SEC Chairman Gary Gensler will testify during a House Financial Services Committee hearing titled “SEC Oversight” in the Rayburn Building on Wednesday, September 27, 2023.
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Gensler says the new rules are necessary to protect investors.
“Functionally, a targeted IPO of a SPAC is used as an alternative means of conducting an IPO,” Gensler said in a March 2022 statement about the proposed regulations.
Gensler has been hostile to SPACs since the beginning of his tenure at the SEC. in A video has been posted On the SEC's website in December 2021, Gensler was openly disdainful of SPACs:
“Let's say a group of strangers came to you and said, 'I have a company that doesn't do much of anything, but sometime in the next two years it's going to merge with another company. I don't know what that company is yet.' Are you investing in Al Gharib Company? Gensler says in the clip. “That's basically what a special purpose acquisition company, a SPAC, does.”
Gensler also criticized the high 20% sponsorship fees associated with SPACs, as well as other fees for bankers and financial advisors.
He has also criticized how SPAC investors are diluted through the use of so-called private investments in public equity, which give investors, mostly large institutions, an additional opportunity to invest money in a SPAC. Gensler emphasized that PIPE investors can often buy shares at a discount after a targeted merger.
The new rules will:
1) Expand disclosure requirements regarding SPAC sponsors, SPAC sponsor compensation, conflicts of interest, dilution, and target company. After a blank check SPAC goes public, an acquisition of a target company is usually announced within two years, known as a de-SPAC deal. The new rules will also require additional disclosures from the board of directors about whether a SPAC cancellation deal is in the best interests of the SPAC and its shareholders.
2) Align the disclosure and legal responsibilities of de-SPACS more closely with those of traditional IPOs. Executives marketing SPACs have often made wild claims about the future profitability of their companies, claims that could never have been made had the traditional IPO route been used.
“The idea is that parties to a deal should not use overly optimistic language or overpromise future outcomes in an attempt to sell investors on the deal,” Gensler said in a March 2022 press release.
The new rules will make the legal obligations and responsibilities of a de-SPAC transaction similar to those of traditional IPOs. It would, for example, make the target company legally liable for any statement made about future results by assuming liability for disclosures.
Companies are provided with a “safe harbor” when they make forward-looking statements, which provides them with protection against certain legal liability.
However, IPOs do not have “safe harbor” protection, which is why forward-looking statements in an IPO filing are usually worded with extreme caution. The proposed rules would also make “safe harbor” legal protections for forward-looking statements unavailable to blank check companies, meaning they could be more easily sued.
2020 and 2021 were record years for SPAC IPO filings. In comparison, there were 86 SPAC IPOs in 2022, a significant decline from the previous two years. According to Statista.
In 2023, the SPAC craze collapsed. Bloomberg data cited by Forbes indicated this 21 companies went public Across SPACs went bankrupt in 2023, the largest of which was flexible workspace provider WeWork, which filed for Chapter 11 protection in November 2023. Lordstown Motors also filed for bankruptcy.
When asked if the SPAC craze was over on CNBC's “The Exchange” on Tuesday, Bullpen Capital's Duncan Davidson laughed and said, “Yes. SPACs were very speculative and they collapsed and no one wants to touch a SPAC.”
However, better late than never.
“Investors deserve the protections they receive from traditional IPOs, with respect to information asymmetries, fraud and conflicts, and when it comes to disclosure, marketing practices, gatekeepers and issuers,” Gensler said in a March 2022 statement when the rules were proposed. .
An SEC spokesperson acknowledged that there has been a decline in SPAC activity since 2021, but there is still activity in the market.
“The types of rules we recommend are investor protections and disclosures that we believe are necessary regardless of market volatility,” the spokesperson said.
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