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The SEC is holding potentially misleading revenue projections made by SPAC sponsors, and is seeking clearer disclosure, with one official suggesting on Thursday that the agency could issue a future rule to harness them.
Special purpose acquisition companies, known as SPACs or blank check funds, 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. Thus, the private company is publicly traded and offers an alternative to a traditional stock exchange.
The use and popularity of SPAC has risen over the past six months, John Coates, acting director of the Corporate Finance Division of the Securities and Exchange Commission, said in a note on Thursday.
“With the unprecedented boom came unprecedented scrutiny, and new issues with both standard and innovative SPAC structures continue to emerge,” Coates said.
First, the SEC is looking at filing and disclosing SPACs and their private targets, Coates said.
Some believe that current legislation allows the investment to cover some of the disclosure requirements of the traditional IPO process.
Some fear in particular that SPAC sponsors and their acquisition targets pose a lower legal risk for the presentation of high earnings and valuation forecasts. Misleading disclosures surrounding future income estimates could in turn attract investors.
“These claims raise important investor protection questions,” Coates said.
However, such claims cannot accurately read current security legislation, he added.
“Any simple claim about the reduced exposure to liability for SPAC participants is at best exaggerated and at worst potentially misleading,” Coates said.
The public could benefit from greater clarity on the legal requirements of disclosure by the SPAC, Coates said. He suggested that the SEC could issue a rule or provide guidance on this.