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The Securities and Exchange Commission has been warning investors and corporate executives of the dangers of special-purpose acquisition companies, or shell companies that raise investor funds later used to merge with a private company and transform it into a public entity.
The latest warning came from John Coates, acting director of the SEC’s corporate-finance division, who warned executives that misinformation about the benefits of going public through a SPAC transaction has been spreading in the media and elsewhere.
“Some — but far from all — practitioners and commentators have claimed that an advantage of SPACs over traditional IPOs is lesser securities-law liability exposure for targets and the public company itself,” Coates said, citing comments made by Chamath Palihapitiya, the billionaire CEO of the investment firm Social Capital and chairman of Virgin Galactic Holdings Inc.
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In a recent YouTube interview, Palihapitiya asserted that in the case of a traditional IPO “you can’t show a [financial] forecast and you can’t talk about the future of how you want to do things — you’re just not allowed.” While public companies are protected from lawsuits involving forward-looking statements through a safe-harbor law passed by Congress in 1995, it doesn’t apply to companies that are in the process of going public.
“Because the SPAC is a merger of companies, you’re all of a sudden allowed to talk about the future,” Palihapitiya added. “When you do that, you have a better chance of being more fully valued.”
Coates warned that this advice could be misleading, noting that the safe-harbor provision doesn’t protect any company from enforcement actions brought by the SEC, but only from private litigation. Furthermore, the law doesn’t protect companies that make false or misleading statements, such as giving an incomplete set of projections of company performance.
“Despite all of this, it may still be thought that the [safe-harbor law] offers something for SPACs not available to conventional IPOs,” Coates said, going on to note that this question has never actually been tested in courts.
Coates said that the law does not define what an initial public offering means and that courts may very well interpret it such that a company that goes through a SPAC transaction could be excluded from safe-harbor protection just as if it were a private company seeking to sell shares to the public.
“All involved in promoting, advising, processing and investing in SPACs should understand the limits on any alleged liability difference between SPACs and conventional IPOs,” Coates warned. “Simply put, any such asserted difference seems uncertain at best.”
