Bill O’Brien, Editor
“There may be advantages to providing greater clarity on the scope of the safe harbor in the PSLRA (Private Securities Litigation Reform Act). Congress could not have predicted the wave of SPACs in which we find ourselves. It may be time to revisit these issues.” – Jon Coates, Acting Director, Division of Corporation Finance (SEC)
The SEC’s Acting Director of Corporation Finance, Jon Coates, has called on Congress to reign in SPACs and tighten regulatory disclosure requirements on the “blank check” companies.
What used to be a niche investment vehicle that served as an alternative for privately-held companies to enter public markets is now regarded as a market craze, a change that has taken place amid the historic, pandemic-induced 2020 market crash. Companies looking to go public partnered with SPACs to take advantage of markets flush with capital but volatile amid the backdrop of the coronavirus pandemic. Unfortunately though, SPAC moguls, like Bill Ackman, who the Collegian covered in its Feb 10 issue, are learning that, like all good things, the SPAC craze must too come to an end.
SPAC markets have taken a sharp downturn in recent months, and even more trouble is on the horizon due, in large part, to heightened regulatory scrutiny for the investment vehicle. John Coates, the SEC’s Acting Director, Division of Corporation Finance, released a statement on the Securities and Exchange Commission’s (SEC) website sounding alarms on the SPAC surge. The SEC’s statement, SPACs, IPOs and Liability Risk under the Securities Laws, contained verbiage that has likely contributed to the recent downturn in SPAC markets. The SEC is now eyeing SPACs for the potential they have to mislead investors as they have significantly less disclosure requirements than a traditional IPO would have.
In the statement, Coates discusses how 25 years ago, the path to public markets for a company was fairly simple and one-tracked and, with the innovations markets have today, there should be regulation to follow along with it. “With all these changes, the appeal of understanding and developing law around economic substance over form may be greater than ever.” Coates talks about how initial public offerings are a “distinct and challenging moment for disclosure” for companies undergoing them for good reason. “An IPO is where the protections of the federal security laws are typically most needed to overcome the information asymmetries between a new investment opportunity and investors in the newly public company,” says Coates.
Coates ends the statement by calling for legislative bodies to consider imposing tighter requirements that would target the second phase of a SPAC transaction, otherwise known as the “de-SPAC,” where a target company is acquired and original investors in the SPAC typically unload their shares into the secondary market. Coates calls on authorities to treat the de-SPAC transaction as the “real IPO.” “It is the de-SPAC as much as any other element of the process on which we should focus the full panoply of federal securities law protections — including those that apply to traditional IPOs.” Heightened regulatory pressures have further depressed SPAC markets that have already been reeling in recent months. The proposed regulation could increase disclosure costs for the blank-check companies which already face tough competition from private equity firms when hunting for target companies.
A SPAC index across 210 different companies, made up of 60 percent public companies derived from SPACs and 40 percent pre-IPO SPACs, “Indxx SPAC & NextGen IPO Index,” has fallen 24.87 percent since the SPAC market’s February highs. New accounting guidelines issued by Jon Coates and Acting Chief Accountant of the SEC, Paul Munter, have helped to grind SPAC markets to a halt as well. The statement, which read, “OCA (Office of the Chief Accountant) staff concluded that – the tender offer provision would require the warrants to be classified as a liability measured at fair value, with changes in fair value reported each period in earnings,” has the potential to impact newly issued SPACs and companies that have already gone public through a SPAC transaction. Proponents of the investment vehicle are eyeing financial regulators to see what moves they will make to tighten regulations around the investment vehicle. Eyes will surely be on the SEC in the coming months to see how they choose to advance their agenda as laid out by John Coates.