The emerging risks—and their possible remedies—of the Wall Street phenomenon known as SPACs were the subject of a recent NYU Law Forum sponsored by Latham & Watkins. Offering an alternative path to a public listing, special purpose acquisition companies (SPACs) are publicly traded shell corporations that seek out and merge with privately held target companies, and they have become wildly attractive as an investment in the past two years.
However, a recent paper coauthored by Assistant Professor of Law Michael Ohlrogge, “A Sober Look at SPACs,” has pointed to hidden costs, and has gained widespread attention from regulators and investors. Ohlrogge joined in the June 16 discussion along with Scott Kupor, managing partner of venture capital fund Andreessen Horowitz; Latham capital markets partner Rachel Sheridan; and Andrew Ross Sorkin, a columnist and editor at the New York Times and co-anchor of CNBC’s Squawk Box. Martin Lipton Professor of Law Edward Rock, the co-director of the Institute for Corporate Governance & Finance, served as moderator. Among other issues, the panelists discussed the adequacy and accuracy of disclosures, such as business projections, that are made to investors in SPAC transactions.
Selected quotes from the discussion:
Michael Ohlrogge: “I have a follow-up project looking at SPAC projections. I look at all the projections and stack mergers for the past seven years, and what I find is that even external stock analysts are much more wrong, they much more overestimate the performance of companies that have gone public through SPACs, than they have for companies that go public through traditional IPOs. The more aggressive the projections of the SPAC, the more the external analysts get things wrong. Also, the more expensive the SPAC is, the more aggressive its projections are, and the more wrong its projections are.”
Andew Ross Sorkin: “I do think that there is going to be a serious [regulatory] push over the long term around the projections issue, around the warrants issue, around the disclosure around sponsors and how long that they anticipate and plan to stay. [And] this is my own view: I actually think the sponsors have done a tremendous disservice to themselves, to the industry, and to the SPAC movement by not moving voluntarily on their own to make these disclosures and documents clearer.”
Rachel Sheridan: “To the extent that the disclosure is not consistent or accurate or sufficient, I think that’s worth fixing.… I do see glimmers of that in terms of SPACs seeking fairness opinions—whether that’s really sufficient or worth the time and effort, I don’t know—but you do see SPACs pushing towards that. You see parties around SPAC transactions pushing for additional diligence and more level of certainty than they have before. All of those things I think are the right approach.”
Scott Kupor: “I think the main thing that the SEC should do is just lay out exactly what the disclosure regime should be. And I think if they did that, then I think the market would react to it, and we’d figure out whether there are still active investors who want to do this SPAC transaction with potential liability that accrues to it and with a more plain-English disclosure regime.”
Watch video of their discussion:
Posted August 25, 2021