Gensler Gives SPACs the Side Eye

SEC chairman Gary Gensler took special purpose acquisition companies to task again this week, devoting an entire speech to the governance and disclosure risks that SPACs pose to investors and arguing that SPACs must be beholden to the same investor protection rules that govern traditional IPOs.

Gensler spoke Thursday morning at the 2021 conference of the Healthy Markets Association, a nonprofit that advocates for better investor protection and leans progressive on SEC policy issues. Gensler outlined multiple concerns he has about how SPACs disclose potential conflicts of interest to investors, the marketing practices SPACs employ to drum up investor interest, and the liability that SPAC sponsors and board directors should face when a deal goes sideways.

“SPACs raise a number of questions, in my view… I believe the investing public may not be getting like protections between traditional IPOs and SPACs,” Gensler said. 

As statements from SEC chairmen go, Gensler’s words are a clear signal that more oversight of SPACs is on the way. Indeed, we’ve already seen a handful of enforcement actions against SPACs, and SEC staff have had SPACs on their rulemaking radar since earlier this year. Expect that scrutiny to go nowhere but up in 2022.

Gensler’s concern about SPACs is well-founded, too. As we noted last week, so many SPACs have flooded into Wall Street this year that they have single-handedly reversed the 25-year trend of fewer publicly listed firms trading on U.S. stock exchanges. Gensler tossed out a few more eye-popping statistics in his speech Thursday:

• The number of SPAC blank-check IPOs ballooned nearly tenfold from 2019 through 2021.
• Those SPAC blank-check IPOs now account for more than three-fifths of all U.S. IPOs.
• The number of “de-SPAC” transactions, where the SPAC acquires a private company and creates a newly public firm, soared from 26 in 2019 to 181 so far in 2021, with a total value of roughly $370 billion. 

Those are enormous numbers, rivaling the dot-com bubble in the 1990s. And just like the dot-coms, that growth is happening in a realm of weak governance and untested investor protection rules — which brings us to the concerns that Gensler voiced. (But first, a horrifyingly cute tweet about SPACs the chairman released today.)

What in the world is a “SPAC,” anyway? And why should anybody care? pic.twitter.com/RGx1XACU6W

— Gary Gensler (@GaryGensler) December 9, 2021

Gensler’s Three SPAC Concerns

The chairman spelled out three concerns he has with how SPACs conduct themselves, and whether that conduct squares with fair and reasonable investor protection.

First was the “disclosure differential” that exists among various participants in a SPAC transaction. For example, SPAC sponsors (the management team running the SPAC) might provide extra information about an upcoming merger to large private investors, leaving retail investors with less information about how their shares might get diluted through various stages of the de-SPAC transaction.

Second were the marketing practices that SPACs use when they announce a proposed merger and want to maintain investor enthusiasm until the de-SPAC transaction happens, usually several months later. So SPACs release spiffy slide decks and press releases promoting the deal, often featuring a celebrity “adviser” to impress we mere mortals with their names. (Venus Williams, Jay-Z, Paul Ryan, and Richard Branson, among many others, have all lent their names to various SPACs out there.) 

“I’ve asked staff to make recommendations around how to guard against what effectively may be improper conditioning of the SPAC target IPO market,” Gensler said. That could include providing more complete information at the time that a de-SPAC transaction is announced, which would neatly fit with Gensler’s first concern.

Third was the role that gatekeepers play in bringing a SPAC to investors, and duty and liability those people carry. In a traditional IPO, investment bankers play a crucial role keeping the deal on track and in step with SEC rules. But in a SPAC transaction, Gensler said, multiple people could qualify as gatekeepers: the sponsors acting as the management team, the SPAC’s board of directors, accountants, financial advisers, and others. 

Those people should not be able to dodge investor protection rules, Gensler said, just because SPACs take a company public in a manner different from the traditional IPO. “There may be some who attempt to use SPACs as a way to arbitrage liability regimes,” he said. “Many gatekeepers carry out functionally the same role as they would in a traditional IPO but may not be performing the due diligence that we’ve come to expect.” 

Gensler then said he has asked SEC staff for recommendations about “how we can better align incentives between gatekeepers and investors, and how we can address the status of gatekeepers’ liability obligations.” (The latter seems specifically geared to the possibility that Delaware Chancery Court might not impose sufficient oversight duties on SPACs, in which case the SEC might intervene.)

So, Why Are We Caring About This?

I understand that many corporate compliance professionals work at companies that have already gone public, and perhaps this SPAC business might seem a bit removed from your daily world. I would advise people to look at things as follows.

First, a significant number of compliance professionals work at businesses that aren’t yet public, or at financial firms that help private companies go public. You folks won’t be able to avoid SPACs. There are too many of them, looking for any private-company acquisition target they can find. When a SPAC shows up at your doorstep trying to put together a deal, it will bring all those disclosure and governance concerns to your doorstep, too. 

That means internal control and compliance professionals working at a private company should start thinking now about the internal control systems you might need to assemble — and assemble quickly, since de-SPAC transactions can happen in as little as three or four months. The SEC has been abundantly clear that once a company de-SPACs into a newly public company, you’re a public company. You must comply with all the usual public company disclosure and internal control obligations from that first day of your new, public company life. 

This is an important point because (let’s be honest here) plenty of private companies don’t bother to build up strong financial and disclosure controls. Now SPACs are everywhere, courting these companies with piles of cash and gauzy promises of power, glory, and a cool ticker for the stock exchanges. Plenty of senior management teams will say yes to that proposal with no real idea of what they’re getting into — and people like you will be left scrambling to put together compliance and control programs. 

Second, there’s always the possibility that today’s SPAC mania isn’t a momentary fad; SPACs may indeed emerge as a viable alternate path to take companies public. Well, if SPACs are here to stay, then it’s quite likely that lots of compliance officers will encounter them at some point in your career. Pay attention to the compliance issues swirling around these contraptions, then; so you’ll be prepared when one of them finally knocks on your board’s door.