Breaking: SEC’s Corporate Finance Director Calls For Better Regulations Around SPACs Amid Surging Popularity

John Coates, the acting director of the Security and Exchange Commission’s Corporate Finance division has called for scrutiny around Special Purpose Acquisition Company (SPAC) which has turned into a go-to option for companies going public. Coates said,

“The rapid increase in the volume of SPACs represents a significant change and we are taking a hard look at the disclosures and other structural issues surrounding SPACs,”

The statement comes at a time when the biggest crypto companies including the likes of Coinbase and Bakkt have opted for a SPAC merger for public listing rather than a traditional IPO. The primary reason for opting for a SPAC reason is the swiftness over the traditional process, where a traditional IPO listing could take months and even years and involve a lot of regulatory burdens, SPACs merger is considered smooth and convenient.

• SPAC Formation: A SPAC is formed with an investment from a group of sponsors primarily venture capitalists and private equity firms.
• SPAC IPO: The formation of the blank-check firm is followed by a public offering but instead of the traditional way, a ticker is assigned to the SPAC, and later it is listed on exchanges. The money that flows into the SPAC is held in escrow.
• Acquisition search: The SPAC then starts searching for a private firm for merger and has a two-year time period, following which if the SPAC does not find any company for the merger, the money is returned to the shareholders. However, nowadays a merger is already decided beforehand and thus finalization becomes easier.
• Finalizing the acquisition: After SPAC finalizes a company for the merger, the majority shareholders must approve of the merger for finalization following which the merged company is listed on the stock exchange.

15 Months; 474 SPACs; $156 Billion

The call for scrutiny around SPACs c0mes at a time when it is in a moon phase where $156 billion funds have flowed into these firms over the past 15 months alone with a total of 474 SPACs company getting listed on different exchanges.

A special purpose acquisition company, also known as a “blank check company” is a shell corporation listed on a stock exchange with the purpose of acquiring a private company, thus making it public without going through the traditional initial public offering process.

The growing popularity of these blank-check firms could become a headache for regulators if not monitored.