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SEC’s New SPAC Rules Could Shake up Mergers and IPOs

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SEC’s New SPAC Rules Could Shake up Mergers and IPOs

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SEC's New SPAC Rules Could Shake up Mergers and IPOs

The Securities and Exchange Commission (SEC) introduced a series of new rules for SPACs this week. The new rules would represent the largest effort to regulate SPACs by the SEC.

SPACs, also known as “blank check” companies, are shell companies with no assets of their own. They are still regulated by the SEC and are typically set up to acquire a private company and make it public without going through the initial public offering (IPO) process. 

SPACs were first created in 1993 but were met with skepticism by many in the financial sector. The New York Stock Exchange declined to accept any SPAC listings until May 2017. Soon after, the popularity of SPACs skyrocketed. Investors in the cannabis industry viewed them as a new opportunity to build companies since raising capital in the sector is notoriously difficult. 

According to SPAC Research, 600 SPACs raised some $160 billion in 2021, while Reuters has reported that 18 cannabis-focused SPACs raised over $3.3 billion by last August.

But SPACs have been facing considerable scrutiny recently, especially by investors who believe that some are inflating the business outlooks of the organizations they are seeking to acquire. The SEC is hoping to address this and is also seeking to protect investors concerned about dilution, where their investments can experience unexpected losses because a company decides to issue more stock.

”Today’s proposal includes a new safe harbor for SPACs that meet key investor protection conditions, and should help SPACs identify on which side of the line they fall,” SEC Chair Gary Gensler said in a statement. “This proposed rule would be conditioned on limits on a SPAC’s holdings and a requirement that it announce a SPAC target IPO transaction within 18 months and complete the transaction within 24 months.”

Gensler also addressed SPACs attempting to work around the more rigorous vetting associated with the traditional IPO process.

“Functionally, the SPAC target IPO is being used as an alternative means to conduct an IPO,” Gensler continued. “Thus, investors deserve the protections they receive from traditional IPOs, with respect to information asymmetries, fraud, and conflicts, and when it comes to disclosure, marketing practices, gatekeepers, and issuers.”

In their statement, the SEC announced that they are seeking to:

  • Amend the definition of “blank check company” to encompass SPACs, such that the Private Securities Litigation Reform Act (PSLRA) safe harbor would not be available to SPACs regarding projections of target companies.
  • Update the Commission’s views on the disclosure of projected financial information.
  • Add specialized disclosure requirements regarding, among other things, SPAC sponsors, conflicts of interest, SPAC target IPOs, and dilution.
  • Require additional non-financial disclosures about the target private operating company during the SPAC target IPO.
  • Require that disclosure documents in SPAC target IPOs generally be disseminated to investors at least 20 calendar days before shareholders would have to vote to approve the transaction.
  • Align the financial statement requirements with those of traditional IPOs for business combinations between a public shell company and a private operating company, including for SPAC target IPOs.

The popularity of SPACs already seemed to be waning overall and are especially struggling in the cannabis industry. Reuters has reported that only one cannabis company listed in the United States through SPACs since 2020 is currently trading above the $10 per share IPO price. However, 46.5% of SPACs overall are trading higher since their mergers.

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