Doug Ellenoff of Law Firm EGS, Shares 2023 Expectations for SPACs, Securities Crowdfunding and More

Doug Ellenoff, the managing partner of Ellenoff, Grossman, and Schole (EGS) – a Manhattan-based law firm, has been a supporter of innovation in financial services for many years now. A staunch proponent of the JOBS Act of 2012 before it became law, Ellenoff is a regular on Capitol Hill and an active investor in the Fintech sector including the backing of platforms providing online capital formation.  His law firm is also the top legal advisor when it comes to SPACs or Special Purpose Acquisition Companies – a sector of finance that recently boomed – only to slow as regulators incorporated new rules and the market cooled.

Ellenoff is also a legal advisor to the Association of Online Investment Platforms (AOIP), a group that advocates on behalf of securities crowdfunding platforms, promoting regulations and legislation that improve access to capital.

Recently, CI connected with Ellenoff to review the state of innovation in capital markets from his vantage point. We first asked him about SPACs and his expectations for the market in 2023. Proponents of SPACs see these blank check firms as an alternative path to becoming a publicly traded company – one that lower costs for the process. Ellenoff said he expects a slow, steady rehabilitation of both the SPAC IPO and Business Combination market.

“Without question, last year was very challenging from a capital markets, regulatory and litigation perspective.  The SEC proposed a new set of rules to address its concerns that will be finalized in April.  In addition, they tactically and for self-serving reasons caused unnecessary disruption in the market several times over ridiculous issues. Even if the final rules are approved with all of the most aggressive provisions, certainty is always better to operate within than the current unknowing,” said Ellenoff, adding that he remains optimistic that final rules may limit some of the more “aggressive proposals” that were “authoritatively questioned by the securities bar and legal organizations.”

“Keep in mind, though, that amidst this regulatory chaos, 100 private companies elected to go public through a SPAC versus only 25ish traditional IPOs.  So for perspective, it’s important to recognize that the capital markets clearly indicated that SPACs continue to serve a worthwhile purpose.  Going into this year, there are a few hundred fewer funded SPACs seeking acquisitions, and by September, we should be under 200, which I believe is a better number on balance versus 600 last year.”

It is a fact that companies are seeking to remain private for as long as possible, thus shrinking public markets; some observers believe the SPAC market can help mitigate this decline – one that has been fueled by policymakers taking a rule-upon-regulation approach rocketing costs higher for firms to become public. Ellenoff believes this is the case and that SPACs should be viewed as a positive, helping public markets.

He said that it is a “complete myth” that SPACs and SPAC business combination targets receive any less regulatory scrutiny than IPOs or other transactions in the public markets.

“Realistically, given the political lens that SPACs have been seen through the last couple of years, I’d suggest they’ve unfairly received an even greater review, and in some cases, unprecedented and unfair reviews.  Amusingly, when I testified before the House Financial Services Committee in 2019, the concern of the Democrats, in particular, was precisely the issue you are raising- to wit, why are private companies staying private longer, and how can we induce them to go public sooner?”

Ellenoff noted that the SPAC market in 2020 and 2021 created over 250 opportunities for entering public markets, and now those same politicians want answers on how to prevent this activity.

“My head is spinning, but CI’s observation remains correct- we have fewer than 1/2 the publicly- traded companies than we had 30 years ago, and we need to responsibly redress this issue. SPACs are one of the structures that are needed to grow our universe of public companies,” Ellenoff said.

we have fewer than 1/2 the publicly- traded companies than we had 30 years ago, and we need to responsibly redress this issue Click to Tweet

As some policymakers have concerns about SPACs, we asked Ellenoff what the SPAC industry could do to improve this market. He said that SPACs and SPAC sponsors need to consummate business combinations with private company targets that live up to their promises and have their publicly-traded securities increase in value.  While this seems very basic, the same holds true for both the SPAC industry as it does for IPOs, yet no one questions the viability of IPOs or Direct Listings, whose experiences are no better than SPACs during the past cycle.

“This isn’t a great marketing pitch but nonetheless is accurate, and neither regulators nor politicians care to acknowledge this reality since it doesn’t serve their narrative.  To have SPACs perform better, which I do believe will be achieved in 2023, deals need greater banking coverage and investor awareness and appetite. Additionally, we need to return to a less politically charged environment where the industry isn’t on the front pages of every business publication in the country and where sponsors and investors aren’t spooked to remain on the sidelines,” Ellenoff stated. He acknowledged that perhaps there were too many SPACs formed in the last few years but added that it was complicated by regulators and politicians that used the industry for their own purposes and didn’t improve on an industry that is an accepted form of going public (for 30 years by the SEC) and deserves more measured treatment.

Ellenoff said that every day he has discussions with bankers, sponsors, and investors as to how to improve the structure of SPACs … responding to both SEC and Delaware Court observations and resetting the program for improvised overall performance.

As public markets have declined, some believe that private markets are the new public markets, and JOBS Act exemptions have made it easier for issuers to raise capital online. Under Reg A+ and Reg CF, these exemptions accept all investors (and not just accredited ones as under Reg D).

the mistreatment of public companies generally, and #SPACs specifically, has highlighted to deal makers the need to remain private Click to Tweet

Ellenoff believes that the mistreatment of public companies generally, and SPACs specifically, has highlighted to deal makers the need to remain private, and for longer, ironically.

“All of the Alphabet Soup of Exemptions you’ve referenced have increasingly been discussed and utilized by entrepreneurs to save time, money, and aggravation.  As a proponent of crowdfunding, it makes complete sense to me, and I’m thrilled that a decade into these new pathways for raising capital they are being embraced in broad fashion with virtually none of the concerns and hesitation that once was so prevalent,”stated Ellenoff.  “Even regulators who were openly hostile to these changes to the securities laws aren’t sounding the alarms any longer.  The numbers speak for themselves in many ways, the results are in and entrepreneurs and investors appreciate the wisdom of online capital formation.”

As a long-time proponent of securities crowdfunding, we asked Ellenoff his thoughts on the JOBS Act 4.0 – a package of bills proposed during the last Congress that aim to improve access to capital for smaller firms. Ellenoff reflected upon his early days of promoting the first JOBS Act, sharing that pragmatically they needed to accept a “restricted” set of rules from “skeptical counterparties” otherwise, the market would have been at risk.

“If you look at the cap on Regulation Crowdfunding [Reg CF] today ($5,000,000), it’s where it was originally proposed and not at the $1,000,000 amount that began the industry in 2016.  It’s instructive since we knew in the early days that if the industry performed responsibly over time, we would demonstrate in the market what we had been communicating to regulators, that the online sale of securities for venture deals could be undertaken as responsibly and maybe more so, than traditional friends and family finance without increased litigation nor enforcement.  We did what we said we would do, and so did the market and regulators (light touch). Today that cap is $5,000,000.”

the current regulatory environment is not capital formation friendly Click to Tweet

Ellenoff lamented that the current regulatory environment is not capital formation friendly, stating that what has been achieved over the last decade could be rolled back or jeopardized.

“Thanks to Chair Patrick McHenry (NC) of the House Financial Services Committee, an early and persistent proponent of the JOBS Act, crowdfunding proposals and bills continue to be advanced in Congress.  His office continues to coordinate with the Association of Online Investment Platforms.  The AOIP has written on behalf of the industry seeking greater caps on investment, pre-emotion of blue sky laws for secondary trading, expanded definition of the accredited investor definition and liberalization of the use of SPVs.”

So Are policymakers doing enough to keep the engine of entrepreneurship going, fostering innovation? Should they be doing more?

More is always to be considered, debated, and done, explained Ellenoff.

“Regrettably, we are operating in an environment where the prevailing view is that it’s better to frustrate direct retail investor participation because they may lose their investment, even if they fully appreciate the risks, full disclosure has been made and there has been compliance with the securities laws.  In other words, as Commissioner [Hester] Peirce has recently written, regulators are supplanting their judgment for investors.  This isn’t the historical basis of the structure of our securities laws and, by design, curtails investment.”

regulators are supplanting their judgment for investors Click to Tweet

The messaging causes the earnest and hard-working staff at our regulators to re-interpret our securities laws more restrictively, Ellenoff said, which facilitates more enforcement actions and freezes entrepreneurial activity.

“Counsel advises more conservatively and the capital supply chain pauses.  The downstream consequences of wrong-minded policy have devastating and long-term consequences that are difficult to observe and unwind.  We are in such a period.”

While the US has made a lot of progress since the JOBS Act of 2012, many lessons have been learned Click to Tweet

While the US has made a lot of progress since the JOBS Act of 2012, many lessons have been learned. It matters who is in charge, and how they lead has consequences.

“How laws are interpreted isn’t agnostic. As proud as I am of the achievements of the online capital formation industry, I believe that while the last decade has served our country and entrepreneurship very well, it’s been hampered by too conservative a policy approach that needs to loosen the reigns and optimize the incredible intellectual and technological infrastructure that has already been built. Had the SEC caused the blockchain and crypto industry to utilize the crowdfunding infrastructure and treated those instruments as securities as was recognized after the ICO fiasco, investors and entrepreneurs would have been saved the pain that is being endured today, AND we as a country would have a regulated, safe and even bigger crypto ecosystem IMHO.”


Editors Note: Ellenoff will be testifying in front of the House Subcommittee on Capital Markets this week on February 8th at 2 PM on the topic of JOBS Act exemptions and removing barriers to access to capital.

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