While there is plenty of uncertainty about the specific future of the Special Purpose Acquisition Company (SPAC) industry, it is clear that the industry is on the radar in Washington policy circles. The first half of 2021 was marked by a salvo of regulatory and legislative actions related to SPACs. Moving forward, SPAC filings and de-SPAC transactions can expect more scrutiny. Indeed, past transactions will likely be the focus of SEC enforcement actions, particularly with regards to current and past disclosures. Today’s House Financial Services Committee hearing on SPACs indicates that Congress is contemplating actions – including recently introduced legislation – that, if passed, could great amplify the risk of SPAC transactions. This political and regulatory environment underscores the importance of transparency and good disclosure.
The Rise of SPACs
While blank-check companies in the 1980s were generally perceived to be at the bottom of the securities hierarchy because of a perceived potential for fraud, they gained more acceptance over the years. With the introduction of better governance and structure through the development of the SPAC concept, plus the enactment of the Sarbanes-Oxley Act and its imposition of increased regulatory costs, SPACs grew in market acceptance. In early 2020 SEC Chairman Jay Clayton indicated that he liked the concept of SPACs bringing more competition in the distribution of stock, while making clear the importance that investors understand the difference between SPACs and IPOs. What was viewed with curiosity and some growth a few years ago turned into a boom in 2020 and early 2021.
Recent SEC and Legislative Developments
As SPACs grew in popularity throughout late 2020 and early 2021, SEC staff clearly wanted to take some of the air out of the booming SPAC industry. Recent staff statements about SPAC accounting treatment of warrants had the desired dampening effect on the number of deals. Nevertheless, activity continues in the SPAC market, as does interest from the agency and Capitol Hill. For example, new SEC Chairman Gary Gensler indicated that his enforcement agenda would include heightened scrutiny of SPACs, and today the House Financial Services Committee is hosting a hearing on SPACs. Both Republicans and Democrats have introduced legislative proposals related to SPAC transactions.
We have seen this movie before. With heightened Capitol Hill engagement, the SEC will certainly get more questions from lawmakers, which could push the SEC to expand its enforcement focus on SPAC-related cases. The SEC’s enforcement division is likely already looking at disclosures, seeking tips, and asking questions about tender offers attendant to SPAC transactions. The SEC will likely use every tool at its disposal to find enforcement actions to bring.
Upholding Investor Protection and APA Requirements
The SEC will, however, have to strike a balance between upholding its investor protection mandate while meeting requirements of the Administrative Procedure Act. The APA requires that regulatory agencies provide public notice and comment on any new proposed regulations. Indeed, the SEC’s staff statements about accounting treatment and the cascading effect these statements have had on the industry could bring claims of APA violations. If the agency is overly aggressive and uses enforcement or guidance in effect to impose new regulations or requirements, it could face litigation.
Especially with this much increased scrutiny, it is important for industry participants to engage in the debate – whether through white papers, trade associations, and engagement with SEC staff and the Chairman’s and Commissioners’ offices. It goes without saying that industry participants must ensure that their disclosures are top notch and that all policies and procedures are in place and being done by the book. Investors need information and transparency.
With the Federal Reserve’s attempt to keep interest rates at historically low levels, investors will continue to explore alternatives in a search for yield. The SPAC industry is having its moment under the white-hot lights of regulatory scrutiny. It can emerge from this process stronger by upholding the current regulations and engaging in the debate about its future.
Additional SPAC Perspective
Patomak CEO Paul Atkins recently participated in a B. Riley Financial panel discussion about the SPAC landscape and outlook. The entire event can be viewed here.