The U.S. Securities and Exchange Commission today approved new rules to enhance investor protection in initial public offerings by special purpose acquisition companies (SPACs), as well as subsequent deals with target companies—called de-SPAC transactions—used by private companies to enter the public markets.
The new rules include greater disclosures and stricter guidelines on the projected earnings advertised by SPACs, which are publicly-traded corporations formed with the sole purpose of effecting a merger with a privately held business to enable it to go public.
The new rules are geared toward protecting investors from overly rosy projections and poor SPAC performance, albeit several years after thousands of investors were caught up in the SPAC explosion of 2020 and lost $4.8 billion, or 23%, of the aggregate $21.3 billion they plowed into SPACs from the beginning of 2020 to the first week of April 2022, according to Vanda Research.
That’s because poor performance has dogged the companies taken public through a SPAC merger. SPAC performance fell nearly -76% in the first half of 2023, according to Kroll, formerly Duff & Phelps.
That comes on the heels of prior annual SPAC industry losses, including the loss of -75% in 2022 and -45% in 2021, per the Russell Investments De-SPAC Index, which measures the performance of companies that go public via a SPAC merger.
“Just because a company uses an alternative method to go public does not mean that its investors are any less deserving of time-tested investor protections,” SEC Chair Gary Gensler said after the approval.
“Today’s adoption will help ensure that the rules for SPACs are substantially aligned with those of traditional IPOs, enhancing investor protection through three areas: disclosure, use of projections, and issuer obligations. Taken together, these steps will help protect investors by addressing information asymmetries, misleading information, and conflicts of interest in SPAC and de-SPAC transactions,” Gensler added.
The new rules and amendments require enhanced disclosures about conflicts of interest such as whether and when a SPAC sponsor and its affiliates may sell securities of the special purpose acquisition company, since the extensive sale of stock may constitute a market-moving event
Added disclosure also includes sponsor compensation, dilution, and other information that is important to investors in SPAC IPOs and de-SPAC transactions.
The rules also require registrants to provide additional information about the target company they are taking public to “help investors make more informed voting and investment decisions in connection with a de-SPAC transaction,” the SEC said.
Overall, the rules more designed to more closely align the required disclosures and legal liabilities that may be incurred in SPAC transactions with those in traditional IPOs.
To clarify investors’ private right of action, the rules block SPACs from using the safe harbor from liability offered in the Private Securities Litigation Reform Act of 1995.
In connection with SPAC IPO transactions, the rules also create stricter guardrails for SPAC and their IPO valuation and earnings projections and require them to make disclosures detailing how the projections are created, including disclosure of all material facts and assumptions used.
The rules become effective 125 days after publication in the Federal Register, the SEC said.