April 27, 2022

SEC Investor Advocate Urges Tougher Listing Standards for SPACs

SEC Investor Advocate Rick A. Fleming urged NASDAQ and the NYSE to revise their listing standards so that special purpose acquisition company ("SPAC") business combinations could only be consummated when 50 percent or more of public shares would be invested in the SPAC post-combination.

In Memoranda to the exchanges, Mr. Fleming, stated that "we have significant reservations about the consequences of the current listing standards that allow for empty voting and otherwise permit significant conflicts of interest." He highlighted the SEC's proposed rule to increase disclosure in IPOs by SPACs and in business combination transactions involving shell companies such as SPACs, (see prior coverage).

In the Memoranda, Mr. Fleming asserted that (i) the exchanges' elimination of a conversion rights percentage threshold and (ii) the replacement of voting protections with registration statement risk disclosures of underfunded business combinations enabled many companies to go public even when most SPAC IPO investors had redeemed their shares. He contended that this allows the occurrence of business combinations even when assets are depleted due to the exercise of conversion rights, which in turn gives early investors economic incentives to allow low-quality deals to happen. The Investor Advocate concluded that these measures (i) enabled "empty voting" and conflicts of interest and (ii) "benefitted SPAC sponsors and sophisticated IPO participants . . . at the expense of public investors."

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