May. 07, 2022
File No: S7-13-22 Mohammed Ali Rashid SEC Commentary For The Proposed New Rules For SPACs Special purpose acquisition companies are normally created by an investor or pool of investors for the sole purpose of acquiring or merging with other entities, mainly private companies, with the aim of going public without incurring the high cost of initial public offerings. We still need to offer a higher level of educate as to what SPACS are to the general public to avoid risky investments. If a young Mohammed Ali Rashid sees a spac trending on Robin Hood and he invests and loses his shirt it would be due to lack of education most likely. SPACs, as they are commonly referred to, have been providing numerous loopholes that investors have recently been exploiting more frequently to avoid the stringent disclosure requirements of IPOs. In a bid to seal these loopholes, the Securities and Exchange Commission is proposing new rules to govern how SPACs are used. Ali Rashid explains the proposed changes in greater detail. Keep reading to learn more about the proposed changes. We Need To Teach The Public How a SPAC Works A SPAC is basically a shell company creating with the goal of acquiring or merging with an unidentified private entity within a period of 2 years. SPACs are managed by the sponsors, who are usually paid one quarter of the SPAC IPO proceeds. Since SPACs are usually required to commit to offer at least $5 million worth of redeemable shares and warrants, sponsors usually get a minimum payoff of $1.2 million, which is a guaranteed. Depending on the value of the IPO, the commission can be much higher. This is the motivation behind the recent surge in SPAC transactions. Listing of Shares The end goal of a SPAC is public listing of its assets within a limited time-frame, typically 2 years. When the period lapses, the assets of the SPAC are placed in escrow or in a trust and registered under section 12(b) of the Exchange Act. Once registered, the shares begin trading on the national security exchange. Why Make Changes? 1. Conflict of Interest Sponsors stand to make at least 25% of the IPO proceeds. As a result, there may be conflict of interest in the establishment and running of the SPAC because the sponsors can acquire or merge with large private entities that may be making losses or startups that are yet to make any money. The end goal being to increase the value of the IPO proceeds. As a result, the value of their commission will increase. Unfortunately, retail investors who buy shares during the IPO will be left with overvalued shares. The sponsors might have also formed the SPAC to purchase their own private company, in which case there will be conflict of interest. The SEC proposes that all conflict of interest be reported. 2. Misleading Information Usually, de-SPAC transactions use projections that may be unreasonable, misleading or unfounded. Unfortunately, these transactions do not have a named underwriter who would carry the liability should investors make ill-informed decisions due to the unfounded, misleading or unreasonable projections. This means that investors can be misled to buy shares in an IPO based on inaccurate information, and they'll have nobody to blame. The new rules seek to address this loophole 3. Due Diligence There is plenty of gray areas in SPAC rules that investors have taken advantage of to make a killing in the industry at the expense of retail investors. For instance, de-SPAC transactions have not recently been subjected to due diligence. The new rules propose stricter enforcement of de-SPAC due diligence rules. This will help to ensure everything is done in the right way 4. Public Disclosures The SEC recommends the publishing of reports analyzing the parties involved in de-SPAC at various stages of the process. Their incentives and compensation will also be made public to improve transparency in the process. This will undoubtedly help bring back investor confidence in the industry. Before making these changes, as an investor Mohammed Ali Rashid and his constituents would like to see the Small Business Formation Advisory Committee of the SEC looked at the reasons behind the sharp rise of SPAC transactions over the last two years as well as the parties involved and noted the changes that should be made to enhance the regulation of de-SPAC. Thank you, -Mohammed Ali Rashid