SEC Proposes New Disclosure Requirements for SPACs

Also known as blank-check companies, SPACs became wildly popular on Wall Street in 2020 and 2021, when they accounted for the majority of U.S. 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.

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…