CFA Institute Publishes In-Depth Report on SPACs

CFA Institute, the global association of investment professionals, today published an in-depth report on Special Purpose Acquisition Companies (SPAC) entitled, “The New Age of Special Purpose Acquisition Companies: What Investors Should Know.” In it, the report details how a SPAC works, discusses incentives and conflicts, covers the state of disclosures, and make seven pragmatic regulatory recommendations to further protections for SPAC investors.

“The rise of SPACs as a means for companies to go public aside from the traditional IPO process has been extraordinary,” said Paul Andrews, Managing Director, Research, Advocacy, and Standards at CFA Institute. “In this report, we take an in-depth look into SPACs and make concrete and actionable recommendations for US securities law changes to better protect SPAC investors.”

Among those specific recommendations:

• That the SEC conduct a full examination of trading on inside information and “gap trading” anomalies. The SEC staff should determine if additional guidance or rules are needed to address insider trading concerns or market manipulation risks unique to the de-SPAC process.
• That the SEC review the conflict-of-interest scenarios surrounding SPACs and provide further guidance on disclosure fairness and prominence around such activities. The SEC  should consider whether the nature of the SPAC merger and the presence of material, related-party conflicts should trigger the heightened disclosure requirements.
• Make adjustments to the Private Securities Litigation Reform Act “safe harbor” for forward-looking information as it relates to de-SPAC mergers.
• Establish an investor protection “warning label” that should accompany all required filings for both the initial SPAC IPO and subsequently updated for further details as to risks and conflicts associated with a proposed merger.
• New disclosure requirements for registration statements and merger proxy materials used in the SPAC de-SPAC process.

“SPACs have a distinct and complex structure,” said Andrews. “In this report, we recommend a pragmatic approach that would increase disclosures to benefit retail investors, while keeping SPACs as a flexible tool for companies to approach the public markets.”

In May 2021, CFA Institute created a new SPAC Working Group to examine and make recommendations regarding the surge in US public listings of SPACs and the implications for investor protection, corporate governance, and market integrity. This new report represents the product of that Working Group’s endeavors. CFA Institute thanks all the members of the Working Group for their input into this report and its recommendations.