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March 30, 2022

SEC Takes Promising Step in Addressing Investor Protection Concerns with SPACs

WASHINGTON, D.C.—Legal Director and Securities Specialist Stephen Hall issued the following statement regarding the Securities and Exchange Commission’s (SEC) proposed rule regarding special purpose acquisition companies (SPACs):

“We welcome today’s proposed rule on SPACs as an important step in addressing the serious investor protection concerns raised by these vehicles.  The past few years have seen a huge surge in the use of SPACs, which are public shell companies formed for the specific purpose of taking an operating private company public.  This surge has been fueled, among other things, by celebrity endorsements and claims that SPACs provide retail investors with access to the riches of private equity.

“The reality of SPACs, however, is much different than the hype.  SPAC transactions involve significant and intense conflicts of interest.  For example, the promoter’s compensation is tied directly to the ability to consummate a merger within the lifetime of the SPAC (typically two years).  That can incentivize the promoter to push a merger that is suboptimal for the SPAC shareholders, the target company, or both.  And SPAC performance has been dismal for many investors, particularly those who hold SPAC shares through its merger with the target company.  One study found that SPAC returns trail the S&P 500 by as much as 15%.  Another found that the four year buy-and-hold return following a SPAC IPO was -51.9%, compared with a positive 8.5% for other IPOs launched the same year.  In other words, SPACs have not proven to be a superior method of bringing companies public or of providing retail investors with exceptional returns but instead, in many cases, have proven to be a superior method of ripping investors off.

“Today’s SEC proposal is a promising step in addressing the issues that make SPACs rife with pitfalls for investors.  The enhanced disclosure requirements should increase transparency, making it easier for investors to understand the risks of investing in SPACs.  In addition, the proposal would better align the disclosure requirements applicable to SPACs with those applicable to traditional IPO transactions. And it would increase accountability by limiting reliance on the safe harbor for forward-looking statements and expanding underwriter status.  We look forward to carefully reviewing the proposal and engaging with the SEC to ensure that investors are adequately protected in SPAC investments.”

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Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies—including many in finance—to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit www.bettermarkets.org.

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