SEC Chairman Gary Gensler testifies during the House Financial Services Committee hearing entitled “Oversight of the Securities and Exchange Commission” on Wednesday, September 27, 2023, in the Rayburn Building.
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The Securities and Exchange Commission, chaired by Gary Gensler, will vote Wednesday on new rules to curb SPACs.
Special purpose acquisition companies, sometimes called “blank check companies,” are companies formed to raise capital through an initial public offering to purchase or merge with an existing company.
Gensler says the new rules are necessary to protect investors.
“Functionally speaking, the SPAC Target IPO is used as an alternative means of conducting an initial public offering,” Gensler said in a March 2022 statement on the proposed regulations.
Gensler is not a fan of SPACs
Gensler has been hostile to SPACs since the start of his tenure at the SEC. In a video posted on the SEC website in December 2021, Gensler was openly disdainful of SPACs:
“Suppose a group of strangers come to you and say, ‘I have a company that doesn’t do much but is going to merge with another company sometime in the next two years. I don't know which company it is yet.' .' “Would you invest in the stranger’s company?” Gensler says in the clip. “That’s essentially what a special purpose acquisition company, a SPAC, does.”
Gensler also criticized the high 20% sponsorship fees associated with SPACs, as well as other fees for bankers and financial advisors.
He also criticized how SPAC investors have been diluted by using so-called private investments in public equity, which gives investors, mostly large institutions, an additional opportunity to put money into the SPAC. PIPE investors can often buy shares at a discount following a target merger, Gensler claims.
SPACs: Much more disclosure will be required
The new rules will:
1) Expand disclosure requirements regarding SPAC sponsors, SPAC sponsor compensation, conflicts of interest, dilution, and the target company. After a blank-check SPAC goes public, it will typically announce an acquisition of a target company within two years, known as a de-SPAC transaction. The new rules would also require additional disclosures from a board about whether the de-SPAC transaction is in the best interests of the SPAC and its shareholders.
2) Align disclosure and legal obligations for de-SPACS more closely with those of traditional IPOs. Executives marketing de-SPACs often made wild claims about the future profitability of their companies, claims that would never have been possible using a traditional IPO route.
“The idea is that the parties to the transaction should not use overly optimistic language or overpromise future results to convince investors of the transaction,” Gensler said in a March 2022 press release.
The new rules would make the legal obligations and liabilities for a de-SPAC transaction similar to those of traditional IPOs. For example, this would result in the target company becoming legally liable for any statement about future results by assuming responsibility for the disclosure.
Forward-looking statements: Not a safe harbor
Companies receive a “safe harbor” when making forward-looking statements, which protects them from certain legal liabilities.
However, IPOs do not enjoy this safe harbor protection, which is why forward-looking statements in an IPO filing are typically worded very cautiously. The proposed rules would also result in blank-check companies no longer being able to rely on the safe harbor for forward-looking statements, meaning they could be more easily sued.
The SPAC market has already collapsed
2020 and 2021 were record years for SPAC IPO filings. In comparison, there were 86 SPAC IPOs in 2022, a significant decline compared to the last two years, according to Statista.
In 2023, the SPAC trend collapsed. Bloomberg data cited by Forbes suggests that 21 companies that went public through SPACs went bankrupt in 2023. The largest of these was flexible workspace provider WeWork, which filed for Chapter 11 protection in November 2023. Lordstown Motors also filed for bankruptcy.
Asked if the SPAC madness was over on CNBC's “The Exchange” on Tuesday, Bullpen Capital's Duncan Davidson laughed and said, “Yes. The SPAC companies have been highly speculative and are collapsing, and no one wants to touch a SPAC.”
Nevertheless: better late than never.
“Investors deserve the protections they receive from traditional IPOs with respect to information asymmetries, fraud and conflicts, as well as disclosure, marketing practices, gatekeepers and issuers,” Gensler said in the March 2022 statement when the rules were proposed.
An SEC spokesperson acknowledged that SPAC activity has declined since 2021, but there is still activity in the market.
“The types of rules we recommend are investor protections and disclosures that we believe are necessary regardless of market fluctuations,” the spokesman said.