The Securities and Exchange Commission announced on March 30 that it is proposing disclosure rules for special-purpose acquisition companies, which are also known as SPACs.

A SPAC is a publicly-traded company with no commercial operations. It is created for the sole purpose of acquiring or merging with an existing company to raise capital.

Some examples of SPACs include Soaring Eagle Acquisition Corp., which is valued at $1.7 billion, and Altimar Acquisition Corp., which is valued at $275 million.

They are often referred to as “blank check” companies. They have become increasingly famous on Wall Street in 2020 and 2021, and account for many public offerings.

Their rise to fame aligning with COVID-19 is no coincidence. With interest rates being low, borrowing money was cheap and incentivized many people to invest in SPACs.

They have become as popular as they are today since it is a cheap way of raising money, and allows their sponsors to end up gaining financially.

Additionally, many prefer SPACs over initial public offerings, or IPOs, because they require a much easier and less time-consuming process.

Last year, SPACs raised more than $160 billion, more than the previous pandemic year, which raised $83 billion.

With such astronomical growth, SPACs continue to push boundaries at the expense of the investor, especially after seeing the extensive appeal to it of IPOs.

Something to note when comparing the two, the pricing of IPOs is based on historical financial records, whereas the SPACs provide forward-looking financial statements to support their valuation. This is the core of all issues surrounding SPACs and the SEC’s involvement.

The current SPAC rules are not heavily regulated and allow a private company access to everyday investors without providing the timely disclosures that an IPO would require. Additionally, a company can make soaring forecasts about its business prospects, something which is prohibited by an IPO.

Current rules also allow people running SPACs to multiply their initial investment, even if their companies struggle and shareholders lose money.

Investors in struggling firms inflate their business outlooks for other firms they are looking to acquire.

Another issue that annoyed investors and was behind the SEC’s push for tougher regulations was the sponsors taking promotions and a founder’s share of 20%.

In one of the biggest attempts to take a hold on SPACs, SEC Chair Gary Gensler said no more to this leniency and wants to impose more disclosures and give those who suffered from SPACs a sense of protection.

The implementation of the SEC rules would make it more difficult for SPACs to raise money from investors and execute mergers. The SEC aims to form these rules to reduce information advantages SPAC insiders have over investors, demand more disclosure to avoid conflict of interests and tighten rules.

Under the new rules, SPACs will be required to disclose information about their sponsors’ compensation and the dilution that shareholders can suffer if an acquisition is completed. There will be limited types of financial statements that shell companies can make for potential business combinations and their merger targets.

Critics have not taken this decision lightly and see it as a threat to their existence. SEC Commissioner Hester Peirce voted against it, saying it is hindering SPACs growth instead of asking for appropriate disclosures.

This was made to create a fairer system and address issues with SPACs, specifically in regard to the Private Securities Litigation Reform Act. The adoption of such rules allows SPACs to follow similar regulations to IPOs and have due diligence for IPOs.

The issue with these SPACs is that investors are betting on unrealistic growth forecasts and future promises to get more investors more to go through deals, but investors tout that these projections are often misleading. These extravagant projections and growing startups are things that attract investors to a lot of capital.

Public comments will be open for 60 days following the publication of the proposal on the SEC’s website or 30 days following the Federal Register, depending on which one is longer.

More regulation is bound to bring fairer outcomes for everybody, but in this case, something to watch out for is the future loopholes that will be created to attract unfair gains.