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.

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.