The death sentence for SPACs?

It’s a tough day for special purpose acquisition companies, or SPACs, which had already fallen out of favor after roughly 18 months in the spotlight. Senator Elizabeth Warren is planning a bill that targets the SPAC industry, her office announced today. Called the “SPAC Liability Act of 2022,” the bill would expand the legal liability of parties involved in SPAC transactions, close loopholes that SPACs have “long exploited to make inflated projections,” and further ensure time to investors who sponsor a deal. Even if the bill never passes, the SEC today concludes a 60-day public comment period on several of its own proposed guidelines for SPACs, specifically on disclosures, marketing practices, and third-party oversight. As TechCrunch pointed out in a weekend look at the staggering number of EV SPACs failing, assuming SEC rules pass, the barrier to entry to go public through a SPAC will rise to the same level as companies that choose the more traditional IPO listing process. , including the liability of the banks associated with the SPACs for errors related to the merger. (To protect itself, Goldman Sachs has already said that it no longer works with most of the SPACs it has made public and is pausing work with the new SPAC issuance.) It’s not like any of the initiatives abruptly stopped SPACs. They had already started to lose steam last year, when the SEC warned in March 2021 that SPACs were not properly accounting for investor incentives called warrants. In fact, while 247 SPACs were closed in 2020, most of the SPACs raised last year (613!) came together in the first half of the year, before the SEC made it so clear it planned to do more on the front end. regulatory. Now those many blank check companies need to find suitable targets in a market that has turned bearish, and the clock is ticking. Since blank check companies are typically expected to find and merge with a target company within 24 months of investors funding the SPAC, if those hundreds of companies are unable to complete mergers with the companies candidates within the first half of next year, it must either be scaled back (which can mean millions of dollars lost for SPAC backers) or seek shareholder approval for the extensions. It’s even worse than it looks. Since the time between the announcement of a deal and the time the SEC has time to review it takes up to five months, according to SPACInsider founder Kristi Marvin, even SPACs that reach a deal tomorrow wouldn’t be able to ask their shareholders to vote on it until about November. Indeed, while lawmakers and regulators appear to be late to the party, they will no doubt be on the lookout for unnatural acts as SPAC sponsors do everything in their power to cross the finish line. Already, several SPAC backers have already begun asking their shareholders for more time to close a deal, some of them apparently hoping to get investors interested again in once-obscure financial vehicles. Magnum Opus, the SPAC that Forbes planned to take over to go public, filed for two deadline extensions this year after announcing the merger last August. He would have needed to get his shareholders’ approval for an extension once again to keep the deal alive; instead, the New York Times reports, Forbes simply called off the deal. More is also likely to happen: SPACs announcing target companies outside their area of ​​expertise and more swaps leaving SPACs with far less cash on hand for their mergers. Surf Air Mobility is a perfect example of both. A nearly 11-year-old electric aviation and air travel company in Los Angeles that operates through a membership model, recently announced that it would go public through a merger with SPAC Tuscan Holdings Corporation II, which joined in 2019. Given Since Tuscan went a little long on the SPACs, they had to ask shareholders to approve an extension. It met with his approval, although many backers redeemed their shares, reducing the size of the equity fund Tuscan had to work with. With less capital to work with, Surf Air essentially raised additional financing for itself. Tuscan was originally targeting, but not limited to, a company in the cannabis industry to acquire, not a travel company. There’s nothing legally wrong with that, stresses Marvin, who also notes that he’s not the first SPAC to buy well beyond his preferred sector of interest. Still, it could be another reason to give investors pause when SPAC backers need them to believe. Consider a previous SPAC, Hunter Maritime, which came together in 2016 with the help of Morgan Stanley to acquire one or more operating businesses in the international shipping industry, according to its original prospectus. Three years later, it acquired a China-based wealth manager and changed its name. Today that combined company, NCF Wealth Holdings, is no longer a company. “A lot of SPACs are going to be liquidated in the next couple of years,” says Matthew Kennedy, senior IPO strategist at Renaissance Capital. “I think shareholders are just looking [the performance of companies taken public via SPACs] and saying, ‘Why would I keep this if I have a four out of five chance of losing money?’”