Brian Snyder / Reuters; Michael Loccisano / Getty Images; Samantha Lee / Insider
- In February, two think tanks on financial reform sent a letter to Congress detailing concerns about the SPAC boom.
- The letter states that the bull market is “fueled by conflicts of interest and compensation for insiders at the expense of retail investors.”
- He offered five recommendations to Congress and financial regulators “to better protect retail investors”.
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While the SPAC craze continues in 2021, attracting big investors and pop culture icons, there are those who believe that retail investors trying to profit from the craze are doing a bad deal.
In February, Americans for Financial Reform and the Consumer Federation of America sent a letter to the House’s Financial Services Committee detailing concerns about the boom among special-purpose acquisition companies.
The letter, addressed to President Maxine Waters, said that the boom in SPACs is “fueled by conflicts of interest and compensation for corporate insiders at the expense of retail investors.”
He also suggested an attempt by the sponsors and their targets “to establish lasting rules designed to promote fair and efficient markets”.
SPACs have been around for decades, but they reached prominence last year and in 2021, presented as a faster and cheaper alternative for companies to go public compared to the traditional IPO.
In the first two months of 2021 alone, 175 SPACs became public, according to data compiled by Goldman Sachs – about five trades per trading day. If this pace continues, the investment bank estimates that this year’s offers will exceed the total number of SPACS in 2020 by the end of March.
The letter, authored by Andrew Park of the Americans for Financial Reform, and Renee M. Jones of Boston College Law School, says that SPACs must be controlled.
The organizations offer five recommendations to Congress and financial regulators “to better protect retail investors”.
1. Modernize the definition of “blank check company”
Congress must reconsider the legislation that allows the SEC to regulate blank check companies, and the deadline should not be limited to companies that issue “low price” offers. “Blank check companies” using larger vehicles can now escape the restrictions that Congress has adopted to protect investors from “misleading information, conflicts of interest and fraud”.
“Making a larger investment vehicle and attracting greater investment does not solve the problems inherent in the marketing, sale and trading of shares with blank checks”, states the letter.
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2. Reduce pre-merger hype
SPAC sponsors, target companies and consultants are protected from liability for overly optimistic projections. This contrasts with traditional IPOs, where unfounded financial projections are restricted. Closing this gap will level the playing field, the letter said, especially as SPAC sponsors “often boldly assert investors that they will be able to generate billions in revenue in the near future”.
3. Ensure adequate accountability of the subscriber
Responsibility should also extend to underwriters and financial advisers during the merger phase. As SPAC subscribers receive more than half of their subscription fees at the conclusion of the merger, the letter suggested that the subscribers should be the same for the entire SPAC offering.
Financial advisers must also be considered underwriters, the letter said. These changes will level the playing field between SPACs and traditional IPOs.
4. Improved disclosures in the SPAC offer and merger phases.
Disclosures for the SPAC merger must explicitly include the amount of money that SPAC is expected to hold immediately before the merger, the letter said. This includes collateral payments, agreements to pay sponsors, SPAC investors and PIPE investors.
The letter that this information often has to be gathered from various documents.
5. Study the risks and outcomes of the SPAC craze
The letter recommends that the Securities and Exchange Commission collect data on SPACs and produce an average performance assessment report. The agency is also expected to investigate the categories of investors who “typically bear the brunt of post-merger losses on SPACs.”
The letter states that many of these investors are retail investors who “are usually attracted to SPAC’s investments in advertising and hype” and “are probably unaware of the complexity of the fee agreements or the expected dilution that will eventually erode the value of their investments. “. The letter suggested that apps like Robinhood played an important role in all this hype.
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