Guidance nudges SPACs on conflicts’ disclosures

SEC staff is reminding special purpose acquisition companies that they'll have to do a thorough disclosure of potential conflicts as the industry explodes.

Blank check companies should do an inventory of potential conflicts and make sure they’re disclosing them “clearly” when either launching an IPO or considering a merger, SEC staff says in new guidance.

Special purpose acquisition companies exchange cash for securities through trust or escrow accounts designed to help acquire private companies. They’re having a bit of a cultural moment, with multibillion-dollar, celebrity companies, such as venture-backed betting site DraftKings and electric trucking firm Nikola, offering “proof” that SPACs give savvy private investors a chance to find under-appreciated companies and turn them into spun gold.

Some have even suggested that SPACs may be the best way to bring retail investors into private funds.

But staff at the SEC’s Division of Investment Management say they’re worried that there may be a clash of interests among SPAC sponsors, executives and retail investors.

“Clear disclosure regarding these potential conflicts of interest and the nature of the sponsors’, directors’, officers’ and affiliates’ economic interests in the SPAC is particularly important because these parties are generally responsible for negotiating the SPAC’s business combination transaction,” the December 22 guidance states. “Unlike the traditional IPO process where a private operating company sells its securities in a manner in which the company and its offered securities are valued through market-based price discovery these individuals are solely responsible for deciding how to value the private operating company and how much the SPAC will pay for it.”

This is not likely to be the last time you hear from the SEC about SPACs.

The companies had a record year in 2020, raising more than $79 billion in funds and accounting for nearly half of all the companies that went public. Many observers expect that Gary Gensler, president Biden’s nominee for SEC chairman, will take a hard look at the blank check companies as he ratchets up enforcement.


Regulators say they’re worried that SPAC sponsors or executives “may not work exclusively” with the funds when they’re looking for potential investments. In order to make sure that there isn’t a conflict among target companies and SPAC leadership, staff says it wants companies to ask themselves a few questions:

  • “Have you clearly described the sponsors’, directors’ and officers’ potential conflicts of interest? Have you described whether any conflicts relating to other business activities include fiduciary or contractual obligations to other entities; how these activities may affect the sponsors’, directors’ and officers’ ability to evaluate and present a potential business combination opportunity to the SPAC and its shareholders; and how any potential conflicts will be addressed?
  • “Is it possible that you will pursue a business combination with a target in which your sponsors, directors, officers or their affiliates have an interest? If so, have you disclosed how you will consider potential conflicts of interest?”

Further questions

SPACs generally set deadlines for finding target companies and completing the merger/takeover, and Commission staff say they’re worried that as the deadline approaches, the fund’s “options may narrow, giving acquisition targets significant leverage in negotiating the terms of a business combination transaction.”

It’ll be important, then, that the SPACs examine closely, and disclose clearly, any conflicts.

When blank check companies are considering business combinations, they may discover they need more funds. In that case, staff says they want you to ask:

  • “Do you disclose clearly any additional financing necessary to complete the business combination transaction and how the terms of such financing may impact public shareholders? If the terms of additional financing involve the issuance of securities, have you described how the price and terms of those securities compare to and differ from the price and terms of the securities sold in the IPO? Are sponsors, directors, officers or affiliates participating in additional financing?
  • “If you will issue convertible securities, do you describe the material terms for conversion and any material impact on the beneficial ownership of the combined company?”

This article first appeared in affiliate publication Regulatory Compliance Watch