Better Markets filed a comment letter in response to the proposal of the Securities and Exchange Commission (“SEC”) to enhance investor protections in initial public offerings by special purpose acquisition companies (“SPACs”) as well in business combination transactions between SPACs and private operating companies (“de-SPAC transactions”). The Proposal would implement a variety of improvements in the regulation of the SPAC IPO model, which would further enhance disclosures to investors and more closely align regulations with those applicable to traditional IPOs.
Why It Matters.
The SPAC IPO model exploded in 2020 and 2021, with more than $80 billion raised in 2020 and $160 billion raised in 2021, which accounted for 60 percent of IPOs in 2020 and 66 percent in 2021. However, despite the pomp and circumstance surrounding many of these high-profile SPAC deals, the average performance of a SPAC IPO in the public markets has been nothing short of abysmal. While SPAC sponsors and underwriters saw huge windfalls from these transactions, retail investors were too often the ones left holding the bag. Roughly 90 percent of the companies that went public through a SPAC between 2020-2021 traded lower than their initial IPO price. Specifically, the mean- and median-adjusted returns of SPAC shareholders that held through the SPAC merger were negative 64 percent and negative 88 percent, respectively.
What We Said.
The sordid story of SPACs since 2020 includes jazzy celebrity endorsements, high-profile sponsors, promises of exorbitant returns, and retail investors left holding the bag. This has proven doubly harmful because investors lose money and capital is diverted away from worthy IPOs that might grow the economy and create jobs and wealth.
The current incentives and lack of regulations inherent in the SPAC IPO model explicitly enabled this reverse Robin Hood transfer of wealth at the expense of retail investors. The Commission correctly identifies many of the deficiencies associated with the current SPAC IPO model, most notably the information asymmetries investors in SPAC IPOs receive relative to the information investors in traditional IPOs receive, as well as the presumed safe harbor SPAC sponsors believe exists from liability in the PSLRA. The Proposal effectively addresses many of the investor protection concerns surrounding SPACs, but it can and should be strengthened. The Proposal fails to adequately solve for SPAC investors’ ability to redeem their shares while simultaneously voting in favor of a de-SPAC transaction, something the Proposal recognizes as a form of “moral hazard.” Additionally, the Proposal’s safe harbor from compliance with the Investment Company Act conflicts with the plain text of the Act and past Commission regulations. While we support the overall framework of the Proposal, we believe the Commission must: (1) include a conversion threshold that would prohibit completion of a de-SPAC transaction if a certain percentage of SPAC shareholders redeem their shares; and, (2) eliminate the safe harbor for compliance with the Investment Company Act.
Bottom Line.
Better Markets supports the SEC’s proposed rule to enhance investor protections and more narrowly align information asymmetries between SPAC IPOs and traditional IPOs.
90 percent of SPACs are trading below their initial offering price and merely a third of them meet or beat their financial projections. That’s because SPACs overpromise and underdeliver due to wildly inflated financial projections that have no basis in reality because the sponsors don’t have liability due to gaping loopholes in the law. This is in effect a license to lie. The SEC’s proposal will revoke that license to lie and increase transparency to protect investors and our capital markets.
However, we believe the Commission should include a conversion threshold to better align the inherent incentive misalignments in SPACs and eliminate the safe harbor for SPACs from compliance with the Investment Advisers Act because it is inconsistent with the plain text of the Act.
Read our full Comment Letter here or click the button below.
