SEC issues statement putting SPACs on notice

After weeks of wading into the debate over how to regulate special purchase acquisition companies — the popular blank-check deals that provide companies a back door to public markets — the Securities and Exchange Commission is sending its first shot across the bow.

John Coates, acting director of the corporate finance division at the SEC, issued a lengthy statement Thursday about how securities laws apply to blank-check firms. “With the unprecedented surge has come unprecedented scrutiny,” Coates wrote of the recent boom in blank-check deals.

In particular, he is interested in a crucial (and controversial) difference between SPACs and traditional initial public offerings: Blank-check firms are allowed to publish often-rosy financial forecasts when merging with an acquisition target, while companies going public in an IPO are not. Regulators consider such forecasts too risky for firms as yet untested by the public markets.

Investors raise money for SPACs via an IPO of a shell company, and those funds are used within two years to merge with an unspecified company, which then also becomes a publicly traded company. Because the deal is technically a merger, it’s given the same “safe harbor” legal protections for its financial forecasts as a typical M&A deal. That’s why there are flying-taxi companies with little revenue going public via a SPAC while promising billions in sales far in the future.

The SEC thinks allowing financial forecasts for these deals might be a problem. They can be “untested, speculative, misleading or even fraudulent,” Coates wrote. And he concludes his statement by suggesting a major rethink of how the “full panoply” of securities laws applies to SPACs, which could upend the blank-check business model.

If the SEC does not treat SPAC deals as the IPOs they effectively are, he writes, “potentially problematic forward-looking information may be disseminated without appropriate safeguards.”

The letter serves as a warning, but perhaps not much else — yet. Unless the SEC issues new rules (as it did for penny stocks) or Congress passes legislation, SPAC projections will continue. But this strongly worded statement could moderate or even mute them.

“The SEC has now put them on notice,” said Lynn Turner, a former chief accountant of the agency.