To review: a SPAC is an entity formed with the intent of acquiring an emerging private company which it will then operate, paying for that acquisition in stock.  The cash previously raised from investors in the empty (shell) SPAC is retained to finance the operations of that acquired business.  For years prior to the pandemic, SPACs were a way quickly to make acquired early-stage companies solvent and public, with less cost and regulation than going through a full SEC registration process (IPO).

The principal problems with prior SPAC practice: promoters of the SPAC took a lot of equity, diluting public investors; the regulatory structure controlling the SPAC process by which public investors ended up owning a public operating company were not as rigorous (relative to accounting and disclosure of the nature of the operating company) as would obtain if that company filed its own IPO (a lack of consistent regulation being applied to two transactions ending up with the same result once the dust settled); historically high compensation for the deal promoters–all against a backdrop that a disproportionately large number of SPACs performed poorly or went bust.  This last important point, not surprising given that early stage companies were financed via SPACs when they would not be commercially acceptable to investors in an IPO, caught the attention of the SEC, which is concerned with protection of the retail investor.

This past Wednesday, the SEC issued new regulations designed to make the SPAC process substantively equal in terms of disclosure to that which the public would receive in an IPO.  Not intending here to summarize over 500 pages of SEC output, suffice it to say that these new regulations require SPACs to: make clear the dilution suffered by public investors at the hands of the promoters; disclose the detailed bases of financial projections; and, remove an SEC rule that previously protected SPACs from all liability even if financial projections proved massively over-optimistic.

Preliminary lawyer reaction from the SPAC bar is that these new regulations (effective in about four months) will make SPAC deals slower and more expensive, but will not destroy the practice; in the future, only larger SPAC transactions will make economic sense.

Note: yet again the two Republican SEC Commissioners (out of five) voted against tightening SEC regulations. While no doubt the Democratic majority on the Commission is activist and thus seemingly always in favor of more regulation, it is hard in this instance to agree that regulation here is not warranted; past inconsistent regulation of similar business transactions is facially difficult to justify, and there is no doubt but that the failure rate (from the standpoint of the public investor) in SPAC companies was significantly worse than with IPO offerings.  You can rationally believe that IPO procedures are expensive and disadvantage small emerging companies, as seems to be the Republican viewpoint, but absent reform of the IPO process (which is not going to happen during a Democratic administration), the SPAC really was just an end-run around the regular standards for raising public equity.