Gary Gensler, the chairman of the US Securities and Exchange Commission (SEC), has laid out the case for stricter regulations of special purpose acquisition companies (SPACs) to ensure SPAC mergers are treated more like traditional initial public offerings (IPOs).
A SPAC is a company that has no commercial operations and is formed strictly to raise capital through an IPO for the purpose of acquiring or merging with an existing company. These "blank cheque companies" have been around for decades, but their popularity has soared in recent years.
Among Gensler’s ideas are new rules around marketing practices, tougher disclosure requirements and liability obligations for SPAC “gatekeepers”, which could include sponsors, financial advisors and other bookkeepers, CNBC reported.
In a speech to the virtual Healthy Markets Association Conference, Gensler said he was concerned by a disconnect between the amount of information companies have to provide through a traditional IPO compared with the disclosures required from SPACs.
“Currently, I believe the investing public may not be getting like protections between traditional IPOs and SPACs,” the SEC chair said. “Due to the various moving parts and SPACs’ two-step structure, I believe these vehicles may have additional conflicts inherent to their structure.”
Gensler, who was appointed by President Joe Biden earlier this year, called for SPACs to be required to provide investors with more information about fees, expected equity dilution and conflicts, as well as better ways to access that information before an investment is made.
The push for tighter SPAC rules comes days after the news that the SEC and other US regulators are investigating a merger involving former President Donald Trump’s social media company and a SPAC called Digital World Acquisition Corp.
The SEC and the Financial Industry Regulatory Authority (FINRA) are investigating potential breaches of securities laws, including rules concerning the disclosure of information about the deal talks.
READ: Trump Social SPAC under SEC scrutiny
Some of the well-known public companies resulting from SPAC mergers include space-tourism firm Virgin Galactic and online real-estate company Opendoor. Both have seen their shares drop more than 30% this year.
CNBC said its SPAC Post Deal Index, which is comprised of the largest SPACs that have already completed a SPAC merger within the last two years, is down more than 33% in 2021.