U.S. financial industry groups are pushing to water down a proposed Securities and Exchange Commission (SEC) rule aimed at curbing special purpose acquisition companies, or SPACs, arguing it could kill the industry.
The American Securities Association (ASA), SPAC Association and CFA Institute are among groups warning that the SEC’s proposed March rule would create too much liability for parties involved in SPAC transactions, and as such goes further a far cry from the traditional initial public offering (IPO). and rules on mergers and acquisitions.
The deadline for submitting comments to the SEC was Monday.
“The agency should protect investors, but not kill the industry,” said Kurt Schacht, head of advocacy at the professional investor group CFA Institute, adding that his organization had urged the SEC in a comment letter and at meetings not to regulate SPACs out of business.
Wall Street’s biggest gold rush in recent years, SPACs are shell companies that raise money through a public listing with the goal of acquiring a private company and taking it public.
The process allows the target to escape the stricter regulatory scrutiny of a traditional IPO, prompting criticism that many deals are shoddy or suffer from lax due diligence, and in turn have let investors suffer losses.
Investment banks have raked in billions of dollars fueling a frenzy in SPAC deals while putting little of their own cash at risk, Reuters reported in May, although some banks pulled out of SPAC deals following the SEC proposal.
This proposed rule is intended to provide SPAC investors with protections similar to those they would receive during the IPO process. This would increase the liability of parties involved in such transactions, remove a legal safe harbor for profit projections and strengthen investor disclosure.
“If you add it all up, it’s definitely going to make people a little more nervous about using SPACs,” said Morris DeFeo, partner at law firm Herrick, Feinstein LLP, which advises SPAC sponsors and target companies. .
In particular, the rule would improve disclosure about the target takeover, known as a “de-SPAC” transaction, including requiring the sponsor to explain whether the proposed deal is fair to investors and has been approved by third.
Anna Pinedo, a partner at Mayer Brown who advises SPAC sponsors, said that while the SEC wants to treat SPACs like IPOs, the proposal actually puts SPACs at a disadvantage to IPOs, “especially at the stage of the de-SPAC transaction”. The rule goes much further than many state laws and current best practices for mergers and acquisitions, she said.
The proposal would expand the liability of financial advisers in a de-SPAC transaction beyond current rules for underwriters in traditional IPOs, the American Securities Association wrote in its comment letter.
“This risk would make it untenable for investment banks to continue advising on de-SPAC transactions,” said ASA CEO Chris Iacovella.
It was unclear how receptive the SEC was likely to be to such complaints. The Wall Street regulator is under pressure from some lawmakers, including leading Democratic senator Elizabeth Warren, to crack down on the SPAC industry.
An SEC spokesperson said the agency “benefits from strong public engagement and will consider all comments submitted during the open comment period.”
Samir Kapadia, representing the SPAC Association, said policymakers should recognize that SPACs perform a crucial market function by improving access to capital.
“We have seen tremendous economic impact in the form of job creation and capital investment in sectors such as clean energy, healthcare and technology,” Kapadia said.
“The regulator should value data, not politics.”