SPACs Revisited

In my May 5 post, I predicted that the SEC’s animosity to SPACs would not fade away.  It was easy prophesy and of course it has come to pass.

In an announcement issued yesterday, the SEC’s Office of Investor Education and Advocacy surely set out to warn investors of the risks of investing in SPACs– four single-spaced pages of cautionary text.  While the explanation of SPAC transactions was both clear and helpful, it is a little hard to understand all the criticism when SPACs are valuable market entities; and, they are already so closely regulated by the Commission in terms of detailed disclosure requirements.  Surely there is no evidence proving pervasive fraud experiences justifying an intense campaign of warnings.

You might conclude that the SPAC process, whereby a funded holding company acquires a private operating company and thus makes it public, annoys the staff as it interferes with the historical IPO process which has been part of the SEC’s fundamental regulatory system for almost a hundred years.

Among the warnings: read the deal carefully;  you are relying on the judgment of the management of the SPAC as to what entity is acquired; if you paid more for your SPAC shares on the open market, they may deteriorate in value below the share value held in cash for purposes of buying a target; there may be shrinking targets to acquire as SPACs proliferate; often SPACs also issue warrants and their terms vary among deals; shareholder approval of an acquisition may be voted upon by the sponsors of the SPAC if they and their cohorts have controlling shares; original investors in SPACs likely will have paid less per share than the public investor; future funding may come from sponsors of the SPAC and the terms of such financing may create sponsor business interests not congruent with public investor interests.

No doubt the above all are risks, but are they not covered by disclosure?  Are many not common in nature and impact with issues faced by companies offering shares by a traditional IPO?  Is there a market study showing in fact that SPACs create greater risk of fraud or deception of investors?  I am a believer in strong regulation of the markets, having seen so much illegality and deception over my years of practice, but free markets are important also. So far, this pronouncement comes as “education.”  Not sure where this is all heading….

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