The SEC is focusing on SPACs with new rules regarding overstated business projections and merger disclosures.

• The SEC introduced new rules for SPACs, which represents a significant effort to regulate blank-check companies.
• The proposed rules would modify safe harbor rules, exposing SPACs to investor lawsuits for inaccurate business forecasts.
• Gary Gensler, SEC Chair, stated that investors should receive the same protections from SPACs as they do from traditional IPOs, including protection against information asymmetries, fraud, and conflicts.

On Wednesday, the Securities and Exchange Commission introduced new rules for SPACs, which, if implemented, would represent a significant effort to regulate the booming market for blank-check companies.

In recent years, investors have criticized special-purpose acquisition companies (SPACs) for overstating the financial outlooks of the companies they aim to acquire, particularly start-ups that have not yet turned a profit.

The SEC aims to tackle issues of incomplete information, conflicts of interest, and fraud through its new rules, although these problems are less prevalent in traditional initial public offerings.

Private companies can be bought by shell firms that raise funds through a public listing, allowing them to avoid the stricter regulations of a traditional IPO.

Gary Gensler, SEC Chair, stated that the SPAC target IPO is being used as an alternative to traditional IPOs, and as such, investors should receive the same protections, including information asymmetries, fraud, conflicts, disclosure, marketing practices, gatekeepers, and issuers.

Some of the SEC’s proposed rules would:

• The definition of a "blank check company" would no longer provide a liability safe harbor for forward-looking statements, such as business forecasts, if SPACs are unable to make such statements. This would leave SPACs vulnerable to investor lawsuits if they feel that the blank-check company's estimates were overly optimistic.
• When a blank-check company files a take-public Form S-4 or F-4, the SPAC's private business target must be a co-registrant.
• Improving police conflicts of interest, clarifying fee responsibilities, and preventing the dilution of investor holdings.
• Update the Securities Act of 1933 to restrict the financial statements that shell companies can make regarding potential business combinations and their potential merger targets.

The SEC has informed reporters that dilution is a major concern for individual investors due to complaints about unclear SPAC processes, which can result in unexpected losses if a company decides to issue more stock.

Since May, Gensler has expressed concerns about SPACs, and on Wednesday, the SEC proposed its first comprehensive set of rules regulating the industry.

The SEC has independently investigated various SPACs and blank-check merger deals, including one involving former President Donald Trump's social media project.

The US SPAC market experienced a surge in popularity in 2021, with numerous deals taking place in the first half of the year. However, this momentum slowed down as the SEC tightened its regulations and many deals underperformed.

The CNBC SPAC Post Deal Index, which tracks SPACs that have completed their mergers and taken their target companies public, has fallen 44.8% in the past year and has decreased 20% in 2022.