- Securities and Exchange Commission (SEC) restrictions and other obstacles that halted a boom in special purpose acquisition companies (SPACs) will strengthen investor trust and set the groundwork for a rebound in the so-called blank-check companies, Duff & Phelps said in a report.
A cooling in private investment in public equity (PIPE) deals and increased reliance by SPAC boards on independent fairness opinions have also slowed the SPAC market in recent months, according to Duff & Phelps, a Kroll company.
“The current slowdown is expected to be short-lived as these developments are ultimately beneficial for SPAC investors, giving them more resources to bolster their trust in the process,” Duff & Phelps said.
SEC Chair Gary Gensler said last month the agency will seek to strengthen investor protections by investigating how SPACs raise cash from the public and merge with target companies.
The SEC’s corporate finance, examinations and enforcement divisions will “be closely looking at each stage to ensure investors are being protected,” Gensler said in testimony to a House subcommittee, adding “each new issuer that enters the public markets presents a potential risk for fraud or other violations.”
A SPAC — or what Gensler called a “blank-check” initial public offering — offers private companies a quicker, cheaper alternative to traditional IPOs. A SPAC raises money by selling shares, which it lists on a stock exchange. It then merges with a private company.
The SEC this year has received 700 filings from such shell companies seeking to go public, and 300 have been completed, Gensler said in written testimony to the subcommittee on financial services and general government, calling the number of filings an “unprecedented surge.”
The SEC reined in the SPAC market in April when staff accountants released a memo saying that warrants attached to SPAC shares should be treated as liabilities rather than as equity. The agency approved only 13 SPACs in April compared with 109 in March.
In order to comply with the new guidance, sponsors need to hire accountants and auditors to value the warrants each quarter using a complex calculation. When treating warrants as equity, sponsors make a simpler, up-front calculation.
Several conditions will likely rekindle the SPAC market, Duff & Phelps said.
"Given the current market conditions, potential capital gains tax changes coupled with more traditional financial sponsors and financial firms getting involved, it is reasonable to believe there will be plenty of high-quality, private equity-backed companies and corporate carve-outs to support SPAC momentum for the foreseeable future,” Duff & Phelps said.