SPACs face new regulations. What’s ahead for their future?

On March 30, 2022, the SEC proposed much-anticipated new rules relating to special purpose acquisition companies (SPACs). The proposals, the SEC said, are designed to “improve the usefulness and clarity of the information provided to investors” and “to enhance investor protections” in both SPAC IPOs and de-SPAC transactions.

The proposed rules were prompted in part by a significant rise in SPAC activity.  Despite a considerable slowdown over the past six months, since 2020 we’ve seen a rise in the number of SPACs and the amount of money raised through them. As you might expect, we’ve also seen a corresponding increase in the number of private operating companies going public through mergers with a SPAC.

Over that same period, there’s been a perception by regulators as well as many investors, the financial media and the public at large, that these SPAC mergers are just a shortcut for private companies to go public without all the hurdles of a traditional IPO. The SEC has asked for and received a lot of feedback surrounding these mergers, gathered largely through its comment letter process.  Among the issues:

• Questions over the reasonableness of the valuations being given to the target companies by SPAC sponsors.
• Conflicts of interest and compensation associated with the economics of the SPAC sponsors and their advisors.
• Concerns over insufficient disclosure regarding sources of potential dilution, such as contingent share earnouts based on post-close stock price performance.
• The assumptions underlying the target company’s forward projections. Many investors indicated these assumptions should be enhanced so they can better assess the reliability and reasonableness behind the projections.
• Whether target companies and SPAC sponsors should have “safe harbor” around the prospective financial information included in the merger documents.

Through conversations we’ve had with various executives, advisors and other stakeholders regarding the SEC’s proposals, we gathered a number of general perspectives worth sharing.

• The SEC’s proposal may bring more credibility to the SPAC merger process.
• These changes will better align SEC reporting requirements for companies going public through a merger with a SPAC to those of a traditional IPO.
• Given the higher level of scrutiny being driven by the changes, public company readiness continues to be paramount for any organization looking to go public. Whether a company looks to go public through a SPAC merger or a traditional IPO, its leaders should prepare themselves for life in a public company. This includes bringing their financials up to SEC standards, presenting a clear equity story, considering appropriate KPIs, demonstrating a track record of performance and accurately forecasting projections. Other important preparations include instituting strong governance, considering the appropriate organization structure and keeping the appropriate ESG considerations in mind.

More than 600 SPACs were holding approximately $150 billion of capital looking for merger partners when the SEC released its proposals, leading us to wonder, how will the proposed rules influence the overall SPAC market?  Will the new rules provide investors the comfort needed to complete a SPAC merger? Will more companies opt for the traditional IPO path? Time will tell, and as that clock ticks and many SPACs that went public in 2020 or early 2021 get closer to their expiration, we’ll see what the future holds for SPAC mergers.

As you prepare for the public markets, reach out for a discussion on PwC’s public company readiness framework, and how we can advise your organization.