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The SEC is looking at potentially misleading earnings projections made by SPAC sponsors and is looking for clearer disclosures, with an official hinting Thursday that the agency may issue a future rule to curb them.
Special purpose procurement firms, known as SPACs or blank check funds, are a direct selling item on Wall Street.
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Investments are like quasi-IPOs. A publicly traded shell company uses investors ’money to buy or merge with a private company, usually within two years. In doing so, the private company goes public, offering an alternative to the traditional IPO.
The use and popularity of the SPAC has increased over the past six months, John Coates, acting director of the Corporation’s Finance Division of the Securities and Exchange Commission, said Thursday.
“With the unprecedented increase there has been unprecedented control, and new problems continue to arise with standard and innovative SPAC structures,” Coates said.
On the one hand, the SEC is looking at requests and disclosures made by SPACs and their private targets, Coates said.
Some believe that current legislation allows investors to circumvent some of the disclosure requirements of the traditional IPO process.
Primarily, some fear that SPAC sponsors and their acquisition targets pose a lower legal risk to present high gains and valuation projections. Misleading disclosure about future earnings estimates, for example, can attract investors.
“These claims raise important investor protection issues,” Coates said.
However, these claims may not provide an accurate reading of current securities legislation, he added.
“Any simple claim about a reduced liability exposure for SPAC participants is exaggerated at best and can be seriously misleading at worst,” Coates said.
Coates said the public can benefit from greater clarity on the legal requirements of SPAC disclosures. He suggested that the SEC could issue a rule or provide guidance in this regard.