The Securities and Exchange Commission has proposed new rules and amendments to disclosure standards for special purpose acquisition companies (SPACs).
Another route to funding
SPACs expedite the process to going public and have become a popular fundraising route. In a SPAC, a private company seeking to go public is acquired by an already-listed company rather than going through the more arduous disclosure and filing process of a traditional initial public offering.
But over time, SPACs have drawn scrutiny from the SEC since the swift process can allow some firms to go public with lofty projections, sometimes without even a product.
More like an IPO
Now, the SEC is starting the process of taking action on SPACs, this time in the form of a rule change proposal. The new SPAC rules would significantly heighten disclosure standards for the process, making the SPAC process closer to the IPO process.
As SEC chair Gary Gensler put it:
“For traditional IPOs, Congress gave the SEC certain tools, which I generally see as falling into three buckets: disclosure; standards for marketing practices; and gatekeeper and issuer obligations. Today’s proposal would help ensure that these tools are applied to SPACs.”
The idea is to heighten disclosure requirements and regulate marketing practices to get information in the hands of shareholders before voting, investment or redemption decisions.
The proposal would require similar financial statement requirements to an IPO involving a public shell company and a private operating company. It will also add specialized disclosure requirements on sponsors, projections, conflicts of interest, SPAC target IPOs and dilution that must be disseminated to investors 20 days before a vote to approve the transaction. Any sale of a non-shell company to a shell company’s shareholders would be subject to the Securities Act.
It also creates a safe harbor for SPACs currently in progress that meet certain disclosure requirements.
Gensler said in a statement that the proposal stems from the understanding that functionally, SPACs are being used as an alternative to a traditional IPO.
“Thus, investors deserve the protections they receive from traditional IPOs, with respect to information asymmetries, fraud, and conflicts, and when it comes to disclosure, marketing practices, gatekeepers, and issuers,” he said.
Though much of the Commission backs the proposal, crypto-friendly Commissioner Hester Peirce published a dissent today. While she said she would support heightened disclosures, she feels the current proposal goes too far.
“Today’s proposal does more than mandate disclosures that would enhance investor understanding,” she wrote. “It imposes a set of substantive burdens that seems designed to damn, diminish, and discourage SPACs because we do not like them, rather than elucidate them so that investors can decide whether they like them.”
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