SEC’s Gensler Seeks to Level Playing Field Between SPACs, Traditional IPOs

“Currently, I believe the investing public may not be getting like protections between traditional IPOs and SPACs,” Mr. Gensler said in remarks prepared for the Healthy Markets Association. “I’ve asked staff for proposals for the Commission’s consideration around how to better align the legal treatment of SPACs and their participants with the investor protections provided in other IPOs, with respect to disclosure, marketing practices, and gatekeeper obligations.”

For private companies, SPACs offer a streamlined alternative for going public compared with the traditional IPO process. A SPAC—essentially a shell company that holds nothing but cash—initially raises money in its own public offering and lists its shares on a stock exchange. After that, it uses the war chest to hunt for a private company to merge with. If it finds a deal, the private company takes the SPAC’s listing on the exchange and becomes a public company.

The SPAC merger process allows companies going public to make revenue and profit projections that aren’t allowed in traditional IPOs, often helping them to achieve a higher valuation. Companies in SPAC deals are allowed to make those forward-looking statements because SPACs are regulated as public companies, differentiating the SPAC process from the regular IPO process.

The structure attracts an array of investor types, from hedge funds to high net-worth individuals and small investors.

Mr. Gensler said such forecasts go against a fundamental tenet of U.S. securities laws, which seek to block parties to a transaction from using marketing practices to create buzz about a company before required disclosures reach investors.

“SPAC target IPOs often are announced with a slide deck, a press release, and even celebrity endorsements,” Mr. Gensler said, which can move the SPAC’s shares significantly based on incomplete information. “It is essential that investors receive the information they need, when they need it, without misleading hype.”

After SPACs and companies going public announce deals and publish investor presentations, they must later file detailed financial statements with the SEC, including information about past business performance and how the deal came together.

Mr. Gensler said he has asked staff for recommendations against improper priming of the market by SPAC sponsors. Potential fixes, he said, could include requiring more-complete information to be disclosed at the time a merger between a SPAC and a target company is announced.

The SEC chief also said gatekeepers in SPAC mergers—including SPAC sponsors, financial advisers, accountants, directors and officers—should perform the same due diligence and face the same liability as the investment banks that underwrite traditional IPOs.

“There may be some who attempt to use SPACs as a way to arbitrage liability regimes,” he said. “Make no mistake: When it comes to liability, SPACs do not provide a ‘free pass’ for gatekeepers.”

Regulators have launched several investigations of individual SPAC deals in recent months. Earlier this week, the SPAC that is taking former President Donald Trump’s new social-media venture public disclosed that the SEC is probing the proposed merger. Electric-vehicle maker Lucid Group Inc. also recently said regulators are seeking information about statements and projections it made as part of its recently completed SPAC deal.

Nikola Corp. will likely pay $125 million to settle an investigation into allegedly misleading statements the electric-truck startup’s founder and executive chairman made when the company was going public through a SPAC. The company hasn’t delivered any trucks to customers but still has a market value of roughly $4 billion even after a big drop in the stock this year.

Despite regulatory scrutiny and share-price declines for startups that go public this way, SPACs continue to rake in new money. More than 580 SPACs have been launched in 2021 and raised more than $155 billion, according to data provider SPAC Research. That is roughly the same amount as companies have raised in traditional IPOs during a record year for new listings.

In the six prior years combined, about 420 SPACs were created and brought in roughly $125 billion.

—Amrith Ramkumar contributed to this article.

Write to Paul Kiernan at [email protected]