U.S. Financial Firms Push Back On SEC Bid To Rein-in Blank Check Company Deals

U.S. financial industry groups are pushing to water down a draft Securities and Exchange Commission (SEC) rule aimed at reining-in special purpose acquisition companies or SPACs, arguing it could kill the industry.

The American Securities Association (ASA), the SPAC Association and the CFA Institute are among groups warning that the SEC's proposed March rule would create too much liability for parties involved in SPAC deals, and as such goes further than traditional initial public offering (IPO) and M&A rules.

The deadline for submitting comments to the SEC was Monday.

"The agency should protect investors, but don't kill industry," said Kurt Schacht, Head of Advocacy at professional investor group the CFA Institute, adding his organization has urged the SEC in a comment letter and in meetings not to regulate SPACs out of business.

Wall Street's biggest gold rush of recent years, SPACs are shell companies that raise funds through a public listing with the goal of acquiring a private company and taking it public.

The process allows the target to sidestep the stiffer regulatory scrutiny of a traditional IPO, sparking criticism that many deals are of poor quality or suffer from lax due diligence, and in turn have left investors nursing losses.

Investment banks have raked in billions of dollars feeding a frenzy in SPAC deals while putting little of their own cash at risk, Reuters reported in May, although some banks have stepped back from SPAC deals following the SEC proposal.

That draft rule aims to offer SPAC investors protections similar to those they would receive during the IPO process. It would increase the liability for parties involved in such deals, remove a legal safe harbor for earnings projections, and boost investor disclosures.

"If you add up all of that, it's going to certainly make people a little bit more skittish in using SPACs," said Morris DeFeo, a partner at law firm at Herrick, Feinstein LLP who advises SPAC sponsors and target companies.

In particular, the rule would enhance disclosures about the target takeover, known as the "de-SPAC" transaction, including by requiring the sponsor to explain whether the proposed deal is fair to investors and has been vetted by third parties.

Anna Pinedo, a partner at Mayer Brown who advises SPAC sponsors, said that while the SEC wants to treat SPACs like IPOs, the proposal actually puts SPACs at a disadvantage compared to IPOs, "particularly around the de-SPAC transaction stage." The rule goes much further than many state laws and current M&A best practices, she said.

The proposal would expand liability for financial advisors in a de-SPAC transaction beyond the current rules for underwriters in traditional IPOs, the American Securities Association wrote in its comment letter.

"This risk would make it untenable for investment banks to continue advising on de-SPAC transactions," said Chris Iacovella, CEO of the ASA.

It was unclear how receptive the SEC is likely to be to such complaints. The Wall Street regulator is under pressure from some lawmakers, including leading Democratic Senator Elizabeth Warren, to crack down on the SPAC industry.

An SEC spokesperson said the agency "benefits from robust engagement from the public and will review all comments submitted during the open comment period."

Samir Kapadia, who represents the SPAC Association, said policymakers should recognize that SPACs serve a crucial market function by increasing access to capital.

"We've seen tremendous economic impact in the form of job creation and capital investment in industries such as clean energy, healthcare and technology," said Kapadia.

"The regulator needs to value the data, not the politics."