The U.S. House Financial Services Committee considered proposed public market reforms, including legislation to enhance investor protections relating to special purpose acquisition companies ("SPACs").
At the hearing, titled "Going Public - SPACs, Direct Listings, Public Offerings, and the Need for Investor Protections," legislators considered a bill that would amend the SA Section 27A ("Application of safe harbor for forward-looking statements") and SEA Section 21E ("Application of safe harbor for forward-looking statements") to exclude certain SPACs from the safe harbor for forward-looking statements.
Witnesses included:
- Scott Kupor, Managing Partner, Andreessen Horowitz. Mr. Kupor warned of the risk of creating a two-tiered capital market structure with (i) one tier comprised of institutions and wealthy individuals and (ii) another tier comprised of individuals who make up the public markets' retail investor base. Mr. Kupor suggested that legislators could improve initial public offering markets and retail access to capital by (i) simplifying the process for issuers endeavoring to become public companies, (ii) encouraging options for issuers to become public to promote fair competition, better price discovery and greater retail participation, (iii) improving non-institutional investors' access to private markets and (iv) increasing access to capital formation and individual participation in investment opportunities through appropriate blockchain regulation.
- Stephen Deane, Senior Director of Legislative and Regulatory Outreach, Chartered Financial Analyst Institute. Mr. Deane pointed to the "pattern of starkly divergent investment returns" with respect to SPAC investments, in which larger investors generally do substantially better than retail investors. Mr. Deane stated that the following features of SPACs contribute to divergent returns: (i) the dilution of post-merger public company future returns through SPAC sponsors' compensation, warrants that initial IPO investors retain, and private investment SPAC side deals known as private investment in public equity ("PIPE") transactions; (ii) the incongruous incentives of SPAC sponsors and shareholders; (iii) the lack of disclosures with respect to PIPE investors in SPAC side deals; and (iv) the "disparate regulatory treatment" of SPACs and IPOs with respect to forward-looking statements, despite the two being functionally identical.
- Andrew Park, Senior Policy Analyst, Americans for Financial Reform. Mr. Park criticized the differences in the regulatory treatment of SPACs and IPOs, urging legislators to (i) adopt amendments to the Exchange Act to conform the regulatory treatment of SPACs concerning forward-looking statements with that of IPOs and (ii) expand the definition of "blank check companies" to improve retail investor protections.
- Usha R. Rodrigues, Professor, University of Georgia School of Law. Ms. Rodrigues agreed that the different regulatory treatment of SPACs and IPOs unnecessarily weakens investor protections. She argued that standardized disclosures are not sufficient for investor protection. Ms. Rodrigues advocated for voting reform, namely requiring that a transaction not go through if a majority of public stockholders want to cash out following a SPAC's merger.
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