The Securities and Exchange Commission has promised to investigate further the forecasts of revenue and profit offered by firms published by a specialty venture, in a shot over the arcs of Spac advisers and promoters.
John Coates, the acting director of corporate finance at the SEC, said Thursday that the perceived benefit of offering investors forward-looking statements by disclosing a Spac is exaggerated at best and, at worst, potentially misleading.
Spac critics believe that the companies practice a form of regulatory arbitrage because young businesses that do not have an income, or sometimes not even a prototype, can offer high projections to the public about future growth.
Although companies that choose a traditional initial offer do not technically prohibit the same, there are serious liability risks associated with it.
Specific questions were raised regarding the development of electric vehicle technology businesses via Spacs, which at the end of last year gained a market capitalization of almost $ 60 billion, despite the fact that most have not yet earned a single dollar in revenue.
An analysis by the Financial Times of nine automotive technology groups listed via a Spac in 2020 showed that they would expect only $ 139 million in that year, but that by 2024 they would earn a total of $ 26 billion.
Skeptics said inflated valuations for young businesses with unproven technology could be a sign that investors are getting an overly rosy picture of the company’s future growth when they make their public debut.
When a Spac merges with an operating company that wants a public listing, it is said to be ‘de-Spac’. In a statement, Coates said such transactions should be subject to “the full protection of federal security legislation”.
“A De-Spac transaction does not give anyone a free pass for material misstatements or omissions,” he said, adding that the SEC is considering treating such transactions more like traditional IPOs.
“If we do not regard the de-Spac transaction as the ‘right IPO’, our attention may be drawn to the wrong place, and potentially problematic forward-looking information may be disseminated without appropriate guarantees.”
In the first quarter of 2021, Spacs made a combined $ 172 billion in de-Spac transactions, representing more than a quarter of the total value of all merger and acquisition transactions in the first three months of the year.
The SEC has issued a number of statements warning investors about Spac hype. In March, it warned retailers to be wary of celebrities sponsored by celebrities, a growing phenomenon.
Coates also called for greater transparency on how supporters benefit from the transactions. Several Spac sponsors, such as Chamath Palihapitiya and Michael Klein, are sitting on huge fortunes due to shareholding they received on favorable terms.