SPAC & Spin: SEC’s Gensler Aims to Shine Up SPAC Disclosure
Roughly six months after telling Congress that regulators would explore new rules for SPACs, Securities and Exchange Commission Chair Gary Gensler is giving a clearer picture of his views.
As a refresher, a SPAC or special purpose acquisition company, sometimes known as a blank-check firm, starts as essentially a giant pot of cash. It then goes public, hunts for a private company to take over within a certain time frame, and raises more money in the form of private investments in public equity (PIPE) to carry out a merger. For private companies that become SPAC targets, merging with a SPAC can be a faster way to go public than with a traditional initial public offering (IPO) that follows stricter rules.
And there are so many SPACs. There were more than 600 SPAC IPOs this year—10 times as many as in 2019, according to SPAC Research.
In a speech to a Healthy Markets Association conference in December, Chair Gensler built on comments from the former acting director of the SEC’s Division of Corporation Finance, John Coates, and Gensler’s own earlier comments. In May, Chair Gensler had asked whether retail investors were getting the information they need, both when a SPAC goes public and again when it has identified a target to take over. He also noted the differing interests of everyday investors, the sponsor that forms the SPAC, and the big-time investors providing PIPE funds, often at a discount as compared to shares on the open market.
All of the speeches compared SPAC mergers and traditional IPOs, as noted by members of the law firm Akin Gump Strauss Hauer & Feld LLP when the Workiva team chatted with them informally about Gensler’s latest speech.
"The theme was ‘treat like cases alike,’” said Stephanie Lindemuth, who concentrates on complex commercial litigation and class action defense, including litigation involving SPACs, at Akin Gump.
Here are five takeaways from Gensler’s December speech:
1. Level the playing field
Chair Gensler said he’s interested in offering SPAC investors similar protections to investors in traditional IPOs with respect to disclosures, marketing practices, and obligations of “gatekeepers,” such as auditors, underwriters, and even accountants who could play a role in preventing fraud.
2. Dial up the 411
At Chair Gensler’s request, SEC staff are researching how to better inform investors of fees, projections, conflicts, and how the value of their shares might be diluted throughout a SPAC’s life.
- One study found that retail shareholders who still hold shares when the SPAC merges often saw post-merger losses while sponsors still profited. For one thing, a sponsor might receive 20% equity in the SPAC at no cost after it first goes public, just for its troubles in forming the SPAC. But that can dilute the value of other outstanding shares.
- Sponsors have an incentive to complete a merger before their deadlines, or they have to return the money they raised to shareholders. Never mind if it’s gotten harder to find a worthy target with so many SPACs out there.
- PIPE investors sometimes have access to non-public information to make their investments and can buy shares at a discount.
Chair Gensler wants to ensure amateur investors understand all SPAC shareholders aren’t necessarily equal—and their interests aren’t always aligned.
That means private companies could face a level of disclosures they hadn’t expected when they first considered a SPAC merger.
3. Cool the hype machine
It’s not uncommon for celebrities to attach themselves to SPACs, which could entice starry-eyed amateurs to buy in without doing their due diligence. Celebrity endorsements may never go away, but Stephanie suggests that SPACs should pay attention to what they say in slide decks, news releases, and marketing materials, not just proxy disclosures, to make sure they’re not misleading potential investors.
In my view, there could be future restrictions on how SPACs market themselves or extra disclosure requirements once a target has been identified—or maybe both.
Is it the Peter Parker principle that says with great power comes great responsibility? Chair Gensler doesn’t want parties who play a role in SPACs to evade liability obligations at the expense of regular investors. So, in the future, safe harbor provisions may not necessarily protect SPACs from litigation.
4. Mind the gatekeepers
A PIPE investor’s SPAC involvement could signal some sort of confidence in the SPAC’s managers or the company they want to take public. But it’s possible the parties might not have done the same due diligence on a SPAC merger versus a traditional IPO.
“SPACs are typically shell companies that don't have operations, so they may be outsourcing accounting and finance roles,” Stephanie notes. Target companies should consult with outside counsel and their internal accounting or finance teams on matters like how to navigate the de-SPAC transaction and the due diligence process required.
5. Bring down the hammer
The SEC has charged one SPAC and related parties over accusations of making misleading claims. (No one has admitted wrongdoing.)
Chair Gensler indicated the SEC could do it again, if it has a legal case to do so. Watch out for that, and follow recent pieces of guidance.
In defense of SPACs
SPACs have plenty of fans. They can give retail investors a chance to buy into a pre-public company unlike traditional IPOs that are typically open to bankers, institutional investors, and the wealthy few.
“It’s still a popular way to go public. They'll be popular for some time to come, but maybe not forever,” said Jacqueline Yecies, a partner at Akin Gump. "There is always a lag between increased scrutiny and actual legislation or regulation. It will take some time to have concrete regulations that would be a deterrent to the SPAC market.”
Don’t forget the kicker to Chair Gensler’s speech in December: “I think that these innovations around SPAC target IPOs remind us that there may be room for improvements in traditional IPOs as well.”
There’s much more to come to be sure. Subscribe to the blog for our updates as we track the developments.
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