The Securities and Exchange Commission is obviously watching the explosion of blank check companies on Wall Street, but is not yet fully cracking down on them. Looking to anticipate any potential problems that may result from the current craze for Special Purpose Acquisition Companies, or SPACs, on Wall Street, the Securities and Exchange Commission issued a staff statement last week to remind companies of the rules. That warning followed the revelations of multiple investigations into specific SPACs, intensifying thoughts that the regulatory agency is looking to reject recently popular funding mechanisms.
However, the actual reading of what the SEC is doing is smoother. This is the warning before a potential storm, but not the storm itself. “They just don’t want it to seem like something they can be blamed for later on,” said Dan Gode, a clinical professor of accounting at New York University’s Stern School of Business. “This is ‘OK, we’re looking.’ This is not a pass to compliance, you don’t get a pass because it was made public through the SPAC route, ‘”he said. SPACs roared on Wall Street amid the COVID-19 pandemic as investors frantically searched for homes for cash with the potential for big returns down the road. The craze continued through the beginning of this year, with the number of SPACs that went public in the first three months of 2021 (298 deals for $ 97.3 billion) already dwarfing the total for the full year 2020: 248 IPOs raising a total of $ 83.4 billion, according to SPAC Research. SPACs raise money in an IPO and then have two years to find and acquire a business or businesses. Businesses that have gone public through a takeover by a blank check company are often not prime-time ready, which has been seen in some in the e-vehicle or battery space, where the products are still in the research phase and the revenue is little or no. been received. More importantly, many private companies do not have the same rigorous financial reporting standards or controls that companies adopt on the path to going public, and SPACs can make more projections than a publicly traded company through the typical process of listing. IPO. The Tesla Bubble: The bets on electric cars and the rise in SPACs have led to a new version of the dot-com boom. In recent weeks, the SEC has launched investigations into at least four companies, according to documents filed with the SEC by companies. Late last month, Reuters reported that the US regulator opened a general investigation, sending investigation letters to investment banks involved in SPAC deals, seeking information on how underwriters are managing the risks involved. The SEC did not address its ongoing investigations in two statements last week, including one by acting chief accountant Paul Munter. “SPAC’s transactions carry their own set of risks for investors at the time of SPAC’s initial offering, during SPAC’s search and merger with a target company, and after the merger when operating as a combined public company,” Munter said in a statement. “A merger with a SPAC can also pose unique challenges for a private target company looking to become a publicly traded company.” Stanford law professor Michael Klausner, co-author of an upcoming study on SPACs, said the SEC is trying to remind companies that they will be held accountable. “It’s a very useful document that completes a very broad set of rules that a SPAC should care about and that a target should care about,” he said in an interview. “But it does not introduce anything new.” The SEC is believed to be investigating at least four companies that have publicly admitted to an ongoing investigation. Klausner said he is aware of ongoing investigations at Nikola Corp. NKLA, + 1.13%, Clover Health Investments Corp. CLOV, + 2.80%, Akazoo SA, whose shares have been suspended, and Ability Inc. ABILF, + 7.14%. Last year, the SEC accused Ability, an Israel-based intelligence communications company, of defrauding investors in a SPAC, claiming the defendants lied to shareholders to ensure a “nefarious merger was approved. so they could line their pockets with tens of millions of dollars from the merger. ” More from Therese: Congress is fed up with Big Tech. Now what? While the SEC reminds companies that they must adhere to the much stricter method of financial accounting as public entities, SPACs have a leeway that standard IPOs do not have in terms of forecasting. That exemption may have helped fuel the current boom, as executives can make wild and outlandish financial predictions. The general and broad exemption is not addressed in the SEC’s statement on SPACs, Klausner said. “Perhaps most importantly, the SPACs and their merger targets can use a safe harbor against liability under the securities laws for projections and other forward-looking statements,” Klausner and his co-authors wrote in their recent article, titled ” A sober look at SPACs. “” Listed companies in an IPO, however, are not covered by this safe harbor and rarely provide such information. It is impossible to say to what extent this and other regulatory advantages explain the popularity of SPACs, but as a matter of policy, differential treatment is difficult to justify. ”The SEC did not address that discrepancy in the safe harbor rules, but it certainly could. Going forward Businesses and investors should realize that regulators are beginning to pay attention to this sudden and frequently used financial device and be cautious when buying.