Inspecting papers

The boom in financings by special purpose acquisition companies (SPACs) may be largely over for now, but the possibility that their popularity will rise again when market conditions improve has led global securities regulators to consider investor protection guidelines.

The International Organization of Securities Commissions (IOSCO) published a report examining the SPAC phenomenon — shell companies that raise capital from investors with the promise that the money will be used to acquire an operating business. The report also reviews the efforts of regulators in different markets to address SPAC risks through traditional disclosure and gatekeeper obligations.

In 2021, the umbrella group of global regulators established a unit to share information and examine issues with SPACs, after a recent surge in listings “raised concerns for many IOSCO members about investor protection and market integrity.”

The group’s new report aims to help regulators reconsider and enhance their approach to regulating SPACs.

“While SPACs pose similar risks to investors as traditional IPOs, the complexity and uncertainty inherent in the SPAC structures raise a number of different risks,” the group said.

In particular, the risk of shareholder dilution in SPACs “is often both significant and uncertain,” IOSCO noted. When a SPAC identifies a takeover target, shareholders in the initial fundraising are typically diluted by the terms of the acquisition.

At the same time, there are also “widespread concerns about retail participation in SPACs,” it said, given that the inherent disadvantages of retail investors can be exacerbated when they are involved in a deal that involves a “blank cheque” company raising money and carrying out a dilutive acquisition.

And while the SPAC boom has seemingly subsided for the moment, there remains a “significant backlog” of SPACs that will have to be liquidated if the companies are unable to find appropriate targets to invest in. That possibility raises a spectrum of additional investor protection concerns, including issues of target selection, as well as the time and process required for liquidating failed SPACs and returning funds to investors.

While the SPAC structure raises certain unique investor protection risks, the regulators also conclude that there’s no “one size fits all” approach to addressing these risks.

“Markets and regulations are still evolving, and it is too early to assess what the most effective approaches are to regulating SPACs,” it said.

That said, the report details a series of issues for regulators to consider, and possible approaches to enhancing SPAC regulation.

“This toolkit is intended to support or guide regulators as they review, develop, align or improve their SPAC framework, as well as to help them identify potential risks,” IOSCO said in a release accompanying the report.

“The SPAC boom of the last couple of years raised a host of issues related to investor protection and fair, orderly and efficient markets. While the boom may be over, it is important that we now take stock of whether there are any lessons to be learnt from the recent experiences with SPACs,” said Jean-Paul Servais, chair of the IOSCO board and leader of its SPAC initiative, and chairman of Belgium’s Financial Services and Markets Authority, in a release.

Additionally, IOSCO said it’s now turning its attention to the regulation of the markets for raising capital and listing securities generally.

“SPACs are just a small part of the primary markets, and this work has come at a time when the functioning of primary markets more generally merits closer monitoring,” the group noted. As a result, IOSCO’s board has decided to transform its SPAC unit into its new “primary market” unit to look at the broader environment for listing companies and raising capital.