After months of SEC warnings that SPAC regulation was coming, and after numerous SPAC deals lost investor value post-deal, the SEC has proposed rules (subject to comment and amendment) that are a combination of traditional SEC disclosure requirements and imposition of substantial penalties if a deal goes South.  Highlights follow (but the proposals, all 372 pages of them, are worth a read at least if you are a SPAC investor).

Disclosure is required in great detail as to the profits being taken by the promoters of the deal which, of course, take investor cash off the table and dilute retail investor equity (the idea seems that if it is clear how much the promoters rake off the top then those promoters will have to cut back on their returns).  Disclosure is also directed at possible conflicts of interest (the promoters and management of the companies the SPAC acquires are richly rewarded if the SPAC actually proceeds and buys the target company, presumably inspiring a lack of care).

Enforcement teeth also are sharpened here.  Under current practice it is the promoters, the people who collect funds into the SPAC to attract an operating company into a merger, who are responsible under the Securities Laws for the accuracy and completeness of the disclosures to investors.  The SEC proposals would add the management of the target company to the group liable for the inaccurate public disclosure, which presumably would force the target company to be more candid about the value and operations of the target entity being acquired by the SPAC.

Further, certain statutory provisions written into Federal Law in 1995 protect issuers of securities from liability if their projections are honestly generated even if proven wrong. This is particularly important in SPAC offerings, where projections of future performance, seldom placed in traditional IPO prospectuses, typically are included in the public disclosures.  The SEC proposal makes this statutory protection unavailable to SPAC deals, putting great pressure on keeping projections more shall we say “modest.”

There are other technical proposals having to do with who is an underwriter of securities (that status can create liability in a bad deal) and, for edification of the truly curious, a discussion of how to keep a SPAC out of classification as an Investment Company (to save space, let me just say that being an Investment Company creates huge regulatory issues).

Again, I am constrained to note, the sole surviving Republican SEC Commissioner voted “nay,” claiming that adoption of these proposals was a death knell for SPACS.  Although not likely, surely these regulatory changes may well take the sizzle out of SPACs — although one might think that the market reaction to existing SPACs would have had that result already, that is if any retail investors were paying attention.