Merging company

US panel passes bills to strengthen PSPC oversight

Dive brief:

  • TThe House Financial Services Committee passed two bills aimed at strengthening protections for investors in Special Purpose Acquisition Companies (SPACs), so-called blank check companies that have exploded as cheaper and faster alternative to raising capital than traditional initial public offerings.
  • A bill would prohibit after-sales service who do not adhere to the stricter disclosure rules for the sale of their securities to retail investors, while another would exclude certain SPACs from a safe harbor for forward-looking statements, thus making them liable for misleading or false statements . The committee approved the bills on Tuesday.
  • “What we have to ask ourselves today: do we want specialized acquisition companies to go out and merge or acquire other companies and be able to make fraudulent statements as they try to attract investors? Representative Michael San Nicolas, a Democrat from Guam and godfather of RH 5910, said before the committee’s approval of the bill. “If we agree with an acquisition regime that is going to have the green light to make fraudulent claims, then we can continue with the status quo.”

Dive overview:

While the outlook for the two bills in the Senate is unclear, the approval by the House committee signals lawmakers’ support for the efforts of Securities and Exchange Commission (SEC) Chairman Gary Gensler to strengthen oversight of SPAC.

Gensler asked agency staff to recommend strong disclosure rules for SPACs in an effort to protect investors.

“SPAC sponsors generate significant dilution and costs for investors”, Gensler notified during a meeting of the agency’s Investor Advisory Committee (IAC) in September.

Gensler said he had asked SEC staff to “closely examine each step of the PSPC process to ensure that all investors are protected” and to provide “analysis to better understand how investors are benefiting or disadvantaged by PSPC transactions “.

Representative Brad Sherman, a Democrat from California and godfather of RH 5913, said Tuesday his the bill would allow SEC Disclosure Rules and “Ensuring Investors have the Information They Need When Making a PSPC Investment and at Every Step of the Investment Decision Making Process.”

SAVS collect funds by selling shares listed on the stock exchange. They then merge with a private company.

Gensler at the IAC meeting cited a study noting “that the costs built into the PSPC structure are subtle, opaque and much higher than previously believed.”

“Although the SPACs raise $ 10 per share from investors in their IPOs, by the time the median SPAC merges with a target, it only holds $ 6.67 in cash for each outstanding share,” says the study. “PSPC investors bear the cost of the dilution built into the PSPC structure and in effect subsidize the companies they bring on the stock market.”

Gensler spoke to the IAC before he unanimously approved an eight page report urging the SEC to “regulate SAVS more intensively by exercising increased concentration and stricter enforcement of existing disclosure rules.”

“PSPCs, by their very nature, are riddled with conflicts of interest that must be disclosed to potential investors,” according to the IAC, which was created under the Dodd-Frank Act.

PSPC’s IPOs accounted for more than half of the $ 67 billion in IPO capital raised in the United States last year, the advisory board said, citing data from Goldman Sachs. In the first quarter of 2021, SPACs raised $ 87 billion out of $ 125 billion in total IPO funding.

The SEC slowed down the PSPC market in April when personnel accountants issued a memo saying that mandates attached to the PSPC stocks should be treated as liabilities rather than equity. The number of IPOs of SPAC plunged 87% from April to June compared to the first quarter of 2021, according to FactSet.

In the third quarter, 60 SPACs raised $ 11.5 billion, an increase of 42% from the $ 8.1 billion in the second quarter, but a decrease of 73% from the $ 42.9 billion. dollars raised in the third quarter of 2020, FactSet said.

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