SEC considers new disclosure rules for SPAC

Also known as blank-check companies, SPACs became wildly popular on Wall Street in 2020 and 2021, when they accounted for most of the US initial public offerings. Enthusiasm for such deals has cooled this year as some companies that have gone public have lowered business projections to attract investors.

SEC officials said the proposed rule would allow SPACs and companies to acquire the same standards as traditional IPOs.

The vehicles act as a pool of cash listed on a stock exchange that can be used by the sponsor to purchase a private company. If acquired by a SPAC, the private company effectively gains access to everyday investors without providing the timely disclosures involved in a traditional IPO.

SEC Chairman Gary Gensler said on Wednesday, “Functionally, the SPAC Target IPO is being used as an alternative means for conducting an IPO. Thus, investor information asymmetry, fraud and conflicts with respect to the traditional Deserves the protection you get from an IPO, and when it comes to disclosure, marketing practices, gatekeepers and issuers.”

The commission, controlled 3-1 by Democrats, is scheduled to vote on the proposal in a meeting that begins at 11:30 a.m. Wednesday. If the proposal is approved, the SEC will take public comment on it for at least 60 days before beginning work to finalize a rule.

Under the proposal the SEC is considering, blank-check companies would be required to disclose information about the compensation of their sponsors as well as the losses shareholders may incur if a takeover is completed. Current regulations often allow SPAC insiders to multiply their initial investment even if the companies they acquire — and other shareholders — struggle.

Companies acquired by SPAC, as well as their officers and directors, will be liable for misrepresentation or omissions in the merger documents that SPAC files with the SEC. That’s because the offer would make the target companies “co-registrants” with blank-check companies.

Mr Gensler, who was appointed by President Biden, directed the agency’s staff taking office last April to look for ways to better protect investors in SPAC. Their stated goals include leveling the playing field with traditional IPOs and eliminating conflicts of interest in deals.

SPACs and their buyout targets will require shareholders to disseminate new information to investors at least 20 days before any vote on whether to approve the acquisition.

The proposal would also tighten the rules for forward-looking projections, which the SEC is currently allowed to avoid without running away from the SEC, to address concerns that institutions often lure investors with unrealistic growth forecasts.

“The idea is that the parties to the transaction should not use overly optimistic language or over-promise future results in an attempt to sell investors on the deal,” Gensler said.

While the proposal is likely to be welcomed by advocates of Wall Street’s tighter oversight, it may be too late to help investors who are already suffering losses after the peak of the SPAC frenzy.

Blank-check companies raised more than $160 billion last year, according to SPAC Research, the highest total for all previous years. So far this year, they are on pace to raise a fraction of that amount. Still seeking over 600 SPAC deals. Those who cannot find the merger within a time frame, usually two years, must return the money to the investors.

If finalized in their current form, the proposed disclosure requirements would be extended to existing SPACs, which have not yet completed the merger, SEC officials said.