SPACs, once red hot topping the traditional IPO market, have dimmed in recent months as the Securities and Exchange Commission has proposed new rules that may make the financing vehicle less viable. Today, the most prominent investment bank in the US, Goldman Sachs (NYSE:GS), has revealed it is “scaling back” its SPAC business.
SPACs, or special purpose acquisition companies, streamline the IPO process. A SPAC company is formed and completes an IPO to raise money for a future acquisition. Typically, there is a time limit as to how long a SPAC has to identify a suitable target – usually one year. If a target firm is not identified, the money is given back to investors. If one is selected, there is a de-SPAC process where a deal is completed taking a company public in the process. A good example in the Fintech space is SoFi.
The proposed new rules for SPACs were released earlier this year and can be viewed here.
While many SPAC industry insiders believe certain changes can be made to improve the vehicle, many see the proposed rules as taking things too far. At the time the new rules were revealed, SEC Commissioner Hester Peirce issued a statement, dissenting from the proposed rule change saying, “the proposal – rather than simply mandating sensible disclosures around SPACs and de-SPACs, something I would have supported – seems designed to stop SPACs in their tracks. The proposal does not stop there; it also makes a lot of sweeping interpretations of the law that are not limited in effect to the SPAC context.”
Critics of SPACs point to the high returns sponsors gain and the overall performance of the firms once the SPAC deal is completed.
Speaking with CNBC, a Goldman spokesperson, stated:
“We are reducing our involvement in the SPAC business in response to the changed regulatory environment.”
Reuters reported that Goldman has decided to halt working on new SPAC issuance.
Some industry insiders have criticized the SEC’s approach to SPACs as being tone-deaf to its mission of enabling capital formation. Instead of killing SPACs, they should be adjusted to make them a better path for capital formation. Many firms that use SPACs are young and still developing and in need of additional capital to grow – unlike traditional IPOs that are more of an exit vehicle for insiders to cash in their gains.
As private markets have grown more effective and less costly, traditional IPOs have declined. In 2021, SPACs reinvigorated a moribund IPO market. If the language of the rule changes stands, the IPO market may sink once again.
