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Human Capital: SEC's Lee Zeroes in on SPACs

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Welcome back to Human Capital. I’m Melanie Waddell, ThinkAdvisor’s Washington Bureau Chief. This week’s hot topic was SPACs — special purpose acquisition companies – with Acting SEC Chair Allison Herren Lee warning Thursday at the SEC’s Investor Advisory Committee Meeting: “We’re seeing more evidence on the risk side of the SPACs equation as we see studies showing that their performance for most investors doesn’t match the hype.”

Lee, a Democrat, added: “As the volume of SPACs’ transactions reaches unprecedented levels, staff is taking a close look at the structural and disclosure issues surrounding these business combinations.”

Indeed, over the past few months, the securities regulator has issued SPAC-related warnings, first an investor alert in December and then another on Wednesday zeroing in on celebrity-endorsed SPACs.

Thanks for tuning in again as we spotlight the people taking the pulse of the financial regulatory landscape.

You can reach me at [email protected] or follow me on Twitter at Think_MelanieW.


What’s a SPAC?

A SPAC is a blank-check company that offers securities for cash through an initial public offering. SPACs then have a specified period of time — typically two years — to identify and merge with a private operating company, the SEC explains.

This business tie-up is often used as an alternative means of taking the acquired company public, rather than through a traditional IPO. SPAC transactions differ from traditional IPOs, the SEC stated, “and have distinct risks associated with them.

‘A Poor Man’s Private Equity’

James Angel, associate professor of finance at Georgetown University’s McDonough School of Business, said SPACs “provide a quick way for companies to go public with less restrictions than a typical IPO.” They’re also “a poor man’s private equity. You can get into a future deal run by somebody you hopefully trust, but you don’t have to be a super-wealthy investor with access to the right connections,” Angel said.

SPAC “promoters have figured out how to sell them and make lots of money on them,” Angel added. “Usually the promoter gets 20% of the common equity upon completion, which is pretty sweet. The option to back out attracts investors because they have a parachute to bail if they don’t like the deal.”

NYSE President’s Take

Stacey Cunningham, president of the New York Stock Exchange, told Bloomberg Thursday: “When a company goes public they’re in it for the long haul. …What SPACs and direct listings both bring to the table [are] alternatives to the public market. These companies … can choose the path to the public market that makes sense for them. And that’s based on their goals. SPACs give companies a little more control; they’re negotiating with a counterparty and they have some control over their public entrance. It’s a little quicker path to the public market; they have the flexibility to provide disclosures and information about future projections.”

SPACs are evolving, Cunningham said. “As new SPAC sponsors are taking a different approach to their promote fees, I expect to see more of that move into disclosures.”

As Gary Gensler likely steps into the role of SEC chairman, he and the SEC will look at whether “investors have the information they need to make informed decisions” Cunningham said.

SPACs are “all about marrying investor choice with investor protection,” she said. “Both of those things are key and we can’t trade either one of them off. SPACs are giving investors access to companies earlier in their lifecycle — that’s a good thing. … We want to make sure they have those protections as well.”

SEC’s Peirce Weighs In

SPACs “are clearly having a moment as they outpace traditional IPOs in the number and size of deals so far in 2021,” SEC Commissioner Hester Peirce, a Republican, said at the Investor Advisory Committee meeting.

Looking past the hype, Peirce said she was “encouraged that SPACs may be vehicles through which retail investors can gain early exposure to high-growth companies that otherwise would not be available to them.”

“We should welcome the addition of startup public companies that historically would have experienced their growth stage in the private markets, where retail investors are not permitted to participate,” Peirce stated.

That said, “many startups fail, and assessing opportunities and risks associated with SPACs can be particularly difficult given the two-staged SPAC process, which involves both an IPO and a subsequent business combination transaction,” she added.

SPACs must provide “sufficient disclosures to enable informed investment decision-making at each stage.”

Peirce also pondered whether the disclosure guidance issued by the SEC’s Division of Corporation Finance in December was “helpful and sufficient.”


At Press Time

President Joe Biden signed into law Thursday afternoon the $1.9 trillion stimulus plan, the American Rescue Plan Act of 2021.

The bill includes $7.25 billion in additional funding for the PPP, including to expand eligibility to additional nonprofits and digital news services; Also, $15 billion additional is allocated for Targeted Economic Injury Disaster Loan Advance (EIDL) payments, including $5 billion for Supplemental Targeted EIDL Advance payments for those hardest hit.

Also on Thursday, House Small Business Committee Chairwoman Nydia M. Velázquez, D-N.Y., introduced the Paycheck Protection Program (PPP) Extension Act, bipartisan legislation that would extend the PPP loan application deadline from March 31 to May 31.


Hill Watch

On March 17, House Financial Services Committee Chairwoman Maxine Waters, D-Calif., will hold her second GameStop-related hearing: Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide, Part II

Senate Banking Committee Chairman Sherrod Brown, D-Ohio, held a hearing on the GameStop frenzy on March 2. Gary Gensler, President Joe Biden’s pick to be chairman of the Securities and Exchange Commission, weighed in on the steps he’d take regarding the GameStop squeeze if confirmed.

The Senate Banking Committee voted Wednesday to advance Gensler’s nomination to the full Senate.


More Regulatory Buzz

FINRA Looks at Reg BI in Light of GameStop Frenzy

Financial Trade Groups Blast Independent Contractor Bill