U.S. securities regulators proposed new rules for shell investment companies on Wednesday, tightening a path for companies to go public that has been criticized for sacrificing investor protections.
The new rules aim to put firms formed solely for the purpose of merging with another entity, known as special purpose acquisition companies (SPACs), on an equal footing with companies that participate in traditional initial public offerings (IPOs).
The move follows a surge in SPAC transactions in 2020 and 2021, with well-known companies ranging from Virgin Galactic and WeWork to several celebrity-linked ventures using the strategy.
The Securities and Exchange Commission will launch a public comment period on its 372-page proposal, which will require additional disclosures about SPAC sponsors, conflicts of interest, and sources of equity dilution.
The proposal also eliminates a SPAC benefit that protected such firms from lawsuits if their forecasts were not met – a feature not available to traditional IPOs.
The change reflects the fact that such projections “may lack a reasonable basis,” according to the SEC’s fact sheet.
The new SPAC regulations are intended to “ensure that investors in these vehicles receive protections similar to those available when investing in traditional initial public offerings,” according to SEC Chair Gary Gensler.
“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,” he said.
According to Dealogic, the pace of SPAC offerings has slowed in 2022, with 53 deals involving US-listed firms raising $9.8 billion.
According to Dealogic, there will be more than 600 transactions totaling $162.6 billion in 2021.