At a meeting of the SEC Small Business Capital Formation Advisory Committee, SEC Commissioners considered the implications for retail investors of shifting trends in companies' pathways to going public, (i.e., by direct listings and special purpose acquisition companies ("SPACs") rather than traditional initial public offerings ("IPOs")).

In his remarks, SEC Chair Gary Gensler stated that improved disclosures and regulations can enhance competition in the SPAC market. Mr. Gensler noted that, after choosing a target company, SPACs typically raise additional capital through private investments in public equity ("PIPEs"), which give large institutions an opportunity to purchase shares at a discount. Mr. Gensler asserted that PIPE investments are an example of a structural component of SPACs that comes at the expense of retail investors' investments. Further, Mr. Gensler stated that issues arising from the structure of SPACs, including the structure of sponsor, investment bank and financial adviser fees, can be used to identify changes that should be made to traditional IPOs.

In separate remarks, SEC Commissioners Hester Peirce and Elad Roisman urged consideration of the expansion of the accredited investor definition to provide retail investors with better access to potentially lucrative investments. Ms. Peirce stressed that the SEC should explore proposals to expand the definition of accredited investors to allow eligibility through different types of certifications and criteria. Ms. Peirce expressed support for the SEC's issuance of temporary relief as to the financial statement review requirements under Regulation Crowdfunding, stating that the SEC should explore additional exemptions that can assist early-stage founders in regions with few sources of capital raising. Ms. Peirce expressed frustration at the SEC's "non-committal" responses during the May 2021 Small Business Forum as to the accredited investor definition and revisions to Regulation Crowdfunding.

Commentary

Chair Gensler's remarks are mostly critical of SPACs. He suggests that "small businesses considering going public via SPACs [must consider] whether it is the best approach for the target company" (as if the many firms choosing to go public in this way were making an ill-informed decision). On the other hand, he says that it is "worth considering what we have learned from SPACs and direct listings, and whether there are any changes that might be appropriate for traditional IPOs." If the SEC prefers that companies go public through traditional IPOs rather than through SPACs, the SEC should give greater consideration to reducing the burdens on traditional IPOs.  

Primary Sources

  1. SEC Agenda: Meeting of SEC's Small Business Capital Formation Advisory Committee: The Changing Dynamics Pre-IPO and Going Public
  2. SEC Statement, Gary Gensler: Prepared Remarks before the Small Business Capital Formation Advisory Committee
  3. SEC Statement, Hester Peirce: Remarks at SEC Small Business Capital Formation Advisory Committee Meeting
  4. SEC Statement, Elad Roisman: Remarks before the Small Business Capital Formation Advisory Committee Meeting

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