Accountability

Nasdaq has implemented a series of reforms to address SPAC compliance gaps, particularly around delisting timelines and transparency. In July 2024, the exchange proposed eliminating the 180-day stay period for SPACs undergoing delisting reviews, a move approved by the SEC in October 2024Capital Markets & Governance Insights - October 2024^[5]. This change ensures that SPACs failing to complete a business combination within 36 months of their IPO are suspended immediately, with the Hearings Panel limited to verifying factual errors rather than granting extensionsSEC Announces Record Enforcement Actions Brought in First …^[1]. By aligning with the NYSE's stricter standards, Nasdaq aims to curb speculative trading in SPACs that lack viable merger targets, reducing risks for retail investors who may be unaware of the time-sensitive nature of these vehiclesDueling Exchange Rule Proposals Target De-SPAC Timelines^[3].

The revised rules also clarify Listing Rule 5810(c)(1), emphasizing that non-compliance with the 36-month deadline or post-merger listing requirements will result in automatic delistingSEC Announces Record Enforcement Actions Brought in First …^[1]. This shift reflects a broader effort to enhance market integrity, as SPACs that linger without clear business plans can distort investor perceptions and create liquidity risks.

SEC Enforcement: A Record-Setting Surge

Parallel to Nasdaq's actions, the SEC has intensified its enforcement focus on SPAC-related misconduct. In the first quarter of fiscal year 2025 alone, the agency filed 200 enforcement actions, with October 2024 marking a historic high of 75 casesSEC Announces Record Enforcement Actions Brought in First …^[1]. These actions span a range of violations, including financial misstatements, misleading disclosures, and fraudulent schemes targeting retail investors. For example, the SEC's first SPAC enforcement action in September 2022 targeted a private fund adviser for undisclosed conflicts of interest related to affiliate ownership of SPAC sponsor sharesRipples Following the SPAC Wave: Litigation and Regulatory Risks^[2].

The agency's aggressive stance extends to SPAC de-merger transactions, where it has mandated co-registrant status for target companies, ensuring shared liability for disclosure accuracyA Summary and Early Analysis of SEC Final SPAC Rules^[4]. This approach addresses historical gaps in accountability, as SPAC sponsors often held disproportionate influence over merger decisions without commensurate transparency.

Investor Protection: Closing the Gaps

The regulatory crackdown underscores a critical shift toward investor protection. Nasdaq's revised suspension rules reduce the window for speculative trading in underperforming SPACs, while the SEC's enhanced disclosure requirements—such as mandatory reporting of sponsor compensation and dilution risks—aim to demystify SPAC structures for retail investorsA Summary and Early Analysis of SEC Final SPAC Rules^[4]. Additionally, courts like Delaware's Chancery Court have reinforced these efforts by applying the “entire fairness” standard to SPAC mergers, holding directors to higher fiduciary standardsRipples Following the SPAC Wave: Litigation and Regulatory Risks^[2].

However, challenges persist. The 36-month deadline, while stringent, may still allow SPACs to extend timelines through shareholder approvals or other mechanismsDueling Exchange Rule Proposals Target De-SPAC Timelines^[3]. Moreover, the complexity of SPAC disclosures remains a hurdle for unsophisticated investors, who may struggle to assess the risks of dilution or sponsor conflicts.

Implications for Market Participants

For SPAC sponsors, the new regulatory environment demands rigorous compliance with evolving rules. Failure to meet deadlines or disclose conflicts could result in costly enforcement actions, as seen in the SEC's 2023 settlements with SPAC sponsors over inadequate disclosuresRipples Following the SPAC Wave: Litigation and Regulatory Risks^[2]. Investors, meanwhile, must remain vigilant, scrutinizing SPAC prospectuses for transparency and evaluating the credibility of merger targets.

The data also suggests a long-term decline in SPAC activity, with only 22 SPACs listed in the first half of 2022 compared to 861 in 2021SEC Announces Record Enforcement Actions Brought in First …^[1]. While regulatory reforms may further dampen SPAC issuance, they also signal a maturing market where investor trust is prioritized over speculative growth.

Conclusion

Nasdaq's compliance reforms and the SEC's enforcement surge reflect a unified effort to mitigate SPAC risks and protect investors. While these measures address historical vulnerabilities, they also highlight the need for ongoing vigilance. For sponsors, adherence to disclosure and timeline requirements is non-negotiable. For investors, due diligence remains paramount in a market where regulatory clarity is still evolving. As the SPAC landscape continues to adapt, the balance between innovation and investor protection will define its future trajectory.