“Make no mistake: When it comes to liability, SPACs do not provide a ‘free pass’ for gatekeepers,” SEC Chair Gary Gensler warned gatekeepers, potentially including accountants, financial advisers, directors, officers and SPAC sponsors.

His warnings come as there has been an unprecedented increase in the number of special-purpose acquisition company (SPAC) transactions. But some have viewed it as a backdoor to initial public offering (IPO) with lighter regulation.

The number of SPAC IPOs has increased by almost 10 times between 2019 and 2021, he said. Such IPOs now account for more than three-fifths of all U.S. IPOs.

In 2021, there were 181 such SPAC target IPOs, with a total deal value of $370 billion. This is up from just 26 SPAC target IPOs as recently as 2019.

The SEC has rulemaking plans to have greater oversight of SPACs and protect all investors. According to the most recent rulemaking agenda, published on Dec. 13, 2021, the commission wants to issue a proposal in the spring of 2022.

In traditional IPOs, underwriters, oftentimes investment banks, are usually involved.

“The law, though, takes a broader view of who constitutes an underwriter. There may be some who attempt to use SPACs as a way to arbitrage liability regimes,” Gensler said in remarks before the Healthy Markets Association Conference on Dec. 9.

“Many gatekeepers carry out functionally the same role as they would in a traditional IPO but may not be performing the due diligence that we’ve come to expect,” he explained. “The third parties involved in the sale of the securities — such as auditors, brokers and underwriters — should have to stand behind and be responsible for basic aspects of their work. Thus, gatekeepers provide an essential function to police fraud and ensure the accuracy of disclosure to investors.”

He said that in April, then-acting director of the Division of Corporation Finance John Coates stated that “any simple claim about reduced liability exposure for SPAC participants is overstated at best, and potentially seriously misleading at worst.”

Thus, Gensler said that he has asked the staff for rule recommendations about ways to better align incentives between gatekeepers and investors, and how the SEC can address the status of gatekeepers’ liability obligations.

A simple SPAC is a shell company that raises capital publicly for the sole purpose of identifying and merging with a target private operating company. This involves two steps, and the SPAC has 18 to 24 months to “de-SPAC” or complete a merger with the target company.

Gensler calls this “SPAC target IPO.” The merger transaction infuses the target company with capital. This often includes additional capital raising through private investments in public equity (PIPEs).

So, these deals give new investors an opportunity to put money in the SPAC target IPO.

With the merger, then the target operating private company goes public. If a deal is approved, the shareholders who got in initially have the right to cash out, redeeming at the SPAC IPO price. The rest of the shareholders are left holding the bag if the price drops subsequently.

“There are conflicts between the investors who vote then cash out, and those who stay through the deal — what might be called ‘redeemers’ and ‘remainers,’” Gensler said.

“Thus, to reduce the potential for such information asymmetries, conflicts, and fraud, I’ve asked staff for proposals for the Commission’s consideration around how to better align the legal treatment of SPACs and their participants with the investor protections provided in other IPOs, with respect to disclosure, marketing practices, and gatekeeper obligations,” he said.

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