25 January 2024

SPACs Face Strict New Due Diligence Bar Under Bold SEC Actions

In January, the SEC unveiled major rules to strengthen investor guardrails around SPAC transactions. The rules aim to enhance transparency, accountability, and disclosure standards.

Governance and compliance teams must prepare firms for critical new compliance changes. The changes enable fairer, more trustworthy deals. They also maintain the speed advantages.

These are the five biggest takeaways GRC professionals need to be aware of.

Bigger transparency push

The SEC’s new rules aim to crack down on what Commissioner Caroline Crenshaw called “gaps” that let sponsors and other insiders make money at the expense of retail investors. This includes stepping up disclosure requirements around potential conflicts of interest. It also involves sponsor pay plans tied to post-merger performance. And it involves how infused cash actually gets utilized. Governance teams will need to guide businesses in fully unpacking the financial intricacies behind these special purpose deals.

Tougher vetting requirements

Target companies previously evaded accountability for claims made to investors during the SPAC process. But now they must sign registration statements as legal co-registrants. This creates parity with traditional IPO liability. This increases the need for governance professionals to review deal projections and details carefully.

Curbing projection hype

All financial projections must now lay out their underlying assumptions and have robust proof available when audited. This makes it easier to collect and analyze documents and it helps governance teams ensure that leadership’s predictions are believable.

Stricter data rules

The SEC will now make SPACs tag and format disclosures using XBRL technology. This is a bid to ease public company reporting analysis. This data structuring mandate hands governance leaders another ball to juggle. It requires revamps to data architecture, collection processes, and personnel literacy. The costs are real but so are the transparency benefits.

SPAC safeguards align with IPOs

After these changes, SPAC user protections will broadly equal those governing traditional public debuts. Imagine that legal protections are now reduced for projecting rapid growth. For example, once-protected merger targets now face liability like IPOs. As rulebooks and penalties align, governance teams must increase their diligence and reporting rigor in this new era.

The bottom line is that these amendments signal regulators closing loopholes. The loopholes allowed excess speculation and insider dealing to spread. Compliance lifts are real. Increased integrity and unmatched speed-to-market advantages can make SPACs a viable capital strategy under the right governance conditions.

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