Brian Snyder / Reuters; Michael Loccisano / Getty Images; Samantha Lee / Insider
- In February, two think tanks for financial reform sent a letter to Congress outlining concerns about the SPAC boom.
- The letter said the rising market was “fueled by conflicts of interest and compensation to corporate insiders at the expense of retail investors.”
- It presented five recommendations to Congress and financial regulators “to better protect retail investors.”
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While SPAC mania continues in 2021 and attracts big-name investors and pop culture icons, there are some who believe retail investors trying to get money out of the craze are getting a raw deal.
In February, Americans for Financial Reform and the Consumer Federation of America sent a letter to the House Financial Services Committee outlining concerns about the boom among companies for special-purpose procurement.
The letter, addressed to President Maxine Waters, said the boom in SPACs “is fueled by conflicts of interest and compensation to corporate insiders at the expense of retail investors.”
It also suggested that an effort be made by sponsors and their targets ‘to work out long-standing rules designed to promote fair and efficient markets.’
SPACs have been around for decades, but they became very prominent last year and in 2021 are seen as a faster and cheaper alternative for companies to go public compared to the traditional stock market.
In the first two months of 2021 alone, 175 SPACs were released according to data compiled by Goldman Sachs – about five transactions per trading day. If the pace continues, the investment bank estimates that the supply will exceed the total number of SPACS in 2020 by the end of March this year.
The letter, written by Andrew Park of the Americans for Financial Reform and Renee M. Jones of Boston College Law School, says that SPACs should be governed.
The organizations make five recommendations to Congress and financial regulators “to better protect retail investors.”
1. Modernize the definition of ‘blank check company’
Congress should look again at legislation that allows the SEC to regulate businesses with blank checks, and the term should not be limited to companies issuing a ‘penny offer’. “White check companies, which use larger vehicles, can now evade the constraints that Congress has adopted to protect investors from” misleading information, conflicts of interest and fraud. ”
“Making an investment vehicle bigger and attracting larger investments does not cure the problems associated with marketing, selling and trading blank check stock,” the letter reads.
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2. Print the hype before the merger
SPAC sponsors, target companies and advisers are protected from liability for overly optimistic forecasts. This is in contrast to traditional IPOs where unfounded financial forecasts are limited. The closure of this loophole will level the playing field, the letter reads, especially as SPAC sponsors ‘often boldly claim against investors that they will be able to earn billions in revenue in the near future.’
3. Ensure appropriate underwriting liability
The liability must also extend to underwriters and financial advisers during the merger phase. Since SPAC underwriters receive more than half of their underwriting money after the merger, the letter suggests that the underwriters should be the same for the entire SPAC offer.
Financial advisers should also be considered as underwriters, the letter reads. These changes will level the playing field between SPACs and traditional IPOs.
4. Improved disclosure during SPAC presentation and merger phases.
The disclosure of SPAC mergers must explicitly include the amount of cash that the SPAC is expected to hold immediately prior to the merger, the letter reads. These include co-payments, surety agreement payments, SPAC investors and PIPE investors.
The letter that this information often has to be put together from different documents.
5. Study the risks and results of SPAC mania
The letter recommends that the Securities and Exchange Commission collect data on SPACs and compile a report evaluating average performance. The agency should also investigate the categories of investors who ‘usually bear the brunt of the losses of SPACs after the merger’.
The letter states that many of these investors are retail investors who ‘regularly pull through the publicity and hype’ of SPAC investments ‘and’ are probably unaware of the complicated remuneration arrangements or the expected dilution that will eventually erode the value of their investments. not. ‘The letter suggests that apps like Robinhood played a role in all this hype.
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