The Securities and Exchange Commission (SEC) under the leadership of Chair Gary Gensler is set to vote on new rules aimed at curbing Special Purpose Acquisition Companies (SPACs). SPACs, also known as “blank check companies,” are entities formed to raise capital through an initial public offering (IPO) with the intention of acquiring or merging with an existing company. Gensler argues that these new rules are necessary to protect investors from potential risks and abuses associated with SPACs.
Gensler has been openly critical of SPACs since assuming his role at the SEC. In a video published on the SEC website in December 2021, he expressed his disdain for these entities, comparing them to a group of strangers asking for investments without providing detailed information about the target company. Gensler particularly targets the high sponsor fees, reaching as high as 20%, and other fees charged by bankers and financial advisors involved in SPAC transactions. He also highlights how SPAC investors can be diluted through the use of private investments in public equity (PIPE), which allow big institutions to buy discounted shares after a target merger.
The new rules being voted on by the SEC aim to address the concerns raised by Gensler and protect investors. These rule changes can be summarized as follows:
1. Expanded Disclosure Requirements: The rules will require greater transparency regarding SPAC sponsors, sponsor compensation, conflicts of interest, dilution, and the target company. Additionally, boards of directors must disclose whether the de-SPAC transaction is in the best interests of the SPAC and its shareholders.
2. Aligning Disclosure and Legal Liabilities: The SEC aims to harmonize the disclosure and legal liabilities for de-SPAC transactions with those of traditional IPOs. Currently, executives marketing de-SPACs can make optimistic claims about future profitability, which wouldn’t be possible in a traditional IPO. The new rules would hold the target company legally liable for any forward-looking statements made during the transaction.
3. Removing Safe Harbor Protection: Blank check companies currently enjoy legal protection known as “safe harbor” for forward-looking statements. However, the proposed rule changes would eliminate this protection, making SPACs more susceptible to legal action for misleading or inaccurate statements.
The Decline of SPAC Activity
2020 and 2021 witnessed a surge in SPAC IPO filings, but the trend seems to be declining. In 2022, there were only 86 SPAC IPOs, a significant decrease compared to the previous years, according to Statista. This decline continued into 2023, with several high-profile SPAC-funded companies, including WeWork and Lordstown Motors, filing for bankruptcy. Duncan Davidson of Bullpen Capital even stated that the SPAC craze is over, with investors becoming reluctant to engage with this investment vehicle.
Despite the decline in SPAC activity, Gensler emphasizes the importance of providing investors with the same level of protection offered in traditional IPOs. He believes that regardless of market fluctuations, regulations ensuring information symmetry, fraud prevention, and conflict resolution are necessary. The SEC spokesperson also reinforces this viewpoint, stating that the recommended rules are designed to safeguard investors and promote transparency regardless of market conditions.
The SEC’s vote on new rules to curb SPACs indicates a determination to address the potential risks associated with these investment vehicles. By expanding disclosure requirements, aligning legal liabilities, and removing safe harbor protection, the SEC aims to provide investors with greater transparency and ensure responsible practices in the SPAC market. Whether these rules will effectively curb SPACs or lead to further reforms in the future remains to be seen, but the goal of investor protection remains paramount in an evolving investment landscape.
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