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By Chris Prentice
WASHINGTON (Reuters) – The U.S. securities regulator on Wednesday will unveil a proposal to tighten its rules on special purpose acquisition companies (SPACs) after a frenzy of deals in 2020 and early 2021 sparked concerns some investors are getting a raw deal.
Wall Street’s biggest gold rush of recent years, SPACs are shell companies that raise funds through a listing to acquire a private company with the purpose of taking it public, allowing such targets to sidestep the stiffer regulatory scrutiny of a traditional initial public offering.
Over the past year, the SEC has been scrutinizing these deals amid worries over inadequate disclosures, lofty revenue projections, potential fee conflicts and accounting issues, according to Reuters’ reports and statements by public officials.
Reuters also reported that the SEC was considering new guidance to rein in SPACs’ growth projections.
SPAC sponsors say the projections are important for investors, especially when targets are unprofitable startups, but investor advocates say they are frequently wildly optimistic or misleading.
In addition, the SEC is considering guidance aimed at clarifying when a key liability protection for such forward-looking statements applies to SPACs, Reuters reported.
Market participants expect Wednesday’s rule will address some of these issues, although Reuters could not ascertain more details. Attorneys expect the agency may also consider subjecting some SPACs to investment company fiduciary duty rules, which require disclosure of conflicts of interest.
The U.S. SPAC market experienced a wild ride in 2021, with an explosion in such deals during the first half of the year quickly cooling off in the second half as the SEC cracked down and many deals performed badly.
All told, 604 SPACs raised $144 billion in 2021, according to data from Renaissance Capital.
Last modified: April 6, 2022