The U.S. Securities and Exchange Commission (SEC) has been focused on projections provided in connection with special purpose acquisition company (SPAC) business combinations for some time. The recent action against Spruce Power Holding Corporation is an example of why.  

In connection with its business combination transaction, the predecessor of Spruce Power represented that it had a "$220 million 12-month sales pipeline" that supported revenue projections of over $21 million in 2020 and $75 million in 2021. In addition, the company claimed to have applied a historical conversion rate of sales pipeline to revenue, which supported the company's 2021 revenue projection of $75 million (i.e., one-third of the $220 million pipeline). However, internal records show that the company only had $20 million in purchase orders at the time, with $194 million of the remaining amount based on opportunities that were deemed by their own salespeople of having a "5% ($133 million) or 25% ($61 million) probability of resulting in a sale." The 5% probability opportunities included potential customers that salespeople had not yet even contacted. The sales pipeline number resulted in projections that forecast revenues for 2024 of $1.4 billion, and resulted in an enterprise value for the company of $1 billion. The foregoing misleading disclosures resulted in significant monetary penalties to the company.  

Target companies developing projections for use in SPAC business combinations transactions should ensure that the projections are based on well-grounded assumptions and not on speculative or unsupported information. Failing to do so could lead to long and expensive SEC investigations and fines, as well as potential actions against a company's management team (though no penalties against the management team were included in the Spruce Power order).