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The SEC is monitoring potentially misleading earnings projections from SPAC sponsors and is looking for clearer disclosures, with an official hint on Thursday that the agency may issue a future rule to keep them in check.
Special purpose acquisition companies, known as SPACs or blank checks, are a hot ticket item on Wall Street.
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The investments are like quasi-IPOs. A publicly traded shell company uses investor money to buy or merge with a private company, usually within two years. By doing this, the private company is listed on the stock exchange and offers an alternative to a traditional IPO.
The use and popularity of SPAC has skyrocketed in the past six months, John Coates, acting director of the Securities and Exchange Commission Division of Corporation Finance, said in a note Thursday.
“With the unprecedented increase, there has been unprecedented control, and new issues with both standard and innovative SPAC structures continue to emerge,” said Coates.
First, the SEC looks at filings and disclosures of SPACs and their private goals, Coates said.
Some believe that current legislation allows the investments to circumvent some of the disclosure requirements of the traditional IPO process.
For one thing, some fear that SPAC sponsors and their acquisition goals pose lower legal risk for presenting high earnings and valuation forecasts. Misleading disclosures about future earnings expectations can, in turn, entice investors.
“These claims raise important questions about investor protection,” said Coates.
However, such claims may not provide an accurate reading of current securities laws, he added.
“Any simple claim of reduced liability for SPAC participants is exaggerated at best and potentially seriously misleading at worst,” said Coates.
The public can benefit from greater clarity about the legal requirements of SPAC disclosures, Coates said. He suggested that the SEC could issue a rule or issue guidelines in this regard.