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SPAC: U.S Advisory Group Approves Tougher Disclosure Rules

Updated: May 14, 2023

An Overview

A SPAC - Special Purpose Acquisition Corporation, is a form of blank-check or shell firm that obtains funds publicly for the sole purpose of locating and acquiring a target private functioning company.

SPACs have grown in popularity as a vehicle for a variety of transactions, including the conversion of a private firm to a publicly traded corporation. Certain market players think that a private business may become a publicly listed corporation through a SPAC transaction with greater price certainty and control over deal conditions than typical initial public offerings, or IPOs.

An experienced management team or a sponsor generally forms a SPAC with nominal invested money, resulting in a 20 percent or less shareholding in the SPAC. A total of about 80% of the SPAC's shares are owned by the general public through "units" sold in an initial public offering (IPO). Each unit consists of a fraction of a warrant and a share of common stock.

The SPAC Market in 2021

According to SPAC Research, 330 SPACs have raised over $105 billion this year. Compared to the previous year, this is an increase: in 2020, 248 SPACs raised over $83 billion, while in 2019, 59 SPACS raised over $13 billion.

However, the blank-check boom was roiled in April 2021 when the SEC announced new accounting regulations for SPACs, causing firms to rush to double-check their financial accounts for mistakes. In the second quarter of this year, the number of new SPAC files fell to only 61.



On September 9, 2021, the Securities and Exchange Commission's Investor Advisory Committee (IAC) unanimously endorsed in an open meeting the IAC's proposal that the SEC regulates SPACs "more intensively by exerting greater emphasis and tougher enforcement of current disclosure standards."

It has also been emphasized that empirical data pertaining to these transactions will help the IAC make additional recommendations and will advise the SEC in future regulation. Meanwhile, SPACs should anticipate the Staff to continue to use the review and comment process, as well as existing requirements, to press for greater transparency in SPAC IPO and business combination filings.

The IAC suggested increased transparency in the Report regarding the following:

  • The sponsor's position, including the sponsor's suitability, experience, and capital commitments, as well as any conflicts of interest on the part of the sponsor, insiders, and their affiliates.

  • SPAC process mechanisms and timelines, including the precise nature of the purchased instrument, events required for instrument value appreciation, and details of the shareholder approval process for the de-SPAC transaction, specifically whether shareholders are allowed to vote in favor of the transaction while also redeeming their shares, are discussed.

  • Competitive pressure and risks involved in locating acceptable targets, as well as information regarding the sponsor's absorption of expenditures in the case of a failed de-SPAC, are examples of "beyond simple risk considerations.”

  • In order to provide a meaningful assessment of the upside possibilities and negative dangers, including, to the degree particulars cannot be identified, transparency surrounding "guardrails" or acceptable term ranges of various participants' economics, including the "promote" paid and it’s influence on dilution.


As per the report, there is an explanation of why the suggestions have been made. Initially, the IAC expresses concern that "sponsors and targets of SPACs may essentially be undertaking regulatory arbitrage by pursuing a transaction structure with a phased disclosure strategy which equates to a less-restrictive path to the public markets." Consider the IAC's recommendation to abolish a safe harbor for predictions, which it says is unnecessary.

IAC also advises that SEC investigate due diligence done by all parties before investing. If the absence of underwriter diligence and Section 11 responsibility in SPAC transactions disadvantages retail investors, and if the SEC should make any recommendations to Congress about essential statutory changes, this report suggests that they do just that.

Looking Ahead: The SPAC's future

In the world of SPAC - Fast movements aren't a flaw, they're a benefit. While it's tempting to follow a particularly overvalued investment, you shouldn't feel obligated to do so. There's always another SPAC chance just around the corner.

However, it is possible to implement many of the IAC's disclosure recommendations by simply enforcing current disclosure requirements, but this will necessitate future rulemaking in order to eliminate the safe harbor for forward-looking statements. The IAC examined a number of problems but did not make any recommendations. One of these was whether or not underwriter liability should be extended to de-SPAC transactions.

Such modifications would very certainly need legislative action by Congress. The report correctly emphasizes that additional data is required before further suggestions can be made, and numerous panelists highlighted the need for greater empirical evidence to guide future policies.

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