PSPCs on the rise ‘at the expense of retail investors’ and regulators should take these 5 steps to fix the market, think tanks say

• In February, two financial reform think tanks sent a letter to Congress detailing concerns about the PSPC boom.
• The letter says the surging market is “fueled by conflicts of interest and compensation for company insiders at the expense of retail investors.”
• He proposed five recommendations to Congress and financial regulators “to better protect retail investors.”
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As the PSPC craze continues into 2021, attracting big-name investors and pop culture icons, some believe retail investors trying to cash in on the craze are getting a rough deal.

In February, Americans for Financial Reform and the Consumer Federation of America sent a letter to the House Financial Services Committee detailing concerns about the boom in special purpose acquisition companies.

The letter, addressed to President Maxine Waters, said the PSPC boom is “fueled by conflicts of interest and compensation to insider companies at the expense of retail investors.”

He also suggested an attempt by the sponsors and their goals “to end long-standing rules designed to promote fair and efficient markets.”

PSPCs have been around for decades, but they rose to prominence last year and into 2021, touted as a faster and cheaper alternative for companies to go public compared to the traditional IPO.

In the first two months of 2021 alone, 175 PSPCs went public according to data compiled by Goldman Sachs – about five trades per trading day. If this pace continues, the investment bank estimates that this year’s offerings will exceed the total number of SPACS in 2020 by the end of March.

The letter, written by Andrew Park of Americans for Financial Reform and Renee M. Jones of Boston College Law School, says PSPCs should be regulated.

The organizations offer five recommendations to Congress and financial regulators “to better protect retail investors.”

1. Modernize the definition of “blank check company”

Congress should reconsider the legislation that allowed the SEC to regulate blank check companies, and the term should not be limited to companies that issue “penny stock” offers. “Blank check companies” using larger vehicles can now bypass restrictions passed by Congress to protect investors from “misleading information, conflicts of interest and fraud.”

“Making an investment vehicle larger and attracting larger investment does not solve the problems inherent in marketing, selling and exchanging blank checks,” the letter said.

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2. Reduce the hype before the merger

SPAC sponsors, target companies and advisors are protected from liability for overly optimistic projections. This contrasts with traditional IPOs where unfounded financial projections are limited. Closing this loophole will help level the playing field, according to the letter, especially as SPAC’s sponsors “often boldly claim to investors that they will be able to generate billions in revenue in the near future.” .

3. Ensure appropriate liability of the underwriter

Liability should also extend to underwriters and financial advisers during the merger phase. Since PSPC subscribers receive more than half of their subscription fees at the end of the merger, the letter suggested that the subscribers should be the same for the entire PSPC offering.

Financial advisers should also be viewed as underwriters, the letter said. These changes will level the playing field between PSPCs and traditional IPOs.

4. Improved disclosures at the PSPC Offer and Merger stages.

Information about the PSPC merger should explicitly include the amount of cash PSPC is expected to hold immediately prior to the merger, the letter said. This includes side payments, sponsor compensation arrangements, PSPC investors, and PIPE investors.

The letter that this information often has to be reconstructed from various documents.

5. Study the risks and outcomes of PSPC mania

The letter recommends that the Securities and Exchange Commission collect data on SPACs and produce a report assessing average performance. The agency is also expected to investigate the categories of investors who “typically bear the brunt of PSPC post-merger losses.”

The letter says many of these investors are retail investors who “are often drawn to the publicity and hype about PSPC investments” and “are unlikely to be aware of the complexity of fee deals or the expected dilution that will eventually erode the value of their investments. ” The letter suggested that apps like Robinhood were playing a part in all of this hype.

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