SEC Proposes New Disclosure Requirements for SPACs

SEC Proposes New Disclosure Requirements for SPACs

WASHINGTON—Federal regulators proposed a bevy of new requirements for special-purpose acquisition companies, or SPACs, and their takeover targets amid widespread concern that the vehicles skirt important investor protections.

The Securities and Exchange Commission advanced a set of rules Wednesday that, if implemented, would make it harder for SPACs to raise money from investors and execute mergers. Its goal is to force the vehicles to meet similar regulatory standards as initial public offerings, though critics accused the agency of aiming to end their use altogether.

Also known as blank-check companies, SPACs became wildly popular on Wall Street in 2020 and 2021, when they accounted for the majority of US initial public offerings. Like cryptocurrencies and meme stocks, critics saw them a symbol of the excesses that bubbled up in financial markets as governments and central banks pumped trillions of dollars of stimulus money into the economy to battle the Covid-19 pandemic.

SPACs function as pools of cash listed on a stock exchange that can be used by a sponsor to buy a private company. If acquired by a SPAC, the private company effectively gets access to everyday investors without providing the timely disclosures that a traditional IPO would involve. Existing rules also enable target companies to make lofty forecasts about their business prospects, something they wouldn’t be able to do in an IPO.

Wednesday’s proposal is part of SEC Chairman Gary Gensler’s wider push to rein in Wall Street through tougher regulation. He has recently backed rules that would place more regulatory scrutiny on privately held companies and increase public companies’ disclosures related to climate change.

The enthusiasm around SPACs has cooled so far this year amid regulatory scrutiny, tumbling share prices and missed projections. Dozens of companies that went public by employing that method—from a designer of all-electric school buses to a startup developing indoor farms in Appalachia—have missed their forecasts, often by substantial margins just months after they made them.

“They have on average been pretty costly and not performed up to the marketing,” Mr. Gensler, who was appointed by President Biden, told reporters Wednesday. “There’s an awful lot of fees in here for the sponsors. There’s an awful lot of fees for bankers and lawyers as well.”

He said the proposal would reduce the information advantages that SPAC insiders have over ordinary investors, as well as conflicts of interest, by demanding more disclosure and tightening rules governing marketing practices and underwriters.

The SEC’s three Democrats voted to open the proposal to public comments for at least 60 days, after which the agency could begin working to complete a rule.

Republican commissioner Hester Peirce voted against it, saying the proposal “seems designed to stop SPACs in their tracks” rather than imposing sensible disclosures that she would have supported. Ms. Peirce said regulators should instead try to make the traditional IPO process less cumbersome, something Republicans and some companies have long called for.

“The typical SPAC would not meet the proposal’s parameters without significant changes to its operations, economics and timeline,” Ms. Peirce said.

Under the proposal the SEC is considering, blank-check companies would have to disclose information about their sponsors’ compensation as well as the dilution that shareholders might suffer if an acquisition is completed. Current rules often allow SPAC insiders to multiply their initial investment even if the companies they take over struggle and ordinary shareholders lose money.

Private companies are flooding to special-purpose acquisition companies, or SPACs, to bypass the traditional IPO process and gain a public listing. WSJ explains why some critics say investing in these so-called blank-check companies isn’t worth the risk. Illustration: Zoe Soriano/WSJ

Companies acquired by SPACs, as well as their officers and directors, would become liable for misrepresentations or omissions in the merger documents that SPACs file with the SEC. That is because the proposal would make target companies “co-registrants” with the blank-check companies.

SPACs and their buyout targets would be required to disseminate the required information disclosures to investors at least 20 days before any vote by shareholders on whether to approve an acquisition.

The proposal would also tighten rules around the forward-looking projections that SPACs are currently allowed to everything without running afoul of the SEC, to address concern that the entities often woo investors with unrealistic growth forecasts.

“The idea is that parties to the transaction shouldn’t use overly optimistic language or over-promise future results in an effort to sell investors on the deal,” Mr. Gensler said.

While advocates of tougher Wall Street oversight are likely to welcome the SEC’s proposal, it may be coming too late to help the investors who already suffered losses after the peak of the SPAC frenzy.

SPACs have been around for decades—their predecessors were known as “blind pools” and associated with penny-stock fraud in the 1980s. Last year, those blank-check companies raised more than $160 billion, topping the total from all previous years combined, according to SPAC Research. Investor enthusiasm for fast-growing startups and their rosy projections in areas such as electric vehicles attracted piles of capital.

Many companies then hit business snags or technological delays, sending share prices tumbling. The SEC has investigated several SPAC deals, including those that took electric-vehicle makers Nikola Corp.

and Lordstown Motors Corp.

public. Nikola late last year agreed to pay $125 million to settle a regulatory investigation into allegedly misleading statements by its founder and one-time executive chairman Trevor Milton.

An exchange-traded fund tracking companies that went public this way has fallen about 30% in the past year. Several companies such as savings and investing app Acorns Grow Inc.

that previously announced SPAC mergers eventually called them off as sentiment shifted. The prospect of tighter regulation has also cooled deal making in the space.

So far this year, blank-check companies have raised just $9.8 billion. There are still more than 600 SPACs seeking deals. Those that can’t find mergers within a deadline, typically two years, will have to return money to investors.

If completed in their current form, the proposed disclosure requirements would extend to existing SPACs that have yet to complete a merger, SEC officials said.

Bill Dooley, director of mergers and acquisitions at consulting firm Morrow Sodali Global LLC, criticized the SEC’s proposal, saying it would create major hurdles for SPAC sponsors and target companies.

“Enhanced disclosure in IPO applications and merger prospectuses will further reduce the stream of public companies coming to market, significantly, and increase the growing number of SPACs searching for targets,” Mr. Dooley said. “Investors, not the SEC, are responsible for due diligence and evaluation of a potential investment, and these rules are a wide-reaching bid to halt the SPAC market.”

Write to Paul Kiernan at

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