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SEC’s New SPAC Rules Could Shake up Mergers and IPOs

The Securities and Exchange Commission (SEC) this week introduced a series of new rules for SPACs. The new rules would represent the largest SPAC regulatory effort by the SEC.

SPACs, also known as “blank check” companies, are shell companies with no assets of their own. They are still regulated by the SEC and are usually set up to acquire a private company and take it public without going through the initial public offering (IPO) process.

SPACs were first created in 1993, but were met with skepticism by many in the financial industry. The New York Stock Exchange refused to accept any SPAC listings until May 2017. Soon after, the popularity of SPACs skyrocketed. Cannabis industry investors viewed them as a new opportunity to build businesses since raise capital in the sector is notoriously difficult.

According to PSPC Research600 SPACs raised some $160 billion in 2021, while Reuters reported that 18 cannabis-focused SPACs raised more than $3.3 billion as of last August.

But SPACs have come under intense scrutiny of late, particularly from investors who believe some are inflating the business prospects of organizations they seek to acquire. The SEC hopes to address this issue and also seeks to protect investors concerned about dilution, where their investments may suffer unexpected losses because a company decides to issue more stock.

“Today’s proposal includes a new safe harbor for SPACs that meets key investor protection requirements and should help SPACs identify which side of the line they are on,” said the chairman of the SEC, Gary Gensler, in a statement. declaration. “This proposed rule would be conditioned on a SPAC’s holding limits and the requirement that it announce a target SPAC IPO transaction within 18 months and complete the transaction within 24 months. .”

Gensler also addressed SPACs trying to circumvent the tighter scrutiny associated with the traditional IPO process.

“Functionally, the SPAC target IPO is used as an alternative way to conduct an IPO,” Gensler continued. “Thus, investors deserve the protections they receive from traditional IPOs, with respect to information asymmetries, fraud and conflict, and with respect to disclosure, marketing practices, gatekeepers and transmitters.”

In its statement, the SEC said it was seeking to:

  • Amend the definition of “blank check company” to encompass SPACs, such that the Private Securities Litigation Reform Act (PSLRA) safe harbor would not be available to SPACs with respect to target company projections.
  • Update the Commission’s views on the disclosure of forecast financial information.
  • Add specialized disclosure requirements regarding, among other things, SPAC sponsors, conflicts of interest, SPAC target IPOs and dilution.
  • Require additional non-financial information about the target private operating company in the target SPAC IPO.
  • Require that disclosure materials in targeted SPAC IPOs generally be released to investors at least 20 calendar days before shareholders have to vote to approve the transaction.
  • Align financial statement requirements with those of traditional IPOs for business combinations between a public shell company and a private operating company, including for SPAC target IPOs.

The popularity of SPACs already seemed to be declining overall and was particularly struggling in the cannabis industry. Reuters has reported only one cannabis company listed in the US via SPACs since 2020 is currently trading above the IPO price of $10 per share. However, 46.5% of SPACs are trading higher overall since their mergers.

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