SEC Aims To Snipe SPACs

By Jake Rickman​

What do you need to know this week?

The US Securities and Exchange Commission (SEC) — one of the main financial markets enforcement bodies in the US — announced they intend to crack down on Special Purpose Acquisition Companies (SPACs).

The SEC’s overriding goal is to make SPACs safer for investors, which will be achieved by increasing the sponsor’s financial liability and requiring the sponsor to be more forthcoming with the financial projections they provide to potential investors.

The SEC’s announcement follows an overwhelming drop in global SPAC activity, accounting for 3% of the value of all deals so far in 2022 (versus 17% in the same period last year).

Why is this important for your interviews?

Though SPACs have been around since the 1990s, their popularity grew substantially in the past couple of years. In 2020 and into 2021, SPACs were all the rage. Understanding their rise and fall can provide you with some good talking points should SPACs ever come in an interview (or elsewhere).

The premise behind SPACs is that they are an alternative way for investors to get in on the action of a company going public, which can be quite lucrative.

Rather than buying shares in a company at the point it goes public through an initial public offering (IPO), investors in a SPAC buy shares in a “blank cheque company” (the SPAC) that has one purpose: find a private company it can acquire. Following this, the once-private company becomes public, which the wider public can now invest in.

In theory, the premise is that investors get ahead of the public because the value of the shares in the SPAC should be much more than the value of the shares before the SPAC has merged with the company. Additionally, the investors benefit from the expertise of the sponsor, which are the professional investors and advisers that create and manage the SPAC.

The reality has not quite lived up to the prospect: investors seem to have soured on SPACs before the SEC announced their reform. For starters, many high-profile SPAC announcements later ended up being duds, leaving investors on the hook.

The ultimate impact of the SEC’s proposed reform remains to be seen: it may be that the SEC’s announcement will further kill SPAC activity in the US (and elsewhere). On the other hand, it might foster a more competitive environment that rewards diligent sponsors prepared to assume more of the risk.

How is this topic relevant to law firms?

Right now, SPACs are one of those trendy topics in the news whose future in the markets is uncertain.

From the perspective of a law firm with sizable corporate and financial practices looking at its long-term strategy, is it worth it for the partners to try and foster a practice known for SPACs if they later turn out to be non-events?

The answer is of course uncertain, but it is a topic that generates lots of attention. What is your opinion?


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