Two pieces of legislation aimed at imposing additional regulations on special purpose acquisition companies (“SPACs”) were recently introduced in the US House of Representatives. H.R. 5910, the “Holding SPACs Accountable Act of 2021,” sponsored by Rep. Michael San Nicolas (D-GU), and H.R. 5913, the “Protecting Investors from Excessive SPACs Fees Act of 2021,” sponsored by Rep. Brad Sherman (D-CA), were both introduced on November 9, 2021 and subsequently referred to the House Committee on Financial Services (the “Committee”). On November 16, after a full committee markup, H.R. 5910 and H.R. 5913 passed the Committee and were ordered reported by a vote of 27-23 and 29-23, respectively.
H.R. 5910 proposes to amend the securities laws to exclude all SPACs from the safe harbor for forward-looking statements (the “Safe Harbor”). Currently, only forward-looking statements made in connection with the offering of securities by a blank check company are excluded from the Safe Harbor. The Securities Act of 1933 (the “Securities Act”) defines a blank check company as “a development stage company that has no specific business plan or purpose or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies, or other entity or person” that issues “penny stock.” The House bill would amend Section 27A of the Securities Act and Section 21E of the Exchange Act to replace the term “blank check company” with “a development stage company that has no specific business plan or purpose or has indicated that its business plan is to acquire or merge with an unidentified company, entity, or person.” Without reference to issuing penny stocks, H.R. 5910 would exclude all SPACs from the Safe Harbor, not just SPACs issuing penny stock.
In May 2021, the Committee circulated a draft version of H.R. 5910 in advance of its hearing, entitled “Going Public: SPACs, Direct Listings, Public Offerings, and the Need for Investor Protections.”
H.R. 5913 proposes to amend the Investment Advisers Act of 1940 (the “‘40 Act”) and the Exchange Act, to prevent investment advisers, as defined by the ‘40 Act, and brokers and registered representatives of brokers, as defined by Exchange Act, from recommending SPAC securities to a non-accredited investor unless the SPAC’s promote or other economic compensation is less than 5% or the SPAC makes certain disclosures mandated by the Securities and Exchange Commission (the “Commission”). The legislation would compel the Commission to promulgate a rule requiring the disclosure by SPACs of compensation arrangements, such as a promote, granted to the sponsor of the SPAC when the arrangement would lead to dilutive effects affecting investors in the SPAC. The dilutive effects of the awards of promotes have been widely criticized.
In April 2021, the first SPAC-focused legislation introduced, S. 1405, the “Sponsor Promote and Compensation (SPAC) Act,” attempted to address the issue of dilutive effects of the compensation structures of SPACs through enhanced disclosure and transparency. The Senate bill was referred to the Committee on Banking, Housing, and Urban Affairs in April, but has not advanced since.
SEC Chair Gary Gensler testified for the second time as Chair before the Committee in early October. In his prepared remarks, due to certain fees and potential conflicts inherent within SPAC structures, Chair Gensler asked the Staff of the Commission for recommendations relating to enhancing disclosures by SPACs so investors can better understand the associated costs and risks. When questioned about timing a proposed rule, Chair Gensler mentioned he had received preliminary recommendations on enhanced SPAC disclosure but was not prepared to confirm a timeframe.
In her opening statement during the November 16 full committee markup, Committee Chairwoman, Rep. Maxine Waters (D-CA), highlighted that “SPACs…can go public and avoid key IPO requirements,” which, she continued, exposes retail investors to “real risks.” As SPACs continue to search for initial business combination targets, we expect regulatory and legislative efforts to try to address these and other perceived issues associated with the popular IPO alternative.