Two top SEC staffers at the end of last week issued a fresh statement on blank-check companies, yet another sign that regulators are worried about irrational exuberance in the booming industry.
Since December, Commission staff have published at least four public statements on special-purpose acquisition companies. The latest came April 12. It’s signed by Division of Corporation Finance acting director John Coates and acting chief accountant Paul Munter.
They say they’ve “evaluated fact patterns” and want to remind SPAC organizers about the implications of indexation, including its effects on warrants, and tender offer provisions. If after reading the new guidance SPAC leaders think they’ve made an error in the accounting for those two areas, Munter and Coates urge them to consider re-filing financial statements and filing a 4.02 attachment to their firms’ 8-K forms.
Hybrid or mongrel?
Depending on your point of view, SPACs are either a hybrid or a mongrel of public and private markets. They are organized as IPOs with the idea that they’ll find and acquire a new or developing company within two years. If SPACs don’t accomplish a takeover within two years, they must give the investors’ money back.
Some people – including arbitrage pioneer Guy Wyser-Pratte – are keen on SPACs. He told affiliate publication Regulatory Compliance Watch that they are the best way to bring retail investors into private funds.
Wyser-Pratte (pictured above) might argue that the markets are with him. Last year, SPACs set new records, raising more than $83 billion and accounting for more than half of all the companies that went public.
So far this year, 308 US SPACs have raised $100 billion, according to SPAC Research.
SPACs have also become something of a celebrity magnet. From NBA Hall of Fame center Shaquille O’Neal to Barstool Sports’ Dave Portnoy, many celebs have expanded their “brands” to include blank-check companies.
The case against
Others – including presumptive SEC chairman Gary Gensler – are not as keen on SPACs. They might argue that the evidence is with them.
A November paper published in the Yale Journal on Regulation, for instance, found that SPACs that had completed mergers between 2019 and 2020 lost 12 percent of their value, on average. Over the same period, the Nasdaq rose by 30 percent, the researchers say.
For critics, SPACs are the worst combination of public and private markets: They bring retail investors into complicated funds with murky operations and murkier operators.
It’s not just the SEC that blank-check companies and advocates should keep an eye on. In affiliate publication Private Equity International, lawyers at Kirkland & Ellis said SPAC organizers also have to be careful they don’t get crosswise with the Treasury Department’s Committee on Foreign Investment in the United States.
SPAC mergers are often subject to the committee’s glare. That means SPAC organizers may have to disclose their foreign entanglements in their S-4 forms, the attorneys pointed out.
This article first appeared in affiliate publication Regulatory Compliance Watch