WASHINGTON D.C. (CelebrityAccess) — On Wednesday, the Securities & Exchange Commission announced a raft of new rules designed to protect investors when companies launch initial public offerings through special purpose acquisition companies, or SPACs.
The SPAC process, which has become increasingly common in recent years, sees companies avoid the significant disclosure requirements of a traditional initial public offering, by merging with a shell company such as a SPAC, which is already publicly traded.
However, under the SEC’s new proposed rules and amendments, companies seeking to go public through a SPAC would be required to make additional disclosures about SPAC sponsors, conflicts of interest, and sources of dilution.
The proposed rule changes will also require additional disclosures regarding business combination transactions between SPACs and private operating companies, including disclosures relating to the fairness of these transactions.
As well, the changed rules would address the often overly optimistic projections made by SPACs and their target companies, including the Private Securities Litigation Reform Act safe harbor for forward-looking statements and the use of projections in Commission filings and in business combination transactions.
“Nearly 90 years ago, Congress addressed certain policy issues around companies raising money from the public with respect to information asymmetries, misleading information, and conflicts of interest,” said SEC Chair Gary Gensler. “For traditional IPOs, Congress gave the SEC certain tools, which I generally see as falling into three buckets: disclosure; standards for marketing practices; and gatekeeper and issuer obligations. Today’s proposal would help ensure that these tools are applied to SPACs. Ultimately, I think it’s important to consider the economic drivers of SPACs. Functionally, the SPAC target IPO is being used as an alternative means to conduct an IPO. Thus, 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.”
While SPACs are often referred to as the “poor man’s hedge fund” academic analysis of SPAC deals reveals that while initial sponsors of the deal may realize profit on the trade, retail investors often see little gain. Moreover, some academics have suggested that the proliferation of the practice accelerates during periods of economic bubbles.
The SEC has invited the public and stakeholders to offer comment on the proposed rules for the next 30 days.