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To SPAC or Not To SPAC – We Help You Decide

Private companies are flooding to special-purpose acquisition companies, or SPACs, to bypass the traditional IPO process and gain a public listing. However, the massive popularity of these transactions and the euphoria created among investors naturally invites scepticism, and we’re now seeing plenty of it. As SPACs raise money and go public before finding businesses to merge with, the SEC in the US has found that certain regulations are required to ensure that the risk involved in such blank-cheque investments is minimal.

US SEC rules on SPAC Mechanism

In line with this, the SEC is potentially introducing new rules that focus on increasing disclosures that facilitate a better view into the mechanics of SPACs by investors.

Some of the top areas of concern that the SEC will be putting up for public discussion include:

  • Dilutions: The dilutions that are a vital part of SPACs can be pretty expensive – roughly twice as high as the cost generally attributed to SPACs. When merger targets are identified, founders are awarded equity which further leads to stock dilutions.
  • Projections: Companies that have taken the SPAC route seem to have a safe harbor to discuss projections with prospective investors regarding potential mergers. There have been reservations about this by SEC’s Investor Advisory Committee.
  • Incentives: This concern centers around the inherent conflict of the sponsor to make a profit, even when shareholders are likely to lose all or nearly all their investment.
  • Conflicts: Considering that SPACs are usually comprised of many parties, conflicts of interest are bound to arise. These need to be divulged clearly to investors.

Despite these concerns, the evidence is clear: SPACs are revolutionizing private and public capital markets. Thus, it’s increasingly important that leaders and managers know details about it. If you consider moving into these rapidly evolving (and for many, unfamiliar) territories, we’re here to help guide you.

Drop a line at enquiry@datatracks.com or call +1 (609) 257 4232 for a brief chat with our XBRL experts.