CFA Institute calls for tougher disclosure rules for Spac sponsors

The professional body for the investment industry is urging regulators to toughen disclosure requirements for Spac sponsors in an effort to make the blank-cheque companies more transparent.

The CFA Institute is recommending that Spac sponsors fully disclose any affiliations with investors and target companies, as well as the existence of side deals with anchor or Pipe investors. The recommendations come in a report soon to be published and seen by the FT.

Improved sponsor disclosures are one of seven recommendations made by the organisation that is best known for overseeing the popular tests to become a chartered financial analyst, and comes after the SEC outlined sweeping reforms of Spacs in March. The CFA’s recommendation regarding sponsors goes further than the regulator’s proposals by urging more detailed information from Spac executives.

Amy Borrus, executive director of the Council of Institutional Investors and a member of the CFA’s Spac working group, said that enhanced disclosures are important “because of the opacity of so many Spacs and the potential for conflicts of interest”. 

“There’s a lot of detail investors need that they don’t get from Spacs now,” she added.

Column chart of  showing Spacs are struggling to get traction

The CFA is also urging the regulator to examine whether further rules are needed to tackle Spac insider trading. “Of particular concern is the high potential for rumour and ‘priming the pump’ type communications on various social media channels,” the report said.

Special purpose acquisition companies soared in popularity at the peak of the coronavirus pandemic and became Wall Street’s most sought-after investment product. Sponsors raise money from investors and publicly list the vehicles as a cash shell before searching for a private company to take public through a merger.

The Spac boom has since fizzled out as investors have soured on the investment vehicles after a string of scandals, poorly performing deals and heightened regulatory scrutiny. Global market volatility caused by rising interest rates and the war in Ukraine has also led investors to pivot away from the growth companies that are typically listed via a Spac merger.

More Spac listings were withdrawn in the past two months than there were new listings, according to Dealogic data, showing how sharply the investment vehicles have fallen out of favour.

The crucial Pipe financing market has also dried up and dealmakers have been forced to sweeten the terms on offer or source more expensive financing. Pipes, or private investment in public equity, help raise extra funding and provide a stamp of approval for companies in Spac mergers.

The SEC’s proposed reforms, which were outlined in March, include stripping Spacs of legal safeguards that have allowed sponsors to present rosy revenue projections to potential investors and require banks that underwrite deals to be potentially liable for misstatements. The proposals are up for public comment, after which the regulator will decide whether to enact them.

“Sponsors are frequently making side deals to induce some hedge funds not to redeem, or giving discounted shares to Pipe investors,” said Jay Ritter, Cordell professor of finance at the University of Florida and a working group member.

“Those types of side payments aren’t always transparent and I definitely am supportive of the notion that there ought to be more disclosure there,” he added.

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