- In February, two think tanks on economic reform sent a letter to Congress outlining concerns over the SPAC boom.
- The letter said the floating market is “driven by conflicts of interest and compensation to business insiders at the expense of retail investors.”
- It made five recommendations to Congress and financial regulators “to better protect retail investors.”
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As SPAC mania continues into 2021, drawing big name investors and pop culture icons, some believe that retail investors trying to make money on mania are getting a crude deal.
In February, the Americans for Financial Reform and the Consumer Federation of America sent a letter to the House Financial Services Committee outlining concerns about the boom among special-purpose companies.
The letter, addressed to Chairman Maxine Waters, said the boom in SPAC is “driven by conflicts of interest and compensation to corporate insiders at the expense of retail investors.”
It also suggested an attempt by sponsors and their goal “to end long-standing rules designed to promote fair and efficient markets.”
SPACs have been around for decades, but still they have emerged last year and in 2021, espionage as a faster and cheaper alternative for companies to be listed compared to the traditional listing.
In the first two months of 2021 alone, 175 SPACs have been published according to data collected by Goldman Sachs – approximately five agreements per trading day. If this pace continues, the investment bank estimates that this year’s offer will exceed the total number of SPACS in 2020 by the end of March.
The letter, written by Andrew Park of Americans for Financial Reform and Renee M. Jones of Boston College Law School, states that SPACs should be governed.
The organizations make five recommendations to Congress and financial regulators “to better protect retail investors.”
Modernize the definition of “blank check company”
Congress should look again at legislation that allowed the SEC to regulate companies with blank checks, and the term should not be limited to companies that offer “penny stocks.” “Blank check firms” that use larger cars can now evade the restrictions Congress passed to protect investors from “misleading information, conflicts of interest and fraud.”
“Making an investment fund bigger and attracting larger investments does not cure the problems inherent in marketing, selling and trading in blank check shares,” the letter states.
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2. Tamp down the injecting drug before the fusion
SPAC sponsors, target companies and advisers are protected from responsibility for overly optimistic estimates. This is in contrast to traditional stock exchange listings where unfounded financial estimates are limited. Closing this loophole will level the playing field, the letter said, especially since SPAC sponsors “often boldly claim to investors that they will be able to generate billions in revenue in the near future.”
3. Ensure appropriate warranty liability
The liability shall also include insurers and financial advisers in the merger phase. Since SPAC policyholders receive more than half of the subscription fee upon completion of the merger, the letter suggested that the insurance companies should be the same for the entire SPAC offer.
Financial advisers should also be considered as insurance advisers, the letter states. These changes will even out the rules of the game between SPAC and traditional IPOs.
4. Improved information on SPAC offers and merger stages.
Information about SPAC mergers should explicitly include the amount of cash that is expected to be in the possession of SPAC just before the merger, the letter states. This includes side payments, agreements to pay sponsors, SPAC investors and PIPE investors.
The letter that this information often has to be put together from different documents.
5. Study the risks and outcomes of SPAC mania
The letter recommends the Securities and Exchange Commission to collect data on SPAC and to create a report that assesses average performance. The agency should also examine categories of investors who “usually bear the burden of SPAC’s losses after the merger.”
The letter said many of these investors are retail investors who “are often attracted to SPAC investments by advertising and hype” and “are probably unaware of the complexity of fee schemes or the expected dilution that will ultimately erode the value of their investments.” The letter suggested apps like Robinhood played a role in all this hype.
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