SEC Poised to Adopt Tougher Rules for SPACs

The SEC will adopt final rules around Special Purpose Acquisition Companies (SPACs) as of January 24, 2024. SPACs, which boomed in popularity during the pandemic due to their swift public market entry and price certainty in comparison to traditional IPOs, have been subject to a number of reforms by the SEC since 2021 due to concerns about the risks posed to investors. The proposed rules would address additional transparency requirements about business combination transactions, including disclosures related to the fairness of the transactions, as well as projections made by SPACs and their target companies regarding forward-looking statements.

Despite waning interest in the SPAC market, Partner Ro Sokhi said there “are still a number of SPACs that are alive and still looking for targets.” About 150 of them are “supposedly actively looking for targets,” he recalled. “That’s a potential for a hundred or so private companies going public if deals are able to be made, and thus the need to protect investors."

There are multiple reasons for the loss of interest, but some of the most prominent reasons include new rules from the SEC, SPACs failing to find target companies to merge with, and unethical actions that are often associated with financial and investment fads. In Sokhi's view, “many of the provisions are likely needed to protect investors as there are differences between using a SPAC to go public versus a traditional IPO that probably shouldn’t exist.” However, some of the proposed changes are expected to go beyond that, and are “somewhat tangential to protecting investors that are going to be interesting to watch,” he said.

One example could potentially impact accounting firms responsible for auditing the related SPACs and IPOs by subjecting them to additional regulation from the PCAOB. “The proposal may align Form AP filing requirements for SPACs and IPOs that could significantly impact accounting firms, including how they are regulated by the PCAOB,” Sokhi said. He noted there was “some ambiguity as to whether a private company would be considered an issuer under the new rules, that hopefully will be resolved.” For accounting firms completing many of the SPAC target audits and are at or close to having 100 public company clients, there's an important threshold to consider. “Once an accounting firm exceeds 100 registrants, they are required to be reviewed by the PCAOB every year instead of every three years,” Sokhi explained.

Read the full article published by Reuters.