The Securities and Exchange Commission on Wednesday debuted a host of new rules for SPACs that, if enacted, would mark one of the broadest attempts to date at cracking down on the hot market for blank-check companies.
SPACs, or special-purpose acquisition companies, have come under fire in recent years by investors who say that the firms often inflate the business outlooks of the firms they seek to acquire. Many of those companies include start-ups that have not yet become profitable.
With its new rules, the SEC also hopes to address complaints about incomplete information and insufficient protection against conflicts of interest and fraud. The issues are not as pervasive in a traditional initial public offering.
SPACs are typically shell firms that raise funds through a listing with the goal of buying a private company and taking it public. That process allows the often-young firms to circumvent the more rigorous scrutiny of a traditional initial public offering.
“Functionally, the SPAC target IPO is being used as an alternative means to conduct an IPO,” SEC Chair Gary Gensler said in a statement. “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.”
Some of the SEC’s proposed rules would:
- Amend the definition of a “blank check company” to make the liability safe harbor for forward-looking statements, such as business forecasts, unavailable in filings by SPACs. The move would leave SPACs open to investor lawsuits if they feel like the blank-check company’s estimates were wildly bullish.
- Require that the SPAC’s private business target be a co-registrant when the blank-check company files a take-public Form S-4 or F-4.
- Better police conflicts of interest, fee responsibilities and the dilution of investor holdings.
- Update the Securities Act of 1933 to limit the types of financial statements shell companies can make of their potential business combinations and their would-be merger targets.
Dilution is a paramount concern for individual investors, as many have complained that murky SPAC processes can leave investments open to unexpected losses if the company elects to issue more stock, the SEC told reporters.
Gensler has voiced concerns about SPACs since May, but Wednesday’s proposed rules represent the first broad rulemaking from Wall Street’s watchdog.
The SEC has nonetheless launched independent investigations into a raft of SPACs and blank-check merger deals, including one involving former President Donald Trump’s social media project, Digital World Acquisition Corp.
The U.S. SPAC market was one of the hottest trades of 2021. An explosion of hundreds of deals in the first half of the year waned as the SEC cracked down and many deals performed badly.
The proprietary CNBC SPAC Post Deal Index, which is comprised of SPACs that have completed their mergers and taken their target companies public, is down 44.8% over the past year and has declined 20% in 2022 alone.