In letters to six special purpose acquisition companies ("SPACs"), Senators Elizabeth Warren (D-MA), Sherrod Brown (D-OH), Tina Smith (D-MN) and Chris Van Hollen (D-MD) raised concerns over "misaligned" investor and sponsor interests under the SPACs structure. The Senators stated that the letters are intended to request information "about your use of SPACs in order to understand what sort of Congressional or regulatory action may be necessary to better protect investors and market integrity and ensure a fair, orderly, and efficient marketplace." The letters were also sent to SEC Chair Gary Gensler and FINRA President and CEO Robert W. Cook.
In their letters, the Senators questioned the growth of the SPAC market and the structure of SPACs, which they claimed is skewed in favor of large institutional investors. The Senators expressed concern that SPAC sponsors may not conduct adequate due diligence on merger targets or may agree to a deal that is not in the best interest of the SPAC's investors due to the two-year time limit for SPAC sponsors to acquire or merge with a private company. The Senators noted that SPAC sponsors are not required to provide the same disclosures as firms seeking to go public in a traditional initial public offering.
The Senators pointed out that SPAC sponsors "make, on average, several times their initial investment" regardless of the performance of the company they take public. Moreover, the Senators cited statistics from a J.P. Morgan report indicating that on average, a SPAC sponsor may receive returns of 958 percent, while an investor selling the investor's stock and warrants immediately before a merger may average a 40 percent return. In contrast, the Senators observed that "the average one-year return following a merger was -15.6%."
The Senators sought information from the six SPAC creators regarding, among other things:
- their relationship with, including investments in and labor provided to, the SPACs;
- their communications with potential or existing investors as to (i) investment solicitation, (ii) the performance of the SPACs and (iii) proposed acquisition or merger voting;
- how the creator is compensated;
- potential conflicts of interest; and
- legal or regulatory action taken against themselves, a SPAC and its target company or the merged company.
The letters are generally identical except for paragraphs tailored to a description of negative events as to each specific SPAC.
The issues raised by the letter - particularly as to conflicts of interest and disclosure - are matters of genuine policy concern and are not going to go away. The financial industry should work with legislators and regulators to craft improvements in the laws governing SPACs.
Legislators and regulators might also consider whether some degree of self-criticism is in order as to the costs that they have imposed on ordinary initial public offerings of securities. These costs are at least partially responsible for private companies seeking alternatives to IPOs to raise money, whether those alternatives are going public through a SPAC or being acquired by a larger established company.
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