SEC clamp down threatens to burst SPAC bubble

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The SPAC bubble could be burst by the Securities and Exchange Commission (SEC) which is reportedly mulling new rules to put some constraints on so-called blank-check companies.

Possible measures considered by the SEC, according to a Reuters report, could include changes in accounting rules, how ‘safe harbor’ rules are applied and scrutiny over the growth projections used in marketing.

Stock market floats via Special Purpose Acquisition Companies (SPACs) surged in the early months of 2021, with the value of deals in the first four months equating to all of those seen in 2020.

Significantly, the method that sees cash-shells floated prior to a process to acquire a business are favoured by deal makers because it is lighter on regulation and legal costs compared to a traditional IPO.

It basically means its cheaper and easier to buy a company into a stock market listed cash shell than bring a company to market with an IPO share shale.

The Reuters report said that the SEC intends to provide more clarity on its guidance for SPACs and it also highlighted recent comments by SEC director of corporate finance who said whilst there are significant issues with some SPAC deals he has a neutral position, and is neither pro- nor anti-SPAC.

SPACs are very big business, albeit mostly in the United States, though this month saw the largest one yet surface in Asia as Grab – the south-east Asian rival to Uber – snapped up in a deal worth US$40bn.

Other notable SPAC deals have included Hims and Hers, a start-up that began selling Viagra online before expanding into anti-baldness cream and female wellness, fantasy sports betting start-up DraftKings and Virgin Galactic.

And this week, Betway owner Super Group has been targeted in a SPAC deal valuing the online betting group at around US$5bn.

In 2021 to date more than US$75bn of capital has been invested into SPACs with the tally reaching close to the entire funding last year already.

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