In our previous posts, we’ve examined the Securities and Exchange Commission’s (SEC) increased enforcement actions against what are called “special purpose acquisition companies” (SPACs). In our final post for the SPAC series, we’ll examine other issues in recent SEC enforcement actions, and some SPAC-related rules the SEC plans to implement.
Misleading And Defrauding Investors
Just as the agency wants to prevent fraud in other types of investments, the SEC is also concerned about fraud in the SPAC context. This applies equally to fraud perpetrated by the SPAC and the potential targets that a SPAC would acquire.
For example, the first major SPAC-related case brought by the SEC was against a SPAC called Stable Road Acquisition Company; Stable Road’s sponsor and CEO; the SPAC’s proposed merger target, Momentus Inc.; and Momentus’ CEO.
The SEC charged that Momentus, an early-stage space transformation company, had falsely represented to Stable Road and potential investors that it had successfully tested its technology when it had not. Momentus also misrepresented its ability to obtain the national security approvals it would need before it could commence operations.
Rushing through its due diligence in a matter of weeks, Stable Road accepted Momentus’ claims of success at face value and brought them to its investors. Stable Road also included Momentus’ false statements in its SEC registration documents.
While the SEC recognized that Momentus had misled Stable Road, the agency held Stable Road accountable, too, for failing to meaningfully investigate Momentus’ technology prior to its acquisition. When announcing the enforcement action, SEC chair Gary Gensler explained,
“The fact that Momentus lied to Stable Road does not absolve Stable Road of its failure to undertake adequate due diligence to protect shareholders. Today’s actions will prevent the wrongdoers from benefitting at the expense of investors and help to better align the incentives of parties to a SPAC transaction with those of investors relying on truthful information to make investment decisions.”
For whistleblowers, there are two takeaways from the Stable Road case: First, the SEC is receptive to tips relating to any false representations a SPAC makes to investors about its plans, its management of investor funds, and the like. Second, the SEC also wants to know about situations where a SPAC failed to investigate the claims made by potential targets of an acquisition.
Disclosure And Compliance Issues
The SEC is bringing enforcement actions relating to a number of compliance-related issues, such as failure to disclose conflicts of interest between SPAC sponsors, private funds, and target companies. Notably, they’re initiating actions against investment advisers who have willfully misled investors as well.
Beyond that, the SEC has also brought charges against investment advisers who neglected to administer required compliance policies. The SEC expects registered investment advisors to comply with the requirements of section 206(A) of the Advisers Act, even when they’re working on a SPAC. Investment advisers working on SPACs still need to adhere to the policies and procedures that protect investors, including the reasonable disclosure of conflicts.
In other words, even if a SPAC has disclosure exemptions, the advisers working on SPAC-related transactions do not. They must meet the same standards for disclosure they normally would with any other type of investment.
Accordingly, if staff or investors are aware of investment advisers who aren’t meeting the compliance requirements for a SPAC, the SEC wants to hear about it.
New Rules for SPACs
Given the concerns about SPACs’ lack of transparency, the SEC has proposed new rules requiring the companies to disclose more about their structure and dealings. The big picture is that SPACs will become more like traditional organizations that use shell companies for the public registration filings for initial public offerings.
Some of the proposed major changes include:
- Requiring enhanced disclosures regarding SPAC sponsors, conflicts of interest, and dilution
- Revising relevant securities laws to end the liability safe harbor for SPACs when it comes to the forward-looking statements (e.g., the accuracy of projections)
- Requiring additional disclosures on de-SPAC transactions, including those relating to the fairness of SPAC investors
- Requiring that, for de-SPAC transactions, the private operating company is a co-registrant for the SPAC’s Form S-4 and Form F-4 filings
- Re-determining smaller companies’ reporting status within four days of a de-SPAC transaction
- In certain conditions, requiring that underwriters of SPAC initial public offerings are the underwriters in subsequent de-SPAC transactions
A Notable Difference In SPAC Cases Whistleblowers Should Be Aware Of
Because whistleblowing investigations and the resulting enforcement actions can be complex, the SEC typically has a 24-month timeline for its cases. That isn’t the case with SPAC enforcement, where the SEC works on an accelerated timeline. For instance, the SEC brought its action against Momentus only eight months after beginning its Order of Investigation.
Speed’s a factor in whistleblowing, too, since awards go to the first whistleblower who reports a tip.