The SEC recently proposed new policies that would require companies being acquired through a special purpose acquisition company (SPAC) to undergo more stringent disclosure procedures relating to future projections, conflicts of interest, as well as potential dilution upon issuance of additional shares.
The new rules would effectively eliminate many of the “safe harbor” protections and advantages of de-SPAC transactions over traditional IPOs that have made them so favorable in recent years. The SEC seeks to better protect investors and their money amid the boom in popularity of “blank check” companies.
According to Georgetown University McDonough School of Business Associate Professor James Angel, simply requiring additional disclosures to be made by companies looking to undergo a de-SPAC transaction will not solve the problem.
“Now, one of the things the SEC is pushing for is more disclosure around the de-SPAC, and they’re also pushing for more liability on everybody involved,” Angel told Yahoo Finance Live. “More disclosure is nice, but that’s really the only tool the SEC has … so more paperwork is really not going to fix the problem.”
Angel joined Yahoo Finance Live to discuss the SEC’s decision to impose new rules on SPAC mergers in an effort to protect investors. SPAC mergers represented a majority of new listings in 2021, and the prevalence of SPAC listings saw a jump of almost 150% last year from 2020. In totality, 2021 saw a total of 613 SPAC listings which raised a total of $145 billion, up 91% from the amount raised in the year prior.
One of the most significant advantages of a de-SPAC over a traditional IPO — a point of contention that has spurred SEC involvement in the issue — is that SPACs are able to provide forward-looking financial projections in place of historical financials to support their valuation when going public.
Ultimately, Angel believes it is up to investors to perform the proper due diligence prior to making any investment decision, whether it involves a de-SPAC deal or not.
“I mean, nobody knows exactly what’s going to happen in the future. And we all know that entrepreneurs are, by definition, really optimistic,” he said. “And I think investors need to take any projection with a grain of salt. They also need to look carefully at the backgrounds of the people who are pushing these SPAC deals and the de-SPACs and ask themselves, ‘What kind of success have they had in the past?’ That’s what I would like to see the SEC focus on.”
2022 IPO slowdown
Many companies that hit the street last year have gotten hammered over the past several months — the average 2021 IPO is down over 20% from its issue price, according to Renaissance Capital Research Director Nick Einhorn. And as the broader IPO market has been seeing a slowdown in 2022 due to valuation corrections across various sectors, much uncertainty looms for companies looking to go public.
Angel noted that the SEC’s crackdown on SPACs could cause great damage to companies’ ability to access public markets in light of the current pullback in number of IPOs.
“I think the SEC means well. And they are trying to clear up some of the problems we’ve seen in the SPAC sector,” he said. “But they’re at great risk of inflicting death by 1,000 paper cuts on SPACs. Now, I’m a big fan of SPACs because I believe they are an innovation in corporate finance. They provide an additional way for a company to access the public markets.”
Thomas Hum is a writer at Yahoo Finance. Follow him on Twitter @thomashumTV
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Read More:SEC’s new SPAC policies are ‘not going to fix the problem:’ Expert
2022-04-10 13:45:50
