U.S. federal regulators may be on track to enact strict new rules governing the use of blank-check companies to bring private companies public, an increasingly popular strategy that critics say can enrich insiders at the expense of retail investors.
“Currently I believe the investing public may not be getting like protections between traditional IPOS and SPACs,” Securities and Exchange Commission Chairman Gary Gensler said during a speech at the Healthy Markets Association Conference Thursday.
Special Purpose Acquisition Companies, or SPACs, are a kind of shell company, which raise investor funds that are later used to merge with a private company in order to transform it into a public entity.
Digital World Acquisition Corp.
the SPAC company planning to take former President Donald Trump’s new social media company public, disclosed this week that federal regulators have requested information about trading activity and communications around its plans to merge with Trump Media & Technology Group.
Gensler said that he wants SEC staff to investigate whether the SPAC structure gives informational advantages to sponsors and other inside investors that enable them to take advantage of retail investors.
A SPAC typically goes public at $10 per share, after which it has two years to use those funds to find a private company to acquire. After the acquisition is announced, investors can decide to get their $10 per share back, or remain in the investment. The SPAC sponsors usually also secure institutional investments to help cover the cost of the acquisition if initial investors back out.
“Due to the various moving parts and SPAC’s two-step structure, I believe these vehicles may have additional conflicts inherent to their structure,” Gensler said, adding that he has asked SEC staff to propose rules that would “reduce the potential for such information asymmetries, conflicts, and fraud.”
Gensler said he was concerned that the institutional investors that provide private investment in public equity, or PIPE loans, following the announcement of a target, may be acquiring inside information and the opportunity to buy shares at a discounted price based on that information.
He also expressed concern that investors aren’t properly being made aware that their investments can be severely diluted by perks awarded to SPAC sponsors and institutional investors during the process, and worried that sponsors could be engaged in deceptive marketing practices when promoting these investments.
“Functionally, the SPAC target IPO is akin to a traditional IPO,” Gensler said. “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, and gatekeepers.”