Financial industry groups in the United States are attempting to weaken a draft Securities and Exchange Commission (SEC) rule aimed at reining in special purpose acquisition companies, or SPACs, claiming it will kill the industry.
The American Securities Association (ASA), the SPAC Association, and the CFA Institute are among the organizations warning that the SEC’s proposed March rule would create too much liability for parties involved in SPAC transactions, and thus goes beyond traditional IPO and M&A rules.
Monday was the deadline for submitting comments to the SEC.
“The agency should protect investors, but not kill industry,” said Kurt Schacht, Head of Advocacy at professional investor group the CFA Institute, adding that his organization has urged the SEC not to regulate SPACs out of business in a comment letter and in meetings.
SPACs, Wall Street’s most recent gold rush, are shell companies that raise funds through public listing with the goal of acquiring a private company and taking it public.
The procedure allows the target to avoid the more stringent regulatory scrutiny of a traditional IPO, prompting criticism that many deals are of poor quality or suffer from lax due diligence, leaving investors with losses.
According to Reuters, investment banks have made billions of dollars by feeding a SPAC frenzy while putting little of their own cash at risk, though some banks have backed away from SPAC deals in response to the SEC proposal.
This proposed rule aims to provide SPAC investors with protections similar to those provided during the IPO process. It would make parties involved in such transactions more liable, remove a legal safe harbor for earnings projections, and increase investor disclosures.
“When you add it all up, it’s going to make people a little bit more wary of using SPACs,” said Morris DeFeo, a partner at Herrick, Feinstein LLP who advises SPAC sponsors and target companies.
The rule would specifically improve disclosures about the target takeover, dubbed the “de-SPAC” transaction, by requiring the sponsor to explain whether the proposed deal is fair to investors and has been vetted by third parties.
According to Anna Pinedo, a Mayer Brown partner who advises SPAC sponsors, while the SEC wants to treat SPACs like IPOs, the proposal actually disadvantages SPACs compared to IPOs, “particularly around the de-SPAC transaction stage.” According to her, the rule goes much further than many state laws and current M&A best practices.
According to the American Securities Association’s comment letter, the proposal would extend liability for financial advisors in a de-SPAC transaction beyond the current rules for underwriters in traditional IPOs.
“This risk would make it impossible for investment banks to continue advising on de-SPAC transactions,” said ASA CEO Chris Iacovella.
It was unclear how responsive the SEC would be to such complaints. Some lawmakers, including leading Democratic Senator Elizabeth Warren, are putting pressure on the Wall Street regulator to crack down on the SPAC industry.
According to an SEC spokesperson, the agency “benefits from robust public engagement and will review all comments submitted during the open comment period.”
Policymakers, according to Samir Kapadia, who represents the SPAC Association, should recognize that SPACs serve an important market function by increasing access to capital.
“We’ve seen tremendous economic impact in terms of job creation and capital investment in industries like clean energy, healthcare, and technology,” Kapadia said.
“The regulator must prioritize data over politics.”