Wedding Finance

Gensler on PSPCs: Treating Cases the Same | Cooley LLP

What could Aristotle have to say about PSPCs? In remarks Thursday to the Healthy Markets Association, SEC Chairman Gary Gensler shared his thoughts on SPAC regulation with a theme drawn from antiquity: Aristotle’s maxim that we should “treat like such cases ”. This concept, according to Gensler, should apply as finance evolves in response to new technologies and new business models. Take PSPC, for example, a type of transaction that, while not entirely new, has really “taken off in the last couple of years.” A PSPC, he said, is really an alternative method of conducting an IPO. The question that Gensler addresses in his remarks is how “this competitive market innovation [should] be dealt with in our public policy framework ”, in effect, giving us a glimpse of what we might see in PSPC’s rule-making, perhaps next year.

According to Gensler, in 2021 there were 181 PSPC target IPOs, or de-PSPC transactions, for a total transaction value of $ 370 billion, a substantial increase from just 26 PSPC target IPOs in 2019. Considering that this increase in PSPC activity, “which principles and tools do we use to ensure that similar activities are treated the same?”

Regarding principles, Gensler points out three: leveling out information asymmetries; guarding against misleading information and fraud; and mitigate conflicts between parties who may have different incentives. To address these issues, Gensler highlights several policy tools for public offerings that were enacted in the 1930s but remain essential, including the need to provide full and fair disclosure in a timely manner, prohibiting the use of sales tactics. to “condition the market” before the required disclosure reaches investors, by imposing obligations on various gatekeepers (such as auditors, brokers and underwriters) “to stand behind and be accountable for fundamental aspects of their job, ”and creating the SEC to serve as a“ federal cop on the beat ”. “

In the context of PSPC, Gensler believes that a de-PSPC transaction is functionally “akin to a traditional IPO”. If we are to treat cases the same, then “investors deserve the protections they get from traditional IPOs.” Yet Gensler is concerned that, whether at the time of PSPC’s initial IPO with a blank check or the merger of-PSPC, information asymmetries, fraud and conflict are not sufficiently mitigated. and that PSPC investors do not receive “the protections they would get in traditional IPOs, with respect to disclosure, marketing practices and gatekeepers.”

For example, PSPCs can involve even more conflict than traditional IPOs, such as the conflict between investors who vote and then buy back their shares to withdraw them and those who remain during the transaction. Do they have the same incentives in the business? Could potentially misaligned incentives lead to enrichment of some parties to the detriment of others?

Gensler indicates that, “to reduce the potential for such asymmetries of information, conflicts and fraud,” he “asked staff for proposals for the Commission’s consideration on how to better align the legal treatment of SPACs and their participants with investor protections provided in other IPOs, with respect to disclosure, marketing practices and custodial obligations. (The SEC’s reg-flex agenda identifies 04/22 as the target date for the publication of a proposal on the PSPC regulation. (See this article from PubCo.))

Disclosure. Gensler argues that the level of disclosure can vary widely between different parties to the PSPC transaction. For example, according to Gensler, “investors in PIPE may have access to information that the public has not yet seen, at different times, and may purchase shares at a discount based on that information,” while “Retail investors may not get adequate information on how their stocks may be diluted throughout the different stages of a SPAC. Are retail investors well informed that the 20% of the equity that usually goes to PSPC sponsors if they complete a de-PSPC transaction “largely falls on the ‘leftovers’, not on those who cash in afterwards? the vote ” ? Gensler asked staff for recommendations for better disclosure “about the fees, projections, dilution, and conflicts that may exist at all stages of SPAC, and how investors can receive this information when they decide to ‘invest. [He has] also asked staff to consider clarifying disclosure obligations under existing rules. “

Marketing practices. Gensler suggests that, with slides and press releases available at the time of the announcement, and even celebrity mentions, “PSPC sponsors can prime the market without providing solid information to the public to back up their claims. Investors can make decisions based on incomplete information or just old hype. Staff recommendations for rule-making will likely include approaches to prevent inappropriate packaging of PSPC’s target market, such as requiring “more complete information when a target PSPC IPO is announced.”

Obligations of the guardian. Who are the custodians of the de-PSPC merger process? In traditional IPOs, investment banks are seen as the “guarantors”, but, Gensler reminds us, the law “has a broader view of who constitutes an underwriter.” Gensler is concerned that “some are attempting to use SPACs as a means of arbitrating between liability regimes. Many controllers functionally perform the same role as they would in a traditional IPO, but may not perform the due diligence we expect. Make no mistake about it: when it comes to liability, the SPAC does not provide a “free pass” for guards.

Quoting John Coates, then acting director of Corp Fin, Gensler reiterates Coates’ assertion that “[a]Any simple claim about reducing the liability exposure of PSPC participants is at best overestimated and at worst potentially misleading. As a result, it seems we can expect to see rules that seek to “better align incentives between supervisors and investors” and “meet the status of supervisory liability obligations”.

Cop on the beat. The Execution Division, according to Gensler, is the “cop on the go.” He notes here the Enforcement accusations brought in July against a SAVS, its sponsor, its CEO and the target of the merger and its CEO.

It should be noted that in the end, not only does Gensler believe that PSPC investors deserve the same protections as investors in traditional IPOs, but he may also hint at future recommendations, observing that “these innovations around SPAC target IPOs remind us that it can leave room for improvements in traditional IPOs as well.

[View source.]