Special-Purpose Acquisition Companies (SPACs) Facing New Rules

The U.S. Securities and Exchange Commission (SEC) is set to vote on rules aimed at protecting investors in special-purpose acquisition companies (SPACs). These blank-check vehicles gained popularity in the early 2010s, bringing public companies like QuantumScape, Rivian Automotive, and VinFast Auto through a series of deals. However, enthusiasm for SPACs has waned since the SEC proposed the rules in March 2022.

Despite the declining interest, some SPACs are still making headlines. One example is Digital World Acquisition, which plans to acquire former president Donald Trump's media ventures.

If approved, the new rules would provide SPAC investors with legal protections similar to those enjoyed by investors in traditional initial public offerings (IPOs).

During Wednesday's meeting, SEC Chair Gary Gensler introduced the rules by presenting a scenario: "Suppose a group of strangers came up to you and said: 'I have a company. It doesn't do much of anything, but sometime in the next two years, we'll merge with another company. I don't know what that company is yet.'" Gensler highlighted how SPACs allow these "strangers" to pocket 20% of investors' money if a merger occurs.

The adoption of these rules by the SEC seems likely, considering the majority held by Gensler and his fellow Democrats over Republican commissioners. If implemented, SPAC filings will be required to disclose sponsors' conflicting interests, compensation details, and the potential dilution that SPAC investors may face. Additionally, private businesses merging with SPACs may be held accountable for any disclosure violations that harm investors.

SPACs: A Look Back at 2021

SPACs, or Special Purpose Acquisition Companies, had a prolific year in 2021 amidst a decadelong bull market and the brief interruption of the Covid pandemic. These shell companies embarked on initial public offerings, raising substantial capital in hopes of merging with promising businesses. Led by renowned celebrities and finance experts, these SPACs offered a quick avenue for new ventures in clean energy and digital commerce to go public while benefiting from the SPAC's financial resources.

However, despite the excitement surrounding these deals, many of them proved to be disappointing, even for seasoned investors. For instance, Koch Industries, a prominent petrochemical company, invested $1 billion in new energy SPAC deals, most of which underperformed. As investor interest waned, some businesses that had previously agreed to merge with SPACs even sought to back out of the deals. Their argument was rooted in the belief that the SPAC sponsors had undisclosed conflicts of interest.

Noting the burst of the SPAC bubble, Democrat Commissioner Caroline Crenshaw supported the proposed rules. In 2022 alone, there were over 200 registered SPACs, but this number dwindled to just 31 in 2023. However, Crenshaw clarified that the SEC's intention was not to categorize this as a bubble.

On the other hand, Republican commissioners Hester Peirce and Mark Uyeda expressed their opposition to the rules, fearing that they would discourage future SPAC transactions.

If approved, these rules will take effect 125 days after their publication in the Federal Register.