New SPAC Reporting Requirements LikelyBy
Congress is considering increasing transparency and investor protection requirements for special purpose acquisition companies (SPACs).
There is bipartisan support for legislation to tighten financial accounting rules for SPACs, even though the Democratic House and Republican Senate proposals differ, at least so far. The U.S. Securities & Exchange Commission (SEC) is also pushing Congress to change the reporting of warrants issued by SPACs from equities to liabilities.
SPACs, also known as blank check companies, are shell companies that generally have two years to find a target company and make an acquisition through a merger becoming what are called de-SPACs. Within four days of completing a de-SPAC transaction, SPAC sponsors must file
Form 8-K, sometimes called “Super 8-Ks” because of the extent of required reporting. Paul Munter, acting chief accountant of the SEC, said, “The merger of a SPAC and target company often raises complex financial reporting and governance issues.” In April 2021, he issued a warning to registrants about potential accounting restatements stemming from option grants issued to promoters.
According to a memorandum from the U.S. House Committee on Financial Services, in 2020, the number of new individual SPAC offerings rose 420% over the prior year and surpassed the $67 billion raised by traditional initial public offerings (IPOs), with new SPAC IPOs earning $83 billion in investments. And in just the first five months of 2021, there were 315 new SPAC IPOs, a 27% increase over 2020.
SPACs are a competing model to IPOs, which are subject to liability for forward-looking statements; SPACs have no such concerns. So far, the emerging House bill is narrowly focused on eliminating the safe harbor that SPACs currently enjoy regarding the forward-looking statements. Stephen Deane, senior director of legislative and regulatory outreach at the CFA Institute, told the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets on May 24, 2021, “The disparate regulatory treatment of forward-looking statements makes for an unlevel playing field.”
The Senate bill introduced by Sen. John Kennedy (R.-La.), called the Sponsor Promote and Compensation Act, is much broader. It requires disclosure of such things as any side payments or agreements to blank-check-company investors or private investors. That provision would impact the venture capital industry, but Sabrina Fang, vice president of communications and marketing at the National Venture Capital Association, said, “We are not weighing in on this issue.”