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

Mercer Advisors, Osaic deepen AI bets with Arch and Nitrogen deals
Mercer Advisors, Osaic deepen AI bets with Arch and Nitrogen deals

Arch claims 40% operating cost savings for Mercer as Nitrogen unlocks its agentic AI and tech suite to 10,000 Osaic advisors

LPL advisor, South Carolina state senator, elected to U.S. Congress
LPL advisor, South Carolina state senator, elected to U.S. Congress

A happy coincidence: one of LPL Financial’s corporate campuses happens to be based in Rep.-elect Wes Climer’s new district.

Advisor moves: JPMorgan lands $940M Merrill veteran in Los Angeles
Advisor moves: JPMorgan lands $940M Merrill veteran in Los Angeles

Wells Fargo and UBS also add advisors from Morgan Stanley, Edward Jones, Merrill and Fidelity in a fresh round of wirehouse recruiting

Wall Street products, Main Street regulators
Wall Street products, Main Street regulators

How we got here – and what to do about it

Most Americans are OK with AI managing their money - but not how you think
Most Americans are OK with AI managing their money - but not how you think

AI trust gap: Americans want protection, not autonomy, in their finances

SPONSORED Built on insurance experience to deliver on long-term promises

Knighthead Life entered the market with a competitive MYGA. A strong launch earned advisor confidence and paved the way for FIAs.

SPONSORED In the Age of AI, Trust Becomes the Advisor's Greatest Asset

As AI makes financial information more accessible than ever, Lana Hock explains why human judgment, trust, and empathy remain the qualities clients value most in a financial advisor