It’s been a bumpy road for the electric vehicle startups that rushed to go public over the past two years by merging with a publicly traded shell company.
Now, the SEC’s broadest attempt to crackdown on these so-called reverse mergers could put a few speed bumps on the road to becoming — and maintaining — a SPAC.
The U.S. Securities and Exchange Commission will conclude Tuesday a 60-day public comment period on a number of proposed guidelines for SPACs, specifically around disclosures, marketing practices and third-party oversight. If approved, the barrier of entry to becoming a SPAC will rise, putting it on par with the regulatory burden placed on companies that pursue the more traditional IPO path.
The rules will “help ensure that investors in these vehicles get protections similar to those when investing in traditional initial public offerings,” SEC Chairman Gary Gensler said when the proposal was first released back in March. The rules, if approved, will also strengthen protections for current investors, as well as prevent SPACs from using “overly optimistic language or over-promise future results” to appeal to potential investors.
“Ultimately, I think it’s important to consider the economic drivers of SPACs,” Gensler said in March. “Functionally, the SPAC target IPO is being used as an alternative means to conduct an IPO.”
The details
The most significant change to the proposed guidelines requires aligning the financial statements required for SPACs with those of traditional IPOs, a major step toward creating more transparency. This includes more disclosure across several areas.
The guidelines also call for gatekeepers such as auditors, lawyers, and underwriters to be held responsible for their work, including assuming liability for the registration statements SPACs must file ahead of a target IPO. Gensler said the changes “provide an essential function to police fraud and ensure the accuracy of disclosure to investors.”
While the proposal winds through the approval process, some players in market have pressed the pause button.
For instance, Goldman Sachs halted its dealmaking in May as it waits to see how the new regulations will affect dealmaking, especially if the SEC revokes the so-called safe harbor protection that until now has allowed SPACs to make bullish projections. Credit Suisse and Citigroup have voiced alarm, too.
“I could say I think I’m gonna make a bajillion dollars in 2025, but here are all the reasons why I might not,” said Ramey Layne, a capital markets and M&A attorney at Vinson and Elkins. “If you say that there’s a safe harbor, then you can’t be sued for that if it proves to be wrong.”
The SEC’s proposed regulations are “a very big step in the right direction,” said Stanford Law School professor Michael Klausner, especially if SPACs are required to “disclose the extent to which their shareholders’ equity is diluted at the time of the merger.”
The SEC expects to finalize new guidelines during the second half of 2022. Meanwhile, of the roughly 600 SPACs currently searching for a company to acquire, some deals have ground to a halt or been scrapped, according to SPAC …read more
https://techcrunch.com/2022/05/29/electric-vehicle-maker-spacs-to-face-more-regulations/