The SEC says it's looking closely at the wild earnings projections attached to many SPAC offerings
- The SEC is warning investors on the lofty projections that come with many SPAC offerings.
- The agency added it will "look carefully" at filings and disclosures of SPACs.
- The SEC said it will treat SPAC deals with the same level of scrutiny as traditional IPOs.
The US Securities and Exchange Commission issued a warning to blank-check companies presenting projections that only give an optimistic outlook of future growth. The agency added that it will "look carefully" at SPAC filings and disclosures as well as those of their private targets.
John Coates, the agency's acting director for the corporation finance division, said on Thursday that a company would be on "shaky ground" if it only disclosed favorable projections and omitted "equally reliable but unfavorable projections."
Special purpose acquisition companies or SPACs have been booming, enabling many pre-revenue startups to go public. SPACs are essentially shell companies seeking to merge with private companies with the intention of taking them public. SPACs are often considered a cheaper, faster alternative to a traditional IPO.
SPAC sponsors have also generally been allowed to more freely give projections of future growth than is allowed for companies going public via traditional IPO, which are not allowed to broadcast future sales or earnings.
Coates pointed to the Private Securities Litigation Reform Act safe harbor, a legal liability SPACs often refer to when making optimistic forward-looking statements.
"This...is the reason that sponsors, targets, and others involved in a de-SPAC feel comfortable presenting projections and other valuation material of a kind that is not commonly found in conventional IPO prospectuses," he said, referring to the safe harbor.
This, he said, raises significant investor protection questions, and is why he is calling on the agency to treat SPAC deals with the same level of scrutiny as IPOs.
"Any simple claim about reduced liability exposure for SPAC participants is overstated at best, and potentially seriously misleading at worst," Coates said. "Indeed, in some ways, liability risks for those involved are higher, not lower, than in conventional IPOs, due in particular to the potential conflicts of interest in the SPAC structure."
Coates added that while projections are woven into the fabric of business combinations, they have to be fair. Forward-looking information, he said, can be "untested, speculative, misleading or even fraudulent, as reflected in the limitations on the PSLRA's liability protections." He floated the possibility of having guidance about how projections and related valuations should be presented.
SPACs have attracted a number of high-profile investors including famed fund manager Bill Ackman and billionaire Chamath Palihapitiya. Celebrities have also joined the bandwagon, with icons such as baseball star Alex Rodriguez and tennis legend Serena Williams backing recent SPAC offerings.
Regulators have recently turned their eye to the soaring market. On March 11, acting SEC Chair Allison Herren Lee said that SPAC returns don't warrant the "hype" they're getting.
Last year, a total of 248 SPACs raised $83.3 billion according to SPAC Analytics. But by the fourth month of 2021 alone, data already show 306 SPACs that raised $98.3 billion, comprising 79% of all public offerings.