Personal finance

SEC Is Scrutinizing SPAC Projections, Seeks Clearer Disclosures

Saul Loeb | AFP | Getty Images
  • The Securities and Exchange Commission is putting SPACs, especially their disclosures, under a microscope.
  • Special purpose acquisition companies, also called blank-check funds, have surged in popularity in recent months.
  • An SEC official noted concern about a potentially lower legal standard for SPAC disclosures compared with traditional IPOs. Some of those concerns may be overblown, he said.

The SEC is eyeing potentially misleading earnings projections made by SPAC sponsors and is seeking clearer disclosures, with one official hinting Thursday that the agency may issue a future rule to rein them in.



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Special purpose acquisition companies, known as SPACs or blank-check funds, are a hot-ticket item on Wall Street.

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The investments are like quasi-IPOs. A publicly traded shell company uses investor money to buy or merge with a private company, typically within two years. In so doing, the private company becomes publicly traded, offering an alternative to a traditional IPO.

SPAC use and popularity have soared over the past six months, John Coates, acting director of the Securities and Exchange Commission's Division of Corporation Finance, said in a note Thursday.

"With the unprecedented surge has come unprecedented scrutiny, and new issues with both standard and innovative SPAC structures keep surfacing," Coates said.

For one, the SEC is eyeing filings and disclosures made by SPACs and their private targets, Coates said.

Some believe current law allows the investments to skirt some of the disclosure requirements of the traditional IPO process.

Primarily, some fear that SPAC sponsors and their acquisition targets carry a lower legal risk for presenting lofty earnings and valuation projections. Misleading disclosures around future earnings estimates, for example, may in turn entice investors.

"These claims raise significant investor protection questions," Coates said.

However, such claims may not provide an accurate reading of current securities law, he added.

"Any simple claim about reduced liability exposure for SPAC participants is overstated at best, and potentially seriously misleading at worst," Coates said.

The public may benefit from greater clarity around the legal requirements of SPAC disclosures, Coates said. He suggested the SEC could issue a rule or provide guidance in this regard.

SEC officials are also looking closely at how SPACs do certain accounting in their financial statements. Errors in previously filed statements associated with "warrants" may lead some sponsors to issue an amended filing, the regulator said April 12.

A warrant is a contract that gives the holder the right to purchase a certain number of additional shares of common stock in the future at a certain price.

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