March 11, 2022
As a shareholder of PSTH and a future holder of the proposed SPAR or subscription warrant instrument, I am aware of and comfortable with its risks and marketability, despite the concerns expressed by the SEC's order dated December 8, 2021. These concerns reveal the SEC's violation (not service) of its mission to protect investors, the public interest, and to promote fair and orderly markets.
The first concern states that subscription warrants \"would be exercisable into the common stock of a company upon its entry into an acquisition agreement with an unknown target, on unknown terms, at any time up to ten years from the date of issuance.\" This is a misunderstanding of the proposal at a very basic level, since earlier in the exact same document on page 2, the rule change description section states that the subscription warrants are exercisable \"into the common stock of such company upon entry into a binding agreement with respect to such acquisition.\"
In other words, the subscription warrants would only be exercisable upon an entry into a binding merger agreement (which would identify terms and merger timeline) with an acquisition target (also identified). The very definition of the instrument is misconstrued to turn it into a concern. The 10-year timeline is to promote elasticity in negotiation for the benefit of investors. As clearly, any sponsor has a strong financial incentive to close a deal sooner rather than later. I find it interesting that I have to explain this to an SEC official.
The second concern speculates that subscription warrants will have \"negligible value\" without any basis or precedent and goes on to highlight shortcomings in the exchange's proposal on how to value them. Subscription warrants have option value that is based on the average expected return for taking a company public (18%), discounted over an average timeframe to reach a merger agreement (less than two years, not 10 years). These are sources of value based on date from previous IPOs and SPAC mergers that would necessarily give subscription warrants a positive and non-negligible value.
It is ironic that the SEC should speculate on the sources of value on such a financial instrument, as instruments with far less discernable value already trade on exchanges. How does the SEC value weekly options and warrants on pre-deal SPACs for example? What are their \"sources of value\" and information? Did the SEC require these same questions to be answered to approve these other instruments?
The third concern just builds on unreliable assumptions from the first two to conclude that subscription warrants would be easy to manipulate with little upfront cost. I established why subscription warrants necessarily have positive, non-negligible value. This, in addition to the exchange's proposed minimum market cap rule, means that this concern is also without merit.
The fourth concern ignores what is plainly stated in the proposed rule change again by contemplating that if a minimum of 1,100,000 subscription warrants are listed that they cannot trade at the $13 price required to maintain the minimum market cap. If there are only 1.1m subscription warrants listed, their underlying common stock would have to be capitalized at a price of $181.82 per share ($200 million per the proposed rule change itself). That's more than enough for the subscription warrants to have an option value far higher than $13 each (almost $27 each using my valuation method from above). This is not a legitimate concern.
The fifth concern is that the SEC, which itself is the registrar of securities (and has already received the registration statement for the first subscription warrants proposed through this rule change) wants the exchange to tell it what the registration requirements would be for the subscription warrants and the underlying common stock into which they become exercisable. The SEC already brought up a comment (submitted by William Ackman Pershing Square) that were submitted previously and go over this exact topic. Ultimately it is the SEC's job to integrate this new instrument into its existing registration framework. This is not the exchange's responsibility, but Im sure they can offer input.
The sixth concern - that the rule change may be subject to the 1940 Investment Company Act - has zero explanation and seems to be in direct collaboration with recent litigation filed against the same SPAC (PSTH) attempting to return capital to shareholders via this rule change. The subscription warrants are not backed by cash in trust so no cash is invested into anything. Like all the other concerns, this one also makes no sense unless it and all the others are part of a wider effort along with the PSTH lawsuit.
It is widely known that investment banks control the market for IPOs and spend billions on lobbying to retain dominance in that market as well as others. The SEC just hired William Birdthistle who tweeted favorably about the PSTH lawsuit and has a history of working closely with John Morley (one of the two professors behind the lawsuit). That action, all these baseless concerns, and especially the last concern about the 1940 Investment Company Act out the SEC as a tool of investment banking special interests. This shameful conspiracy against Americans is to the detriment of market competitiveness and efficiency, and thereby harm to public interest and public investors.