- The Securities and Exchange Commission (SEC) Wednesday proposed tougher disclosure rules for special purpose acquisition companies (SPACs) aimed at ensuring the same protections offered to investors in traditional initial public offerings.
- “Investors deserve the protections they receive from traditional IPOs with respect to information asymmetries, fraud and conflicts,” SEC Chair Gary Gensler said in an endorsement of the proposal before the commission approved it 3-1.
- The new rules would require deeper disclosure about tie-ups between SPACs and private operating companies, and tighten requirements on performance projections by SPACs and the companies that they target for purchase. SPACs would also need to provide more information about their composition, conflicts of interest and sources of dilution.
Volatility in equity markets and sharper regulatory scrutiny have dampened the SPAC market so far in 2022 after a two-year boom.
The rate of SPAC IPO issuance has slowed, with just 53 transactions so far this year at an average size of $185 million compared with 613 transactions last year at an average size of $265 million, according to SPACInsider.
“Everything gets harder when markets are on a downward trajectory,” according to SPAC Research. “Trading conditions are brutal and committed financing is very tough to come by.”
Still, CFOs who want to take their companies public by merging with a SPAC have more choices than ever before. As of today, 610 SPACs are searching for companies to combine with in an initial public offering, SPACInsider said.
The SEC proposal would require SPACs to provide disclosure documents to shareholders at least 20 days before a vote on whether to approve the purchase of a target company.
The SEC also seeks to tighten standards on marketing to ensure SPAC sponsors do not use “overly optimistic language or over-promise future results in an effort to sell investors on the deal,” Gensler said.
Moreover, the SEC aims to hold auditors, lawyers, underwriters and other third-party “gatekeepers” to a higher standard when policing for fraud or inaccuracy in disclosures to investors, Gensler said. The proposal is subject to a 60-day comment period.
“Issuing securities in an initial capital raise is fraught with problems of asymmetric information and moral hazard,” Jessica Wachter, the SEC’s head of economic risk analysis, told the commissioners before the vote.
“Insiders know more than unaffiliated investors – they control the information flow and they also control outcomes,” she said. “Under these circumstances, it is possible for unaffiliated investors to be harmed.”
SEC Commissioner Hester Peirce said the SEC proposal goes far beyond securing greater disclosure, and would impose requirements that undercut the SPAC market.
The proposal “imposes a set of substantive burdens that seems designed to damn, diminish and discourage SPACs because we do not like them, rather than elucidate them so that investors can decide whether they like them,” she said to the other commissioners before the vote.
In order to meet SEC requirements, a SPAC would need to make “significant changes to its operations, economics and timeline,” she said.