The House Financial Services Committee on November 16, 2021, advanced two bills that would impose new constraints on Special Purpose Acquisition Companies (SPACs). Measures to restrict pre-dispute mandatory arbitration and establish an SEC grant program to prevent financial fraud against seniors also cleared the panel.
The bills passed by the committee include:
- H.R. 5910, the Holding SPACs Accountable Act of 2021, sponsored by Del. Michael San Nicolas, a Guam Democrat.SPACs are shell companies that raise money in initial public offerings (IPOs), using that capital to acquire a private company and take it public without a traditional IPO. The process of combining into a single publicly traded entity is referred to a “de-SPAC” transaction. H.R. 5910 is designed to more explicitly prevent SPACs from taking advantage of the protections of the Private Securities Litigation Reform Act (PSLRA), a 1995 law passed to ward off frivolous securities lawsuits, which set out a safe harbor for forward looking statements.
San Nicolas, in remarks before the vote, noted that the bill would not prevent SPACs from making forward looking statements, but would make it a violation under SEC Rule 10b5 “if any forward looking statement was fraudulent, period.”
“And so the real question that we have to ask ourselves today is do we want to have special purpose acquisition companies going out there and merging or acquiring other companies, and being able to make fraudulent statements as they try to attract investors in order to do so,” San Nicolas said. “If we’re OK with an acquisition regime that’s going to have a green light to make fraudulent statements, then we can continue with the status quo. However, if we want to actually strengthen the special purpose acquisition company process, we should do so by making sure that no SPACs can go out there and make fraudulent statements without consequence.”
The bill is supported by financial reform advocates. But the U.S. Chamber of Commerce, in a November 15 letter to the committee, argued that “fundamentally, this legislation is not needed.”
“First, companies have an existing responsibility not to make false or misleading statements,” the chamber wrote. “Next, the Securities and Exchange Commission (SEC) has existing and broad authority to compel information from companies and has strong enforcement mechanisms in place to inform the actions and decisions of market actors. Moreover, the SEC is granted broad authority under the PSLRA to extend and shrink safe harbors as it deems appropriate.”
H.R. 5910 passed on a vote of 27 to 23.
- H.R. 5913, the Protecting Investors from Excessive SPACs Fees Act of 2021, sponsored by Rep. Brad Sherman, a California Democrat. Sherman is chair of the Investor Protection, Entrepreneurship, and Capital Markets subcommittee.The bill would bar broker-dealers and investment advisers from pitching SPACs to retail investors unless the SPAC makes a new set of disclosures to the commission on fees, payments to sponsors or investors, and other information. The measure “will ensure that investors have the information that they need when they make a SPAC investment and at each stage of the investment decision-making process.”
Sherman conceded the latest version of his bill was “far more modest and I hope far less controversial than the original proposal.” An earlier version of the measure had more explicitly targeted SPAC compensation structures – where sponsors can receive a so-called “promote” of 20 percent of the equity in the SPAC for a small price – by applying the marketing restrictions to SPACs with a promote of greater than 5 percent.
H.R. 5913, which also enjoys progressive group support, passed on a vote of 29 to 23.
- H.R. 2620, the Investor Choice Act of 2021, sponsored by Rep. Bill Foster, an Illinois Democrat. The bill, which would prohibit broker-dealers, investment advisers, public companies, funding portals, and others from entering into pre-dispute mandatory arbitration agreements, passed on a vote of 27 to 23.
- H.R. 5914, the Empowering States to Protect Seniors from Bad Actors Act, sponsored by Rep. Josh Gottheimer, a New Jersey Democrat. The measure sets up a task force within the SEC to run a $10 million-per-year anti-senior-fraud grant program for state insurance and securities regulators. It passed by voice vote.