SEC Commissioner Crenshaw Considers Rise of SPACs in Broader Debate on Private/Public Markets
Commentary by Steven Lofchie
SEC Commissioner Caroline A. Crenshaw reviewed the "meteoric rise" in special purpose acquisition companies ("SPACs") "in the context of changes in both the public and private markets."
In "Remarks at Virtual Roundtable on the Future of Going Public and Expanding Investor Opportunities," Ms. Crenshaw called SPACs part of a "race to the bottom" regarding the manner in which companies go public. She noted that in 2020, 60% of initial public offerings ("IPOs") were conducted through SPACs, rather than through traditional IPOs. She asserted that the advantage that SPACs have over IPOs results from "misaligned incentives . . . dilution that may disproportionately impact retail investors, and a lack of liability that may be creating an unjustified advantage in this path to the public markets over the traditional IPO."
Ms. Crenshaw expressed concern over the lack of regulation with respect to SPAC shareholder redemption rights and redemption thresholds triggering a de-SPAC. She argued that shareholders should not be able to vote for a merger to de-SPAC and also redeem their shares because doing so would "eliminate the incentive . . . to consider whether the proposed de-SPAC is worthwhile[.]" Ms. Crenshaw noted that allowing SPACs to merge when a "substantial majority of shareholders" redeem their shares increases dilution and creates investor protection issues. She touted a recent SEC rule proposal that would eliminate a redeeming shareholder's right to vote on a merger (see previous coverage). She stated that "hopefully, the SEC's proposal, if approved, will provide certainty and disclosure where it is needed most." She also called for stock exchanges to implement a conversion threshold of a least 50 percent, among other things.
Ms. Crenshaw acknowledged that the traditional IPO process is "not free from critique," pointing to stagnant fees in middle-market IPOs and the persistent "phenomenon" of IPO underpricing. She stated that while improvements in public markets are needed to remain competitive with private markets, they should "preserve key investor and market integrity protections."
Commentary
Given that 60 percent of the IPO market is through SPACs, the SEC should examine whether the SPAC process is working for retail investors. However, the SEC should equally examine why the traditional IPO market is unattractive, and whether the traditional regulation of such offerings (as well as the ongoing regulation of public companies) makes going public less attractive. While Commissioner Crenshaw hints that the SEC should look at the regulation of traditional IPOs, she seems concerned only that the underwriting fees may be too high.
The SEC is proposing to lay on very substantial additional regulations to public companies, particularly the climate disclosure rules. The Commissioner's invitation to consider the complexities of SPACs in the context of "the broader debate about the balance between public and private markets" is welcome. The SEC might want to consider whether it bears some responsibility for issuers avoiding the public markets.
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The SEC proposed new rules to "address the application of disclosure, underwriter liability . . . and concerns associated with, business combination transactions involving SPACs."