On March 30, the U.S. Securities and Exchange Commission (SEC) proposed new rules and amendments regarding special purpose acquisition companies (SPACs). The proposed rules are designed to “enhance disclosure and investor protection in initial public offerings by SPACs and in business combination transactions involving shell companies, such as SPACs, and private operating companies,” according to the SEC.
SPACs have recently become a popular vehicle for transitioning a private company to a publicly traded company. They have come under significant media and regulatory scrutiny. SPACs are shell companies used to merge with other businesses. Because a SPAC is a shell company without an underlying operating business, it can conduct an initial public offering (IPO) much quicker and easier than a traditional private company. The SPAC’s IPO can be used to raise capital, which allows it to merge with a traditional private company. As a merged company, the traditional private company will become publicly traded without going through the IPO process, which includes lengthy disclosure requirements.
SPACs are thus often seen as a tactic to skirt the IPO process and limit public transparency for investors. For example, in 2021, WeWork went public using a SPAC after its first attempt to go public with an IPO failed because whistleblowers revealed the company over inflated its value.
The SEC’s proposed rules require additional disclosures about SPAC sponsors, conflicts of interest, and sources of dilution as well as additional disclosures regarding business combination transactions between SPACs and private operating companies, including disclosures relating to the fairness of these transactions.
“For traditional IPOs, Congress gave the SEC certain tools, which I generally see as falling into three buckets: disclosure; standards for marketing practices; and gatekeeper and issuer obligations,” said SEC Chair Gary Gensler. “Today’s proposal would help ensure that these tools are applied to SPACs. Ultimately, I think it’s important to consider the economic drivers of SPACs. Functionally, the SPAC target IPO is being used as an alternative means to conduct an IPO. Thus, investors deserve the protections they receive from traditional IPOs, with respect to information asymmetries, fraud, and conflicts, and when it comes to disclosure, marketing practices, gatekeepers, and issuers.”
The news of the SEC’s rule proposal was well-received by whistleblower advocates who believe the rules will better enable insiders to blow the whistle on offerings fraud utilizing SPACs. Siri Nelson, the Executive Director of the National Whistleblower Center (NWC) views the rules as particularly useful for whistleblowers at start-ups.
“NWC has been watching SPACs since WeWork whistleblowers thwarted the company’s IPO,” Nelson said. “Increased activity in SPACs has legitimately sparked concern and the SEC’s engagement is a very good sign for whistleblowers at start-ups.”
The SEC’s highly successful whistleblower program plays a key role in the agency’s enforcement efforts. At National Whistleblower Day 2021, Chair Gensler stated that the agency’s whistleblower program “helps us be better cops on the beat, execute our mission, and protect investors from misconduct.”
Through the SEC Whistleblower Program, qualified whistleblowers, individuals who voluntarily provide original information that leads to a successful enforcement action, are entitled to an award of 10-30% of the funds collected by the government. The SEC has awarded approximately $1.2 billion to 256 individuals since issuing its first award in 2012