Blog Post: SEC Tightening of SPAC Rules Will Spare Investors Further Losses

The Securities and Exchange Commission (SEC) recently finalized a rule that will close loopholes Special Purpose Acquisition Company (SPAC) issuers have taken advantage of to profit at the expense of investors. The rule becomes effective starting July 1st of this year. 

Here is what to expect under the new rules:

  • Any business combination involving a shell company, such as a SPAC, is considered an offering of securities
  • False forward-looking statements and projections by the SPAC issuer or financial adviser are now more clearly subject to legal liability 
  • SPAC issuers must provide additional disclosures, including around potential conflicts of interest
  • Guidance provided on when SPACs should be treated as investment companies under the Investment Company Act of 1940

SPACs have for far too long gotten around the requirements sensibly put in place for companies listing their shares to the public. The SEC’s rules will better protect investors from deceptive and conflicted practices that have unfortunately been common with SPACs. 

Leading up to this final rule, we repeatedly raised concerns about problems with SPACs, including in testimony during a May 2021 House Financial Services Committee hearing, and in a comment submitted to the SEC. Specifically, we focused on three key areas: misaligned incentives between SPAC sponsors and investors, SPAC mergers not being subject to the same standards as IPOs allowing for unverified and overly optimistic projections, and the potential for these projections to enable speculative companies with no revenue to raise capital, enriching sponsors while putting investors at risk.

One of the prime examples of absurd forward projections included in our Congressional testimony was Astra Space, which had been telling investors that the company – with no revenues in 2021 – would be launching rockets daily into space in 2024. Instead it is teetering on the verge of bankruptcy. The company has not ever come close to launching a single rocket, and stock of Astra Space currently trades at a price close to a complete wipeout for shareholders. 

The poor performance of SPACs like this one, however, has not stopped their sponsors from profiting handsomely. Richard Branson’s Virgin Galactic has yet to move closer to the commercial space exploration it promised, and has lost nearly 90% of its value since combining, yet has managed to pay its SPAC sponsor Chamath Palihapitiya several hundred million dollars. Virgin Galactic trades at just below $1/share, down significantly from its initial $10/share and even further from its peak of $60/share. 

Similarly, electric vehicle company Nikola has enriched its founders and SPAC issuers without having ever produced a single car or having performed well for retail investors. Nikola’s founder, Trevor Milton, is currently imprisoned for fraud and after cashing out over $100 million. Nikola’s stock price is also below $1/share after coming public at $10/share and reaching a high of $80/share. 

On average, an index measuring SPACs that have merged with a private company lost 75% in 2022 after losing 45% in 2021

While many of these highly speculative and futuristic SPAC companies cater strongly to our imagination and hope for the future, the lack of basic investor protections in SPACs, compared to those required of companies going public through the traditional Initial Public Offering (IPO) process – especially with regard to forward projections, – has unfortunately led to individual investors losing a significant amount of money.

Very few new SPACs are being launched or acquiring companies in the last year, but one exception is that former president Donald Trump is scheduled to receive a giant $3.4 billion payout as well as another $1.5 billion in additional stock since shareholders of SPAC Digital World Acquisition Corp approved acquiring Trump Media & Technology Group (owner of the social media platform Truth Social). Truth Social has made $5 million in revenue over the past three years while burning through the $40 million raised through debt offerings. Trump Media has lost $58 million in 2023 and since Digital World Acquisition Corp combined with Trump Media & Technology Group, as of April 24th the stock price has dropped by over 50%.