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SPACs are entities that raise cash from public investors and then use the money to buy companies. They bill themselves as acquisition vehicles, though the deals have traits of initial public offerings. In reality the regulatory requirements don’t strictly adhere to either.

The U.S. Securities and Exchange Commission released a statement on how targets of special purpose acquisition companies use projections in deals. That’s a start. But more and clearer disclosures on structure, price, and management goodies are needed. Then the agency has guardrails to punish rule breakers with fines. The SEC could start with itself. It is the first and most important vetting source in an IPO. Prospectuses go through several rounds of comments and companies are often required to offer more disclosure based on idiosyncratic parts of their business. SPACs are starting to go through a similar vetting process. The agency could also require investment banks to provide an important check either by giving a fairness opinion on valuation and financial data, including projections, or by conducting due diligence on target companies. And managers should be required to clearly lay out how much money they will make on a transaction based at different valuations, so investors can make their own assessment about whether they are getting a fair shake.

SPACs are different because the companies they buy are private and many disclosures in M&A deals are meant to protect public investors. Still, large pay-outs to managers encourage SPACs to buy companies that may not be fit for the public market, and scant information can allow for back-door dealing. With more than 400 SPACs hunting for deals, monitoring transactions more closely fits squarely within the SEC mandate to protect investors. SPACs have often said they were protected because companies with established filings have “safe harbour” provisions, as part of the Private Securities Litigation Reform Act of 1995, and blank check companies typically have several quarters of filings before finding a deal. However, The SEC clarified this assumption, saying companies bought by SPACs “have no more of a track record” than private companies doing IPOs. SPAC seems to have rocky road ahead as SEC started scrutinising every aspect and Penalising too.

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