SEC Chair Gensler targets SPACs as regulators mull tougher rules

• Gensler said SPACs now make up more than 60% of U.S. IPOs

• SEC plans to propose new regulations to deal with SPACs by April 2022

The chair of the U.S. Securities and Exchange Commission (SEC), Gary Gensler, laid out a long list of concerns over blank-check firms and said he’ll push for much stricter rules for the special purpose acquisition companies (SPACs).

Gensler, who’s raised issues with SPACs multiple times since taking over the helm in April, gave an outline on Thursday for areas where it needs to step up regulation.

He said the regulator is planning to toughen rules around how underwriters, boards of directors, and sponsors of SPAC structure fees, issue projections, and disclose conflicts.

SEC chair also said he is worried that retail investors are investing in firms taken public by merging with a SPAC may be at a disadvantage compared with backing a traditional IPO.

“Currently, I believe the investing public may not be getting like protections between traditional IPOs and SPACs,” Gensler said at a meeting of the Washington-based Healthy Markets Association.

Cracking down on SPACs

SPACs, which Gensler said now make up more than 60% of U.S. IPOs, is a Wall Street jargon for a shell company with no commercial operation. Also known as blank-check companies, SPACs are formed to raise capital through a public listing and merge with a private company, which intends to go public without going through the hassle of traditional IPOs.

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There was a drastic slowdown in the number of SPACs since April 2021, following a crackdown by the SEC, after a record of 109 new deals in March alone.

There were below 30 new SPAC recorded deals from April to September every month, after SEC issued accounting guidance to classify SPAC warrants as liabilities instead of equity instruments.

In September, the market regulator expanded its crackdown on the SPAC sector, telling top auditors of these shell companies to account more strictly.

However, in October the number jumped to 57.

Increasing scrutiny

In the keynote, Gensler said the new rules would strengthen the responsibilities of “gatekeepers” who facilitate fundraising at earlier stages of a blank-check company before seeking an IPO.

“Many gatekeepers carry out functionally the same role as they would in a traditional IPO but may not be performing the due diligence that we’ve come to expect,” Gensler added.

SEC attorneys recently have stepped up scrutiny on electric carmaker Lucid Group Inc and asked for documents of SPAC merging deal.

Another blank check company Digital World Acquisition Corp, which is merging with former President Donald Trump’s media company, disclosed that they are under investigation.

Earlier, the agency said it plans to propose new regulations to deal with SPACs as soon as April 2022.

Picture Credit: FT