Called the Sponsor Promote and Compensation (SPAC) Act, the legislation would make it so the Security and Exchange Commission (SEC) has to issue rules within 120 days of the act’s passage on how enhanced disclosures for SPACs would happen during the initial public offering (IPO) stage as well as the pre-merger stage, the release stated.
The intent is to make sure disclosures are as transparent as possible for investors, particularly Main Street investors, according to the release. The measures would be intended to help investors make informed decisions based on more accurate valuations of a company’s shares.
“SPACs are becoming more and more popular, but the risks that can come with these companies aren’t clear to most everyday investors,” Kennedy said in the release. “While we can all recognize that celebrities don’t tend to be paragons of sound financial planning, they’re often the public face of companies selling shares to hardworking Americans. It’s right and fair that a SPAC should disclose how its sponsors get paid and how that affects the value of its public shares, and the Sponsor Promote and Compensation Act would require this kind of transparency.”
SPACs are blank-check shell companies only formed to help other companies go public, avoiding the usual trappings of an IPO.
Many SPAC sponsors award themselves “founder shares,” which convert into public shares after a merger happens. Those founder shares typically represent around 20 percent of a company’s total share value, the release stated.
That kind of compensation doesn’t exist in typical IPOs, and SPAC valuations might fall if they end up choosing weak companies to merge with. Critics have called for SPACs to make their compensation structures as transparent as possible to protect retail investors, according to the release.
Earlier this month, John Coates, acting director at the SEC’s corporate finance unit, warned of “some significant and yet undiscovered issues” with SPACs, PYMNTS reported. He didn’t elaborate, but other critics have focused on the promise of growth, which may end up being tough to gauge in terms of real numbers.