The SEC to Regulate SPACs as Strictly as IPOs
Special purpose acquisition companies, also known as SPACs, became all the rage within the last two years. Businesses utilized SPACs as a quicker route to financial markets rather than endure the hassle of an initial public offering. On Wednesday, the Securities and Exchange Commission submitted a proposal for new regulations that would essentially make the disclosures and obligations around SPACs similar to those of an IPO.
“I think it’s important to consider the economic drivers behind SPACs,” said Gary Gensler, SEC Chair, in a statement before a commission meeting to decide for or against the proposal.
“Investors deserve the protections they receive from traditional IPOs, with respect to information asymmetries, fraud, and conflicts, and when it comes to disclosure, marketing practices, gatekeepers, and issuers,” he said.
Many SPACs were able to raise hundreds of millions of dollars at the height of their popularity between 2020- 202. They were able to raise these astronomical figures simply based on the promise that they’d look good for a business to acquire- and all this without disclosing the names sponsoring the SPAC while making brave financial forecasts once they had announced their acquisition target.
The rules proposed by the SEC would help improve these disclosures and establish the deal sponsors and underwriting bankers are liable for any and all misleading statements under the same standards that apply to IPO regulations.
“The U.S public securities markets have experienced an unprecedented surge in the number of initial public offerings by SPACs,” reported the agency in a fact sheet accompanying the new rules. “The rapid increase has heightened investor protection concerns about various aspects of the SPAC structure.”
According to the rules, SPAC offerings will be required to disclose details about SPAC sponsors’ compensation and any conflicting interests the sponsors may have. Typically, the SPAC route to market is undertaken in two steps; in the first, the SPAC sponsors raise a ton of money to fund the acquisition of an operating business. In the second step- at times called the “de-SPAC” transaction, investors are informed about the proposed merger and given permission to cash out if they no longer wish to be holders of the merged business.
One of the big controversies surrounding SPACs is that with SPAC filings, their de-SPAC deals often contain financial projections for the target business that would never be permitted in an IPO. These deals also have the potential to dilute the holdings of public investors greatly.
The proposed rules would abolish the mentality that SPACs are some sort of “safe harbour” where SPACs can make unfounded financial projections. A table to be included in the filings would clearly demonstrate how diluted investors’ holdings will be as a result of a de-SPAC deal. A fairness opinion would also have to come from an independent firm.
If adopted, the proposed rules would also place those involved in SPAC on the hook for misleading statements or omissions, like issuers and underwriters of an IPO. Executives of the acquired business would be forced to sign the de-SPAC registration document, further creating more accountability. An underwriter of the initial SPAC offering who remained involved in the de-SPAC- probably for some deferred compensation- would retain their underwriter’s liability.
Within the new rules framework, SPACs that don’t find an acquisition target within a reasonable amount of time might be considered investment companies like a mutual fund. To avoid this fate, a SPAC would be required to announce an acquisition deal within 18 months of its initial offering; thereafter, it would need to complete that de-SPAC transaction within 24 months of the initial offering.
The public will be permitted to weigh in on the SPAC proposal in 60 days starting Wednesday.