The Securities and Exchange Commission has been warning investors and company executives about the dangers of Special Purpose Acquisition Companies, or shell companies that use investor funds to merge with a private company and transform it into a public entity. The latest warning came from John Coates, acting director of the SEC’s Division of Corporate Finance, who warned executives that misinformation about the benefits of going public through a SPAC transaction has spread in the media and in other places.
“Some, but far from all, practitioners and commentators have asserted that one advantage of SPACs over traditional IPOs is less exposure to the liability of the securities law for the purposes and the public company itself,” Coates said, citing comments made by Chamath Palihapitiya, the billionaire CEO of Social Capital and president of Virgin Galactic Holdings Inc. SPCE, + 0.07% In a recent YouTube interview, Palihapitiya stated that “in a traditional IPO you cannot show a [financial] forecast and you can’t talk about the future of how you want to do things, you just don’t have permission. “While public companies are protected from lawsuits involving forward-looking statements through a safe harbor law passed by Congress in 1995, they don’t applies to companies that are in the process of going public. “Because SPAC is a merger of companies, suddenly you are allowed to talk about the future,” he added. “When you do that, you have a better chance of being valued more. fully. ”Coates, however, cautioned that this advice could be misleading, noting that the safe harbor provision does not protect any company from enforcement actions brought by the SEC, but only from private litigation. Furthermore, the law does not protect companies that make false or misleading statements, such as giving an incomplete set of company performance projections. “Despite all this, you can still think that the [1995 safe-harbor law] it offers something for SPACs that is not available for conventional IPOs, ”he said, but that this question has never been proven in court. Coates said the law doesn’t really define what an IPO means, and that the courts may very well interpret it in such a way that a company going through a SPAC transaction could be excluded from the safe harbor just like any private company looking to sell. Actions. for the public. “Everyone involved in promoting, advising, processing and investing in SPAC must understand the limits of any alleged difference in liability between SPACs and conventional IPOs,” Coates cautioned. “In short, any claimed difference appears, at best, uncertain.”