SEC’s Gensler warns of changes in SPAC IPO rules
20:49, 9 December 2021
Speaking at the virtual Healthy Markets Association Conference on Thursday, US Securities and Exchange Commission (SEC) chair Gary Gensler took aim at what he thinks are abuses in the process special purpose acquisition companies (SPAC) use to take private companies public.
Citing the rise in recent years of SPAC mergers, currently accounting for roughly 60% of all IPO activity – and on the heels of some fairly high-profile enforcement actions and investigations – Gensler outlined what he saw as three aspects of SPAC mergers hurting investors.
Specifically citing an enforcement action taken in July against Stable Road Acquisition and Momentus involving misleading information regarding the latter’s space travel trial results, Gensler said the SEC has added SPACs to its Agency Rule List and is currently scheduled to be addressed next April.
“When new vehicles and technologies come along, how do we continue to achieve our core public policy goals?” Gensler asked the audience, according to prepared remarks released by the SEC. “How do we ensure that like activities are treated alike?”
Information asymmetries
Gensler noted SPAC IPOs can lead to information asymmetries, misleading information and even outright fraud, and inherent conflicts of interest between the various parties involved in a SPAC merger.
“Companies and managers have access to information that the buying public doesn’t necessarily have,” Gensler noted. “These misaligned incentives and conflicts might enrich certain parties at the expense of others.”
Citing the timeline of SPAC sponsors, retail IPO investors and the institution PIPE investors all buying equity at different stages and at different share prices, he said, “Due to the various moving parts and SPACs structure I believe vehicles may have additional conflicts inherent to their structure.”
“PIPE investors may gain access to information the public hasn’t seen yet, at different times, and can buy discounted shares based upon that information,” Gensler added. “What’s more, retail investors may not be getting adequate information about how their shares can be diluted throughout the various stages of a SPAC.”
Equity dilution
This equity dilution is, in turn, passed on to SPAC shareholders who choose to both approve the merger and keep the equity position of the new company.
In announcing such SPAC mergers, generally via a press release, Gensler is worried investors buying shares after the SPAC IPO but before the merger is finalised, “may be making decisions based on incomplete information or just plain old hype.”
To remedy this, Gensler reported he has asked SEC staff for recommendations regarding disclosure rules at the time a merger is announced. “SPAC sponsors generally get to pocket 20% of the equity, but only if they actually complete a deal later. This dilution largely falls on the ‘remainers,’ not those who cash out after the vote.”
SEC staff will consider changes to fees, projections, dilution, and conflicts that may exist during all stages of SPACs, as well as clarifying disclosure obligations at the time a SPAC merger is announced.
Diverting the underwriting process
Additionally, calling SPAC-led IPOs “a way to arbitrage liability regimes” by avoiding the traditional stock underwriting process of investment bank and auditor due diligence followed by an investor roadshow, Gensler thinks the law should take a broader view of what parties, or gatekeepers, in a SPAC IPO have the responsibility of underwriters.
“When it comes to liability, SPACs do not provide a ‘free pass’ for gatekeepers,” Gensler said.
Gensler then added, in addition to new regulations for SPAC IPOs, the SEC may even consider changes to more traditional IPOs. “I think that these innovations around SPAC target IPOs remind us that there may be room for improvements in traditional IPOs as well.”