Sen. John Kennedy, a Louisiana Republican, on April 29, 2021, introduced legislation directing the SEC to impose new disclosure rules on special purpose acquisition companies (SPACs).
The introduction of S. 1504, the Sponsor Promote and Compensation (SPAC) Act, comes as lawmakers and regulators increase scrutiny on the regulatory gaps around blank-check companies and the risks they may pose to investors.
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.
The recent surge in SPACs has been accompanied by a string of celebrity endorsements, including Shaquille O’Neal, prompting the SEC to issue an investor alert in March warning that a famous backer does not necessarily equate to a sound investment.
Kennedy’s bill would go beyond that warning to mandate new disclosures for SPACs in both the IPO and pre-merger phase, which include disclosing “any side payments or agreements to pay sponsors, blank check company investors, or private investors in public equity for their participation in the merger,” including any post-merger rights or warrants and their dilutive impact, according to the bill text.
“While we can all recognize that celebrities don’t tend to be paragons of sound financial planning, they’re often the public face of companies selling shares to hardworking Americans,” Kennedy said. “It’s right and fair that a SPAC should disclose how its sponsors get paid and how that affects the value of its public shares, and the Sponsor Promote and Compensation Act would require this kind of transparency.”
Also to be disclosed under the bill is the amount of cash per share expected to be held by the SPAC prior to the merger under different redemption scenarios, and any payments to the sponsor, underwriter, or other party, including the dilutive impact of warrants outstanding after investors redeem shares per-merger.
The SEC would have 120 days following enactment to issue the rules.
The bill is another indication that lawmakers are more closely examining the ramifications of the rise of SPACs, alongside the SEC. A House Financial Services subcommittee on May 24 plans to hold a hearing that will partly focus on SPACs.
The hearing, entitled “Going Public: SPACs, Direct Listings, Public Offerings, and the Need for Investor Protections,” will be held by the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets, chaired by Rep. Brad Sherman, a California Democrat who has voiced criticism of the SPAC surge. (See House Financial Services Committee to Tackle SPAC Frenzy in the April 29, 2021, edition of Accounting & Compliance Alert.)
In an April 8 statement, SEC Acting Division of Corporation Finance Director John Coates said SEC staff is “continuing to look carefully at filings and disclosures by SPACs and their private targets.”
“As customary, and in keeping with the Division of Corporation Finance’s ordinary practices, staff are reviewing these filings, seeking clearer disclosure, and providing guidance to registrants and the public,” Coates said. “They will continue to be vigilant about SPAC and private target disclosure so that the public can make informed investment and voting decisions about these transactions.”
Coates, in his statement, raised investor protection questions surrounding the de-SPAC process, including possibly overstated claims of greater liability protections for investors and the risks of material misstatements or omissions in a registration statement.
Days after that statement, Coates issued a joint staff statement with Acting Chief Accountant Paul Munter related to financial reporting considerations for warrants issued by SPACs. (See SEC Staff Statement Covers Accounting Considerations for Warrants in SPAC Transactions in the April 14, 2021, edition of ACA.)
SEC staff had also issued a March 31 statement on some SPAC financial reporting considerations. ( See SEC Issues Two Staff Statements on SPACs in the April 5, 2021, edition of ACA.)
This article originally appeared in the May 3, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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