This work lays out some of the complications of a SPAC structure and how to assess an investment either as a trading vehicle or a long-term investment strategy.
Our position
Our recommendations center around seven key points:
- Ensuring an equivalent application of the PSLRA safe harbor.
- Ensuring an equivalent application of Section 11 liabilities for Financial Advisers to the merger.
- Codifying a new form for investor protection: Form KCR (Key Conflict & Risks).
- Review of trading on inside information and gap trading anomalies.
- Examining SPAC Promotion and Digital Engagement Practices (DEP).
- Assessing deSPAC merger transactions with affiliated targets.
- Implementing enhanced disclosure requirements.
Abstract
This report is broken into four sections:
Section 1: How a SPAC works. The first section examines the three phases of the SPAC lifecycle, SPAC structural details, and the roles of the key players. This section also explores key features of SPAC share redemption rights, the warrants that are included along with the SPAC shares, how sponsors are remunerated for completing the SPAC process, and the key role private investors play via PIPE transactions in ensuring the stability of the offering.
Section 2: Incentives and conflicts. The SPAC structure allows for a range of deal incentives that can raise distinct conflicts of interest. We discuss four in particular: the “no deal” conflict; sponsors who are engaged in multiple deals; directors and IPO underwriters with contingent compensation; and inherent conflicts between short-term SPAC traders versus longer-term deSPAC investors.
Section 3: Disclosures. One of the best ways to help retail investors assess SPAC investment risk is to improve disclosures. We suggest more detail on matters such as: the qualifications and experience of the sponsor; affiliations between the sponsor, PIPE investors, and target company; the existence of any side deals; a sponsor’s compensation and dilution effects; and shares and warrants issued and fees and expenses incurred.
Section 4: Regulatory recommendations. Based on extensive discussions, we offer seven pragmatic recommendations to further investor protection for SPAC investors. While in some cases these parallel recent U.S. Securities and Exchange Commission (SEC) proposals, our focus is to provide immediate assistance to investors as they analyze hundreds of current SPAC offerings.