Can Someone Who Received a CSRC Warning Letter Still Be CEO of a SPAC? What Founders and Investors Should Know

Special Purpose Acquisition Companies (SPACs) are companies formed to acquire companies. By going public and then acquiring a private business, SPACs allow that business to become publicly traded, offering a different route to the traditional IPO process. SPACs are generally viewed as a more flexible way to go public; however, there has been a recent trend toward enhanced disclosure requirements.

This blog is going to discuss a specific issue:

What if someone hoping to serve as CEO of a SPAC seeking to list in the U.S. has received a “warning letter” from the China Securities Regulatory Commission (CSRC)? Are there legal barriers, disclosure obligations, or practical consequences?

I. What is a” Warning Letter”?

A “warning letter (警示函)” from the China Securities Regulatory Commission (CSRC) is an official notice issued to individuals or companies that have violated certain securities regulations in China. The public may access it through the official website. Since it does not carry a punitive nature, it is more likely to be considered an administrative regulatory measure.

II. Will Someone Who Received a CSEC warning Letter Be Automatically Barred From Serving as a CEO of a Spac?

In short, no, receiving a warning letter from the CSRC does not automatically disqualify someone from serving as a CEO of a SPAC that’s planning to list in the United States. However, there are still certain disclosure requirements that may apply, along with practical risks that should not be overlooked.

III. Why is Disclosure Still Important?

One example is Item 401(f) of Regulation S-K, which requires companies to share background information about their key officers and directors. This includes certain legal or regulatory proceedings, such as court orders or criminal charges. Whether a foreign proceeding, such as a CSRC warning letter, falls within the scope of this rule is not explicitly stated in its text. Nevertheless, disclosure may still be required, depending on how the rule is interpreted and applied in practice.

Also, depending on the content of the letter, if it is significant to a reasonable person’s investment decision, failure to disclose it might raise concerns under Section 11 and Section 12(a)(2) of the Securities Act of 1933, and Rule 10b-5(b) of the Securities Exchange Act of 1934.

IV. Suggestions for China-based SPACs

The Division of Corporation Finance has suggested that SPACs with ties to China, such as having sponsors, executive offices, or key officers based in or connected to China, should clearly explain how PRC laws or regulations might affect their ability to complete a merger with a Chinese company.

V. Practical Risks to Keep in Mind

There are some potential risks that a founder or investor might need to consider. For example, underwriters may impose pressure for either replacement or disclosure to protect their reputation and reduce legal risk. Also, even if full disclosure is made and no disqualification applies, residual risks may still arise, for example, reputational concerns and potential loss of investor confidence.

In addition, even if the Nasdaq Listing Rules do not expressly mandate disqualification based on a foreign regulatory proceeding (such as a CSRC warning letter involving the CEO), such matters may still pose practical risks. Nasdaq retains broad discretion under Rule 5101, and IM-5101-1 confirms that it may deny listing where an individual, including a director, has a history of regulatory misconduct. In practice, Nasdaq’s IPO listing application form for SPACs also requires disclosure of any proceeding initiated by a foreign regulatory authority within the past 10 years, making such matters directly relevant to the listing review process.

VI. Key Takeaways

1. A CSRC warning letter does not automatically disqualify someone from serving as a SPAC CEO under U.S. securities laws.
2. However, disclosure may still be a key concern, particularly if the letter involves conduct that could materially affect investor decision-making, potentially raising issues under U.S. securities laws.
3. Practical risks remain, including reputational concerns and the possibility that Nasdaq may exercise its discretion to deny listing based on public interest.

VII. Final Thought

Although U.S. securities laws do not contain a statutory provision that automatically bars an individual who has received a “warning letter” from the CSRC from serving as CEO of a SPAC, certain disclosure obligations may apply, particularly in light of the increasing emphasis on enhanced transparency. As such, a prudent and risk-mitigating approach would be to discuss the specific facts and content of the warning letter received with your professional legal team and decide on an appropriate strategy.

Author: Nick L. Torres, Esq. and Jean Huang
Contact Person: Nick L. Torres, Esq. and Zhiqi Zheng, Esq.