Booming SPAC market draws SEC scrutiny

Booming SPAC market draws SEC scrutiny
The vehicles are touted for democratizing markets by allowing retail investors access to high-growth companies. But the SEC said they come with distinct risks.
MAR 11, 2021

As the use of special purpose acquisition companies has soared giving ordinary investors a new way to get in on the ground floor of companies that will go public the Securities and Exchange Commission is scrutinizing the potential dangers the new vehicle could pose to those investors.  

“Lately, we’re seeing more and more evidence on the risk side of the equation for SPACs,” SEC Acting Chair Allison Herren Lee said at Thursday’s online meeting of the SEC Investor Advisory Committee. “As the volume of SPACs reaches unprecedented levels, the staff is taking a close look at the structural and disclosure issues surrounding these business combinations.”

Lee’s comments echo a Wednesday Tweet by John Coates, acting director of the SEC Division of Corporation Finance, and follow an investor alert about SPACs that the SEC issued on Wednesday, warning investors not to invest in a SPAC based solely on a celebrity endorsement.

SPACs, known as blank-check companies, raise capital through an initial public offering. They have up to two years to identify and acquire a private company that then goes public through the merger, according to the SEC alert.

The vehicles have become popular because they’re seen as an easier way to take a company public than the traditional IPO process or through a direct listing. They’re also touted for democratizing markets by allowing retail investors access to high-growth companies that they could not have attained through venture capital or private equity funds.

The number of completed SPAC IPOs has grown from 13 in 2016 to 248 in 2020, Jocelyn Arel, partner at law firm Goodwin Procter, told the SEC Investor Advisory Committee. This year, the number already has hit 232.

“SPACs are here to stay,” Arel said. “They’re a mainstream IPO alternative.”

But in its investor alert, the SEC warned that SPACs differ from traditional IPOs and come with distinct risks.

“For example, sponsors may have conflicts of interest so their economic interests in the SPAC may differ from shareholders,” the alert states.

Lee said one of the questions SEC staff would look at is whether SPAC disclosures are sufficient to help investors understand the risks they’re taking on.

Another SEC member, Hester Peirce, praised SPACs.

“Looking past the hype — and there is a lot of that as our staff highlighted in an investor bulletin yesterday — I am 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,” Peirce told the Investor Advisory Committee.

She warned against overregulating SPACs. “Well-intentioned increased regulatory obligations around SPACs could make them less cost-effective,” Peirce said.

Latest News

SEC charges Chicago-based investment adviser with overbilling clients more than $2.5M in fees
SEC charges Chicago-based investment adviser with overbilling clients more than $2.5M in fees

Eliseo Prisno, a former Merrill advisor, allegedly collected unapproved fees from Filipino clients by secretly accessing their accounts at two separate brokerages.

Apella Wealth comes to Washington with Independence Wealth Advisors
Apella Wealth comes to Washington with Independence Wealth Advisors

The Harford, Connecticut-based RIA is expanding into a new market in the mid-Atlantic region while crossing another billion-dollar milestone.

Citi's Sieg sees rich clients pivoting from US to UK
Citi's Sieg sees rich clients pivoting from US to UK

The Wall Street giant's global wealth head says affluent clients are shifting away from America amid growing fallout from President Donald Trump's hardline politics.

US employment report reactions: Overall better than expected, but concerns with underlying data
US employment report reactions: Overall better than expected, but concerns with underlying data

Chief economists, advisors, and chief investment officers share their reactions to the June US employment report.

Creative Planning's Peter Mallouk slams 'offensive' congressional stock trading
Creative Planning's Peter Mallouk slams 'offensive' congressional stock trading

"This shouldn’t be hard to ban, but neither party will do it. So offensive to the people they serve," RIA titan Peter Mallouk said in a post that referenced Nancy Pelosi's reported stock gains.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.