SPACs are on the chopping block thanks to the SEC’s latest proposal

March 30, 2022, 4:36 PM UTC

It may be the end of the road for SPACs. 

The Securities and Exchange Commission proposed a sweeping new set of rules Wednesday that will effectively flatten the playing field between IPOs and a once-popular and quicker alternative, SPAC mergers.

The new rules lodged against SPACs, or special purpose acquisition companies, will help “ensure that investors in these vehicles get protections similar to those when investing in traditional initial public offerings,” SEC Chair Gary Gensler said in a statement.

Here are a few highlights of the new proposal:

  • New disclosure requirements on sponsors, conflicts of interest, target companies, dilution, and other factors
  • An update to align financial statement requirements for companies going public via IPO or a SPAC merger
  • An amendment to the definition of a blank-check company under SEC rules, so that private investors can sue if they deem a SPAC’s financial projections of its target company are false or have omitted material details

Here’s more: Gensler said that the lawyers or bankers working on these deals “should have to stand behind and be responsible for basic aspects of their work,” and should be responsible for policing fraud and ensuring that SPAC disclosures are accurate. The proposal will make underwriters, auditors, and lawyers—which the SEC refers to as “gatekeepers”—liable to the documents they sign as part of the deal. 

The SEC’s long-awaited proposed regulation is yet another blow for what was only recently an exceedingly popular route to going public. But by now, SPACs seem all but on the brink of collapse.

In the first three months of this year, there have only been 53 SPAC offerings, raising a total of $8.8 billion—a 90% drop in proceeds from this time last year, according to IPO research and ETF company Renaissance Capital. The average deal size is down to $168 million—and that’s before institutional investors decide whether to redeem shares or not. 

As a reminder for how these mergers work, a sponsor puts forth a blank check company to list on an exchange, raises money from institutional investors, and takes it public. Those investors are given warrants that allow them to buy their shares back at the price they originally purchased, which is typically $10. After a blank check company identifies a target, institutions can opt to redeem their shares prior to the merger. 

Investors seem far less infatuated with SPACs than they were during the pandemic, when the number of SPAC deals soared to record heights. Companies that have gone public via SPAC mergers simply haven’t performed well on the exchanges in the last year, although there have been exceptions. The lack of investor activity has spawned the institutional investors who originally backed these deals to redeem shares ahead of a target company merger and get their money back.

This quarter, redemption rates are as high as 99% in some cases. One example is the SPAC merging with apartment hotel company Sonder Holdings, which said in January its investors had exchanged 96% of shares for cash. Companies like Kin Insurance or have called off their own SPAC deals and opted to stay private longer.

Somewhat ironically, Gensler says this proposal is a response to the growing number of companies that are going public via blank check mergers. But by the time that the SEC has brought its proposal to the table, there isn’t near the same demand anymore.

That being said, there still are some companies that see it as a viable option. Tokyo-based Coincheck agreed to merge with a SPAC last week. Yesterday, Axios reported that the subscription content service OnlyFans is trying to find a merger partner—though controversy over the quantity of adult content on its platform seems to be getting in the way.

But if SPACs needed a nail in the coffin, this proposal—should it be approved—will likely serve as one. If requirements between SPAC and IPO are essentially equal, and redemption rates are soaring, who will bother?

See you tomorrow,

Jessica Mathews
Twitter: @jessicakmathews
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Jackson Fordyce curated the deals section of today’s newsletter.


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