Remarks Before the Healthy Markets Association Conference
Dec. 9, 2021
Thank you for the kind introduction, Ty [Gellasch]. It’s great to be with the Healthy Markets Association.
As is customary, I’d like to note that my views are my own, and I am not speaking on behalf of my fellow Commissioners or the staff.
I’d like to start by discussing an overarching principle I consider when thinking about public policy.
This principle has been around since at least antiquity. Aristotle captured it with his famous maxim: Treat like cases alike.
This was as true two thousand years ago as it is in two thousand twenty-one.
Finance is constantly evolving in response to new technologies and new business models. Such innovation can bring greater access, competition, and growth to our capital markets and our economy.
Our central question is this, though: When new vehicles and technologies come along, how do we continue to achieve our core public policy goals?
How do we ensure that like activities are treated alike?
Today, I’d like to discuss one such innovation. It relates to a method by which companies go public: special purpose acquisition companies, or SPACs. While not new — the first SPAC was filed in 2003 — SPACs really have taken off in the last couple of years.
Last year, Ty, you were quoted as saying that SPACs are “fraught with peril for investors.”
SPACs present an alternative method to go public from traditional IPOs. Unlike those conventional IPOs, however, there are two main stages in a SPAC. There also are more players competing for a piece of the pie than there are in traditional IPOs. There are a lot of moving parts, and a lot of novel aspects to these vehicles.
First, blank-check companies raise cash from the public through initial public offerings (IPOs). I call this step the “SPAC blank-check IPO.”
The number of SPAC blank-check IPOs has ballooned by nearly 10 times between 2019 and 2021. Further, those SPAC blank-check IPOs now account for more than three-fifths of all U.S. IPOs.
Typically, the blank-check company has up to two years to search for and merge with a target company.
Once SPAC sponsors find a target company, they often raise additional capital through transactions known as private investments in public equity, or “PIPEs.”
These deals give new investors — mostly large institutions — an opportunity to put money into the SPAC target IPO.
Then, through the merger, the target company goes public. If a deal is approved, the initial shareholders are provided a redemption right to cash out — redeeming at the blank-check IPO price.
Some call that second step, the merger process, the “de-SPAC.” I like to call it the “SPAC target IPO.”
In 2021, there were 181 such SPAC target IPOs, with a total deal value of $370 billion. This is up from just 26 SPAC target IPOs as recently as 2019.
As the figures show, many private companies now consider SPAC target IPOs as a competitive method to access the public markets.
How should this competitive market innovation be treated under our public policy framework?
If Aristotle were around, I think he’d say you shouldn’t be able to arbitrage the rules.
So, with regard to companies raising money from the public, which principles and tools do we use to ensure that like activities are treated alike?
Public Policy Principles
Let’s go back in time again — this time, about a century.
In the early 1900s, a Kansas banking regulator named Joseph Norman Dolley laid out some basic tenets. Depositors in his state were taking money out of the bank accounts to buy securities from bad-faith actors in Kansas, and many of these investors were getting flimflammed.
Thus, Mr. Dolley helped advocate for the first blue-sky laws in 1911. These laws required all securities to be registered with the state. Brokers who were selling these securities had to register, too.
A couple of decades later, in the depths of the Great Depression, the federal government decided it was time to provide investors with federal-level protections. Therefore, Congress and Franklin Delano Roosevelt crafted the Securities Act of 1933 and the Securities Exchange Act of 1934.
With these foundational laws, Mr. Dolley, Congress, and FDR addressed three core, interrelated principles.
First, leveling out information asymmetries.
Companies and managers have access to information that the buying public doesn’t necessarily have. Thus, one of Congress’s goals was to level out some of those information asymmetries.
Second, guarding against misleading information and fraud.
There’s a reason President Roosevelt called the ’33 Act the “Truth in Securities” law. To guard against fraud and abusive, high-pressure sales tactics, he thought it was important to have standards for how and when companies would provide important information to the public, and what the substance of that information would be.
Third, mitigating conflicts.
This is what economists might call “agency costs” — the idea that various parties to a deal, from management to brokers, may have different incentives than investors when it comes to buying and selling stock. These misaligned incentives and conflicts might enrich certain parties at the expense of others.
These principles addressed in the context of the 1930s all three parts of our mission: to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Building trust in our capital markets is as important to those raising money as it is to those investing their money.
Policy Tools for Public Offerings
What tools did Congress and FDR come up with to mitigate these concerns?
First, companies raising money from the public should provide full and fair disclosure to investors at the time they’re making their crucial decisions to invest.
This isn’t just about quality, quantity, and substance of disclosure, but also the timing.
Second, and relatedly, is standards around marketing practices. The idea is that parties to the transaction shouldn’t use sales tactics that would “condition the market” before the required disclosure reaches investors.
Third is gatekeeper obligations. The third parties involved in the sale of the securities — such as auditors, brokers, and underwriters — should have to stand behind and be responsible for basic aspects of their work. Thus, gatekeepers provide an essential function to police fraud and ensure the accuracy of disclosure to investors.
Fourth, of course, Congress also felt there needed to be a federal cop on the beat — the SEC — to help ensure that the rules are met.
This brings me back to SPACs. SPACs raise a number of questions, in my view.
Are SPAC investors — both at the time of the initial SPAC blank-check IPO and during the SPAC target IPO — benefiting from the protections they would get in traditional IPOs, with respect to disclosure, marketing practices, and gatekeepers?
In other words, are like cases being treated alike?
Currently, I believe the investing public may not be getting like protections between traditional IPOs and SPACs.
Further, are we mitigating the information asymmetries, fraud, and conflicts as best we can?
Due to the various moving parts and SPACs’ two-step structure, I believe these vehicles may have additional conflicts inherent to their structure.
There are conflicts between the investors who vote then cash out, and those who stay through the deal — what might be called “redeemers” and “remainers.”
Thus, to reduce the potential for such information asymmetries, conflicts, and fraud, I’ve asked staff for proposals for the Commission’s consideration around how to better align the legal treatment of SPACs and their participants with the investor protections provided in other IPOs, with respect to disclosure, marketing practices, and gatekeeper obligations.
There is inconsistent and differential disclosure among the various parties involved in SPACs transaction — both the SPAC blank-check IPO and the SPAC target IPO.
For example, PIPE investors may gain access to information the public hasn’t seen yet, at different times, and can buy discounted shares based upon that information. That’s among other benefits.
What’s more, retail investors may not be getting adequate information about how their shares can be diluted throughout the various stages of a SPAC.
For instance, SPAC sponsors generally get to pocket 20 percent of the equity — but only if they actually complete a deal later. This dilution largely falls on the “remainers,” not those who cash out after the vote.
Thus, I’ve asked staff to serve up recommendations about how investors might be better informed about the fees, projections, dilution, and conflicts that may exist during all stages of SPACs, and how investors can receive those disclosures at the time they’re deciding whether to invest. I’ve also asked staff to consider clarifying disclosure obligations under existing rules.
Next, I’d like to turn to marketing practices. SPAC target IPOs often are announced with a slide deck, a press release, and even celebrity endorsements. The value of SPAC shares can move dramatically based on incomplete information, long before a full disclosure document or proxy is filed.
Thus, SPAC sponsors may be priming the market without providing robust disclosures to the public to back up their claims. Investors may be making decisions based on incomplete information or just plain old hype.
It is essential that investors receive the information they need, when they need it, without misleading hype.
Therefore, I’ve asked staff to make recommendations around how to guard against what effectively may be improper conditioning of the SPAC target IPO market. This could, for example, include providing more complete information at the time that a SPAC target IPO is announced.
Next, as SPAC target IPOs occur through a merger, who’s performing the role of gatekeepers — potentially including directors, officers, SPAC sponsors, financial advisors, and accountants?
In traditional IPOs, issuers usually work with investment banks. Thus, a lot of people think the term “underwriters” solely refers to investment banks.
The law, though, takes a broader view of who constitutes an underwriter.
There may be some who attempt to use SPACs as a way to arbitrage liability regimes. Many gatekeepers carry out functionally the same role as they would in a traditional IPO but may not be performing the due diligence that we’ve come to expect.
Make no mistake: When it comes to liability, SPACs do not provide a “free pass” for gatekeepers.
As John Coates, then-Acting Director of the Division of Corporation Finance, said in March, “Any simple claim about reduced liability exposure for SPAC participants is overstated at best, and potentially seriously misleading at worst.”
Therefore, I’ve asked staff for recommendations about how we can better align incentives between gatekeepers and investors, and how we can address the status of gatekeepers’ liability obligations.
Cop on the Beat
As we evaluate these policy areas, our Division of Enforcement continues to be the cop on the beat to ensure that investors are being protected in the SPAC space. For example, we recently charged a SPAC, its proposed merger target, and others ahead of the deal in a case that highlighted the risks inherent to SPAC transactions. I’ve asked our Enforcement Division to continue to take all appropriate action, following the facts and the law, to protect investors in these vehicles.
Ultimately, I think it’s important to consider the economic drivers of SPACs.
Functionally, the SPAC target IPO is akin to a traditional IPO. Thus, investors deserve the protections they receive from traditional IPOs, with respect to information asymmetries, fraud, and conflicts, and when it comes to disclosure, marketing practices, and gatekeepers.
In keeping with our three-part mission, we are always thinking about ways to promote efficiency in traditional IPOs. I think that these innovations around SPAC target IPOs remind us that there may be room for improvements in traditional IPOs as well. Broadly, though, the ‘33 Act protections have stood the test of time.
We’re not in Kansas anymore…or for that matter, in Ancient Greece. And yet, as Aristotle might say, no matter when or where, like should be treated alike.
 See Benjamin Johnson and Richard Jordan, “Why Should Like Cases Be Decided Alike? A Formal Model of Aristotelian Justice” (March 1, 2017), available at https://scholar.princeton.edu/sites/default/files/benjohnson/files/like_cases.pdf.
 See “SPAC IPOs Surge,” available at https://www.gfmag.com/magazine/december-2020/spac-ipos-surge.
 See “Testimony Before the Subcommittee on Financial Services and General Government, U.S. House Appropriations Committee” (May 26, 2021), available at https://www.sec.gov/news/testimony/gensler-2021-05-26.
 See “Agency Rule List – Spring 2021,” available at https://www.reginfo.gov/public/do/eAgendaMain?operation=OPERATION_GET_AGENCY_RULE_LIST¤tPub=true&agencyCode=&showStage=active&agencyCd=3235&csrf_token=7CE97CC2D49C9B6B70868F7B2752E582C86F1945A4A46F34426C18AF1ABE101E611318F64B67159C3A36E7556BD0FB872C8F.
 See US SPACs Data Hub, available at https://www.whitecase.com/publications/insight/us-spacs-data-hub.
 See “Kansas Blue Sky Laws,” available at https://www.kshs.org/kansapedia/kansas-blue-sky-laws/18618.
 See “SPACs, IPOs and Liability Risk under the Securities Laws,” available at https://www.sec.gov/news/public-statement/spacs-ipos-liability-risk-under-securities-laws. Citations omitted. This staff statement, like all staff statements, has no legal force or effect; it does not alter or amend applicable law, and it creates no new or additional obligations for any person.
 See “SEC Charges SPAC, Sponsor, Merger Target, and CEOs for Misleading Disclosures Ahead of Proposed Business Combination” (July 13, 2021), available at https://www.sec.gov/news/press-release/2021-124.