SEC is seeking more transparent disclosures on SPAC mergers

The U.S. Securities and Exchange Commission (SEC) is moving towards taking action against the SPAC trend. On Thursday, SEC released a statement on how the target companies of special purpose acquisition companies use projections and valuation material in deals that are not commonly found in conventional IPO prospectuses.

Special Purpose Acquisition Companies (SPAC) or blank check companies are listed entities that issue stocks, raise cash from public investors, and then use the money to buy companies willing to go public.

The SEC’s concern is on the use of projections of the blank check companies. SPACs have several quarters of filings before turning themselves into an acquisition vehicle. Hence, the companies bought by SPACs have no financial record than private companies doing IPOs.

SEC mentioned in its report that SPACs sometimes expressly point to the Private Securities Litigation Reform Act (PSLRA), which was passed in 1995, for safe harbor for forward-looking statements, and state that the safe harbor applies for de-SPAC transactions but not in conventional IPOs.

Another concern of SEC is that during a SPAC merger, underwriters don’t conduct analysis on the target company, unlike a conventional IPO or M&A. Mostly, SPAC mergers don’t have any independent advisors to keep a check on fairness. Blank check firms offer proxy statements with not-so-transparent details before the shareholders' vote.

Reuters reported that the agency could require investment banks and underwriters to provide a necessary check by giving a fair opinion on valuation and financial data, including projections or due diligence on target companies. Also, the agency could ask the managers of the blank check companies to lay out how much money they will make on a transaction based on different valuations so that investors can calculate whether they are getting a fair share.

SEC slapped a $100,000 fine on former CEO Benjamin Gordon of Cambridge Capital Acquisition Corp; a Florida-based blank check company merged with Ability Computer & Software Industries Ltd, an Israeli company, in 2019. The commission found that Gordon failed to conduct appropriate disclosure to ensure that Cambridge shareholders’ voting on the merger by providing Ability’s order backlogs from its largest customer, a police agency in Latin America, among others.

Research firm Deal Point Data’s study shows, 247 SPAC IPOs were completed in 2020, raising total gross proceeds of about $75 billion, which is about 48% of the overall IPO market by value. These figures represent a massive 320% increase in the number of SPAC IPOs, nearly a 525% increase in gross IPO proceeds than 2019’s 59 SPAC merger.

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