'SPAC King' Chamath Palihapitiya says blank-check companies need more oversight and regulation

• Chamath Palihapitiya, a billionaire investor known as the "SPAC King," says SPACs need more regulation.
• In a Bloomberg op-ed released on Thursday, Palihapitiya said SPACs create a market of "haves and have nots."
• "We need to tighten the rules, increase disclosure and separate the wheat from the chaff," Palihapitiya wrote.

Billionaire investor Chamath Palihapitiya is known as the "SPAC King," but he's asking regulators to take a closer look at the blank-check companies, arguing they've created a market of "haves and have nots."

In a Bloomberg opinion column published Thursday, titled "SPACs Need More Oversight and Regulation," Palihapitiya called on regulators to step in to provide fairness in the special purpose acquisition company (SPAC) market.

The billionaire investor said that, when done right, SPACs give "average investors access to potential high-growth companies at an earlier stage." Not only that, SPACs can also be beneficial for startups, according to Palihapitiya.

With proper oversight and regulation, SPACs are an "opportunity to unlock a high-growth company's access to the capital markets and give it the capital it needs to scale for long-term growth," the investor wrote.

"I know how this system works, because I am a part of it and have benefited from it for a long time. But I also see how unsustainable it is," he added.

Palihapitiya has created six of his own SPACs and also participated in the Public Investment in Private Equity (PIPE) funding rounds for another eight deals.

The "SPAC King" has made deals to take companies like Virgin Galactic, Clover Health, and Opendoor Technologies public and participated in PIPE funding for companies like Desktop Metal and ArcLight Clean Transition Corp.

In the past, when startups went public, early private market investors were usually the ones who raked in big profits, according to Palihapitiya. SPACs provide an opportunity for that to change, but they also come with risks when not regulated properly.

Palihapitiya wrote in his Bloomberg op-ed that "it is time to improve the regulations around the SPAC ecosystem with clear and rigorously enforced standards, to push for high deal quality and appropriate investor protections."

The billionaire founder of the venture capital fund Social Capital laid out three main regulatory changes he would like to see in the SPAC market.

1. Better oversight on projections and underwriting

Government regulators should require the principal who is sponsoring a deal to commit personal capital to it, forcing sponsors to underwrite deals with "accurate projections," Palihapitiya wrote in his op-ed.

The billionaire investor noted that of the 127 SPACs that have announced but not closed on a deal in the market today, only 48 have some form of sponsor investment, with just 10 sponsors making long-term commitments.

In a quick tip for investors, Palihapitiya said the best way to know if a SPAC is truly legitimate is to look at how much money the sponsor is investing.

2. More information and background around price discovery

Currently, SPAC sponsors fight over deals under tight timelines and in what Palihapitiya calls an "artificial feeding frenzy." This leads to less-rigorous due diligence by SPAC sponsors.

These comments are backed up by fellow SPAC billionaire Barry Sternlicht who said the SPAC market is "out of control" in a late-March CNBC interview.

Sternlicht described how his company lost a SPAC deal after it said it would need to do 60 days due diligence before investing, and a different SPAC sponsor offered to do the same in just three days.

"Three days due diligence means you check the letterhead and find out if the company exists. It's a little out of control. No, it's a lot out of control," Sternlicht said.

Palihapitiya recommended requiring more transparency around how SPAC sponsors come up with valuations and who was involved in the bidding war.

3. PIPE investors need protections

Finally, Palihapitiya said PIPE investors, like him, need more protections and should even have "the ability to change the terms of the deal if market conditions change materially."

"This would give greater power to PIPE investors and further help protect retail investors," he wrote.

Palihapitiya concluded by saying:

"In order for us to improve the fairness of the public markets, close the inequality gap, and prevent poor deals from tainting the broader value of companies having more access to public capital markets, we need to tighten the rules, increase disclosure and separate the wheat from the chaff."