Enhanced Disclosure Requirements for Special Purpose Acquisition Companies
BY: Tim Kolankowski, RBFL Student Editor
On August 26, 2021, the SEC’s Investor Advisory Committee published recommendations that call for the Commission to implement enhanced disclosure requirements for special purpose acquisition companies, otherwise known as “SPACs.” SPACs are shell companies that accumulate capital during an initial public offering with the intention of using that capital to acquire a private target company. Since 2020, SPACs have drastically grown in popularity as a means for private companies to go public, and as an investment opportunity for institutional and retail investors. The meteoric rise in SPAC formation and investing has caused the SEC, and its new chairman Gary Gensler, to evaluate whether retail investors are protected by the current SPAC regulatory regime. After taking note of various vulnerabilities in current
SPAC regulations, the Investor Advisory Committee devised recommendations calling for enhanced disclosures in order to allow retail investors to make more informed decisions when SPAC investing. Although more information would likely help retail investors, the question must be asked, is it enough?
My Note explores whether the enhanced disclosure requirements that the Investor Advisory Committee calls for would sufficiently protect SPAC investors. The Note first tries to offer a clear explanation on how SPACs operate, and why they have grown so much since 2020. Then, drawing on studies that showcase how enhanced disclosure can lead to better investor decision-making, the Note discusses how there is certainly evidence demonstrating that providing investors with more information about the SPAC could lead to a safer world for SPAC investors. At the same time, however, given investors’ limited attention and other dangerous risks that are inherent to SPAC investing, there is reason to believe that something beyond mere disclosure should be done. Finally, considering the complexities of SPACs and the risks that are
inherent to SPAC investing, I will briefly consider whether retail investors should be able to invest in SPACs at all, and whether an accredited investor requirement should be implemented for SPAC investing.
This is a unique discussion as there is a fair amount of literature on whether disclosure iseffective at protecting consumers and investors in various different contexts. However, there issignificantly less scholarly work discussing the relationship between disclosure and SPAC investing. Given that there are a number of risks to investors that are unique to SPAC investing, the analysis conducted here is necessary to determine how the SEC can best regulate SPACs to provide sufficient investor protection.
Sources:
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