John Coates, the acting director of the Security and Exchange Commission’s Corporate Finance division has called for scrutiny around Special Purpose Acquisition Company (SPAC) which has turned into a go-to option for companies going public. Coates said,
“The rapid increase in the volume of SPACs represents a significant change and we are taking a hard look at the disclosures and other structural issues surrounding SPACs,”
“The rapid increase in the volume of SPACs represents a significant change and we are taking a hard look at the disclosures and other structural issues surrounding SPACs,” said John Coates, Acting Director of the SEC’s Division of Corporation Finance. https://t.co/3SYLtF2ehj
— SEC_News (@SEC_News) March 10, 2021
The statement comes at a time when the biggest crypto companies including the likes of Coinbase and Bakkt have opted for a SPAC merger for public listing rather than a traditional IPO. The primary reason for opting for a SPAC reason is the swiftness over the traditional process, where a traditional IPO listing could take months and even years and involve a lot of regulatory burdens, SPACs merger is considered smooth and convenient.
- SPAC Formation: A SPAC is formed with an investment from a group of sponsors primarily venture capitalists and private equity firms.
- SPAC IPO: The formation of the blank-check firm is followed by a public offering but instead of the traditional way, a ticker is assigned to the SPAC, and later it is listed on exchanges. The money that flows into the SPAC is held in escrow.
- Acquisition search: The SPAC then starts searching for a private firm for merger and has a two-year time period, following which if the SPAC does not find any company for the merger, the money is returned to the shareholders. However, nowadays a merger is already decided beforehand and thus finalization becomes easier.
- Finalizing the acquisition: After SPAC finalizes a company for the merger, the majority shareholders must approve of the merger for finalization following which the merged company is listed on the stock exchange.
15 Months; 474 SPACs; $156 Billion
The call for scrutiny around SPACs c0mes at a time when it is in a moon phase where $156 billion funds have flowed into these firms over the past 15 months alone with a total of 474 SPACs company getting listed on different exchanges.
A special purpose acquisition company, also known as a “blank check company” is a shell corporation listed on a stock exchange with the purpose of acquiring a private company, thus making it public without going through the traditional initial public offering process.
The growing popularity of these blank-check firms could become a headache for regulators if not monitored.