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WASHINGTON—The Securities and Exchange Commission was preparing to vote Wednesday on a proposal that would impose a bevy of new disclosure requirements on special purpose acquisition companies, or SPACs, amid widespread concern that the vehicles skirt important investor protections.

Also known as blank-check companies, SPACs became wildly popular on Wall Street in 2020 and 2021, when they accounted for the majority of U.S. initial public offerings. The enthusiasm for such deals has cooled this year as some companies that went public this way have undershot business projections they made to attract investors.

The proposed rule would hold SPACs and the companies they acquire to similar standards as traditional IPOs, SEC officials said.

The vehicles function as pools of cash listed on a stock exchange that can be used by a sponsor to buy a private company. If acquired by a SPAC, the private company effectively gets access to everyday investors without providing the timely disclosures that a traditional IPO would involve.

“Functionally, the SPAC target IPO is being used as an alternative means to conduct an IPO,” SEC Chairman Gary Gensler said Wednesday. “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.”

The commission, controlled 3-1 by Democrats, was scheduled to vote on the proposal in a meeting that was to begin at 11:30 a.m. ET Wednesday. If the proposal is approved, the SEC would take public comments on it for at least 60 days before beginning work to finalize a rule.

Under the proposal the SEC is considering, blank-check companies would have to disclose information about their sponsors’ compensation as well as the dilution that shareholders might suffer if an acquisition is completed. Current rules often allow SPAC insiders to multiply their initial investment even if the companies they take over—and other shareholders—struggle.

Isabelle Freidheim and Athena President Kirthiga Reddy tell WSJ Future of Money that SPACs are here to stay, but will be smaller and more beneficial to companies that pick the right sponsor. (Feb. 8, 2022)

Companies acquired by SPACs, as well as their officers and directors, would become liable for misrepresentations or omissions in the merger documents that SPACs file with the SEC. That is because the proposal would make target companies “co-registrants” with the blank-check companies.

Mr. Gensler, who was appointed by President Biden, directed agency staff upon taking office last April to look for ways to better protect investors in SPACs. His stated goals include leveling the playing field with traditional IPOs and rooting out conflicts of interest in the deals.

SPACs and their buyout targets would be required to disseminate the new information to investors at least 20 days before any vote by shareholders on whether to approve an acquisition.

The proposal would also tighten rules around the forward-looking projections that SPACs are currently allowed to tout without running afoul of the SEC, to address concern that the entities often woo investors with unrealistic growth forecasts.

“The idea is that parties to the transaction shouldn’t use overly optimistic language or over-promise future results in an effort to sell investors on the deal,” Mr. Gensler said.

While advocates of tougher Wall Street oversight are likely to welcome the proposal, it may be coming too late to help the investors who already suffered losses after the peak of the SPAC frenzy.

Blank-check companies raised more than $160 billion last year, topping the total from all previous years combined, according to SPAC Research. So far this year, they are on pace to raise a fraction of that amount. There are still more than 600 SPACs seeking deals. Those that can’t find mergers within a deadline, typically two years, will have to return money to investors.

If finalized in their current form, the proposed disclosure requirements would extend to existing SPACs that have yet to complete a merger, SEC officials said.

When SPACs Attack

Write to Paul Kiernan at [email protected]

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Source: WSJ

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