SEC Brings Forward New Proposal: Aims to Heighten Disclosures For SPACs

  • The SEC has proposed new amendments for SPACs to have heightened disclosure fine-tuned with the traditional IPOs. 
  • This proposal stems from an understanding that on a functional basis, SPACs are being utilised as an alternative to the traditional Initial Public Offerings (IPOs), highlighted by SEC chair Gary Gensler. 
  • A lot of crypto firms have looked upon the SPACs to accelerate the procedure to go public. 

The Securities and Exchange Commission (SEC) has recently proposed new amendments and rules to disclosure standards for special purpose acquisition companies (SPACs). 

SPACs facilitate private companies by accelerating the process of going public. And has become a considerable fundraising route. In SPAC, a private company that wishes to go public is taken over by an existing listed company. Hence the complex procedure and filing process of an Initial Public Offering (IPO) is eliminated. 

But then everything comes with a price, and SPAC has also witnessed significant criticism from the SEC since the smooth process could enable firms to go public with high projections or without even a product. 

The New Proposal Similar to IPOs?

SEC has now taken a move by way of a rule change proposal. And the new SPAC rules are expected to increase the disclosure standards for the process, making it a bit similar to the traditional IPOs. 

According to Gary Gensler, SEC chair, for traditional IPOs, Congress gave the SEC some tools, which he generally sees as falling into three buckets: disclosure, standards for marketing practices and gatekeeper and issuer obligations. And that this new proposal would help make sure that these tools are applied to SPACs. 

This SPAC proposal is somewhat akin to the IPOs. The proposal would need similar financial statement requirements to an IPO involving a public shell company and a private operating company. It will also need special disclosure requirements on projects, sponsors, conflict of interests, SPAC target IPOs and dilution that must be dispersed to the investors 20 days prior to the vote to approve the transaction. 

Furthermore, any sale of a non-shell company to a shell company’s shareholders would be conditioned to the Securities Act. 

Gensler further noted in a statement that this proposal takes birth from an understanding that on a functional basis, SPACs are being utilised as an alternative to the traditional Initial Public Offerings (IPOs). And that the investors deserve the protections they get from IPOs regarding the information asymmetries, conflicts and frauds, marketing practices, gatekeepers and issuers. 

Whereas this proposal by SEC was somewhat opposed by crypto-friendly Commissioner Hester Peirce, who signified that the proposal does more than to mandate disclosures that would enhance investors’ understanding. It imposes some substantive burdens that seem to discourage SPACs as they do not like them, rather than elucidate them so that the investors can decide whether they like them. 

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