SEC targets SPACs with rules on inflated business forecasts, merger disclosures

cnbc.com:

The Securities and Exchange Commission on Wednesday debuted a host of new rules for SPACs that, if enacted, would mark one of the broadest attempts to date at cracking down on the hot market for blank-check companies.

SPACs, or special-purpose acquisition companies, have come under fire in recent years by investors who say that the firms often inflate the business outlooks of the firms they seek to acquire. Many of those companies include start-ups that have not yet become profitable.

With its new rules, the SEC also hopes to address complaints about incomplete information and insufficient protection against conflicts of interest and fraud. The issues are not as pervasive in a traditional initial public offering.

SPACs are typically shell firms that raise funds through a listing with the goal of buying a private company and taking it public. That process allows the often-young firms to circumvent the more rigorous scrutiny of a traditional initial public offering.

«Functionally, the SPAC target IPO is being used as an alternative means to conduct an IPO,» SEC Chair Gary Gensler said in a statement. «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.»

Some of the SEC's proposed rules would:

Dilution is a paramount concern for individual investors, as many have complained that murky SPAC processes can leave investments open to unexpected losses if the company elects to issue more stock, the SEC told reporters.

Gensler has voiced concerns about SPACs since May, but Wednesday's proposed rules represent the first broad rulemaking from Wall Street's watchdog.

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