Upcoming SPAC Hearing Signals Increased Scrutiny

The House Financial Services Committee will hold a hearing on special purpose acquisition companies (SPACs) on Monday (May 24), another sign of the growing government interest in scrutinizing SPACs.

As Reuters reported Friday (May 21), the Securities and Exchange Commission (SEC) has increased its focus on SPACs recently, through public statements and an inquiry by their enforcement team. And Sen. John Kennedy, a Republican from Louisiana, has introduced a bill calling for more transparency for people investing in SPACs.

“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 last month. “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.

SPACs are blank-check shell companies only formed for the purpose of helping other companies go public, avoiding the usual initial public offering (IPO) process.

The past few months have seen a record amount of money raised by SPACs — $100 billion — with SPAC mergers and acquisitions taking in a record $263 billion.

As Reuters notes, critics of these companies say banks and SPAC sponsors have enjoyed massive payoffs at a cost to investors who come on board later.

Monday’s hearing will focus on SPACs, IPOs and direct listings. Reuters says the House is considering legislation that would redefine “blank check company” to include SPACs according to a 1995 law.

“The law created a safe harbor that protects listed companies from shareholder litigation provided forward-looking statements are made in good faith, identified as such and couched in cautionary language,” per Reuters.

While the safe harbor doesn’t protect IPOs or certain blank check companies, sponsors have typically operated under the assumption it covers SPAC deals and have relied on it to issue growth projections. The SEC is considering guidance that would control these protections.