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SEC Increasing Scrutiny of SPACs Following ‘Unprecedented Surge’ in Activity

“With the unprecedented surge has come unprecedented scrutiny, and new issues with both standard and innovative SPAC structures keep surfacing.”

Video source: YouTube, CNBC Television

The US Securities and Exchange Commission (SEC) said it is reviewing filings and seeking clearer disclosures for special purpose acquisition companies (SPACs).

On Thursday, John Coates, acting director of the SEC’s division of corporate finance, said the agency is stepping up scrutiny following a dramatic increase in the use and popularity of SPACs over the past six months.

“Shareholder advocates – as well as business journalists and legal and banking practitioners, and even SPAC enthusiasts themselves – are sounding alarms about the surge. Concerns include risks from fees, conflicts, and sponsor compensation, from celebrity sponsorship and the potential for retail participation drawn by baseless hype, and the sheer amount of capital pouring into the SPACs, each of which is designed to hunt for a private target to take public,” Coates wrote in a lengthy note.

“With the unprecedented surge has come unprecedented scrutiny, and new issues with both standard and innovative SPAC structures keep surfacing,” he said.

Besides reviewing filings and disclosures, Coates suggested the SEC issue a rule or guidance requiring greater clarity around legal requirements of SPACs.

Coates also added that experts claiming SPACs offer less legal exposure than IPOs might have given the public bad legal advice.

“Some — but far from all — practitioners and commentators have claimed that an advantage of SPACs over traditional IPOs is lesser securities law liability exposure for targets and the public company itself,” Coates wrote. “I fear, though, that participants may not have thought through all the legal implications of these statements under the circumstances of these transactions.”

Coates added, “Any simple claim about reduced liability exposure for SPAC participants is overstated at best, and potentially seriously misleading at worst.”

He also suggested that Congress might need to tweak the law that experts cite as to why SPACs can avoid some safeguards, since the government “could not have predicted the wave of SPACs in which we find ourselves” when it originally drafted the legislation.

Coates’s statement comes a day after he told a legal panel that there are “some significant and yet undiscovered issues” with SPACs, according to The Wall Street Journal

Last month, the SEC opened an inquiry into how underwriters are managing the risks of SPACs, Reuters reported. The SEC also said it was closely watching SPAC disclosures and other “structural” SPAC issues. 

SPACs boomed in 2020 and continued that growth in 2021, with the 306 forming so far this year raising $98.9 billion, according to SPAC Research. 


Source: Equities News

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