The boom in new special purpose acquisition company filings has nearly ground to a standstill in recent days, as regulator statements on the red-hot SPAC market are giving market participants pause. In the past month, the Securities & Exchange Commission staff have warned investors about the participation of athletes and celebrities, suggested SPACs should be treated more like formal IPOs and floated accounting changes to blank check deals.
“There are valid concerns: Has the SPAC market gotten overheated and are investors going to get burned?” explained Jay Ritter, a business professor and SPAC and IPO expert at the University of Florida.
Year to date, an average of 40 SPACs a week have filed for IPOs seeking more than $160 billion, but in the past week, just six blank checks have filed to go public. And there has been little recent advancement on most pending SPACs.
In March, the agency issued an investor alert about celebrities, including pro athletes, and SPACs. “Celebrity involvement in a SPAC does not mean that the investment in a particular SPAC or SPACs generally is appropriate for all investors,” the SEC warned. “Celebrities, like anyone else, can be lured into participating in a risky investment or may be better able to sustain the risk of loss.”
Meant primarily to educate retail traders, the alert does raise the possibility that the agency may clamp down on SPACs it believes are using celebrity involvement purely to pump the offering. For instance, it is possible the business would need to demonstrate to regulators—or in a shareholder lawsuit—that an athlete board member conducted legitimate work for the SPAC. There are 130 active sports-related SPACs, according to data compiled by Sportico. Of those, 40 are currently trying to price their IPO, and at least another 13 have filed to hold an IPO but have no public paperwork yet, according to Sportico’s Sports SPAC Tracker.
“Yes, the SEC is concerned,” James Angel, a business professor at Georgetown University said. “I’m not troubled with athletes and celebrities doing SPACs, because they have connections and they have experience that can bring good deals. The real question is: Does the SPAC have the professional staff with them who can take care of the rest of the deal?”
More recently, the SEC staff suggested that SPAC sponsors may be abusing “safe harbor,” the notion that management can make certain statements about the future of a business without fear of regulatory or legal peril. Unlike IPOs, SPAC sponsors can make revenue projections when announcing a proposed merger to shareholders. Since sponsors put up the money to fund the SPAC to IPO—usually millions of dollars—they have a strong interest in getting shareholders to approve the deal they have crafted. In 2020, one hedge fund manager not speaking for attribution estimated SPAC sponsors earned over 900 percent return on their investment through cheap warrants.
The SEC also floated the possibility that the remedy could be treating the “de-SPACing”—when a SPAC merges with a target company—like an IPO, which would eliminate projections and make the process more rigorous for the businesses. That judgment would sharply curtail the appeal of SPACs, noted Angel.
On Thursday, the SEC staff issued another letter suggesting some warrants should be accounted as expenses on corporate books. That would be similar to how employee stock options have been treated since 2005. Expensing warrants would make companies’ finances look less robust and possibly make investors more aware of the eventual dilution of their equity. That probably wouldn’t affect SPACs very much, since investors have shown a willingness to fund money-losing companies, added Ritter. He pointed to the fact hundreds of biotech and electric vehicle IPOs have had success despite the majority of those business having no revenue and no expectation of near-term profits.
Market fears may also be overblown since the nominee to head the SEC under President Biden, Gary Gensler, has yet to be confirmed. “It remains to be seen how Gensler’s SEC will approach this, because he hasn’t been confirmed yet,” Georgetown’s Angel said. “But clearly the SEC staff is concerned that their procedures have been bypassed by SPACs, and they don’t like that.”
All the recent chatter likely won’t affect the SPAC market’s viability in the long run, but the decrease in activity it has caused was going to happen sooner or later, added Florida’s Ritter. “The filing pace was starting to slow down partly because D&O insurance was getting more expensive, investors were starting to have concerns about too much money chasing deals, and more attention is being placed on who are the sponsors: Are these people who know what they’re talking about, or are they just celebrities hoping to get lucky?”