Is the SEC Ready to Play Ball with SPACs?

If you’re a baseball card enthusiast who left your collection to gather dust in an attic somewhere, you may want to stop reading now. Earlier this year, a 1952 Mickey Mantle in mint condition sold at auction for $5.2 million. The original cost of the pack of Topps cards from which the Mantle card came: a nickel.

Investors in a SPAC sponsored by Mudrick Capital would like to see similar returns from their recently announced merger with Topps. The $1.3 billion deal will let the memorabilia company bypass the traditional IPO process and begin trading on the Nasdaq exchange. Regulators, however, seem to be getting anxious watching companies like Topps head straight to the big leagues.

The acting director of the Securities and Exchange Commission’s Division of Corporation Finance, John Coates, sounded off about SPACs last week. As Cydney Posner of Cooley noted, Coates’s comments pointed to the biggest question raised by the SPAC market frenzy: Shouldn’t we treat SPACs and IPOs the same?

You could say that SPACs are gaming the system more blatantly than the 2017 Houston Astros. These placeholder companies hold their own IPOs on the cheap, then use the proceeds to acquire private companies. The “mergers” between the blank-check companies and their acquisitions effectively turn private companies like Topps into public ones, but at a fraction of the cost and hassle required in a standard IPO. The SPAC and traditional IPO paths both end up on the public market, but one mandates stronger investor protections than the other.

For the moment, entrepreneurs and investors are riding the SPAC winning streak. The first quarter of 2021 alone witnessed roughly 300 SPACs hit U.S. stock exchanges and rake in a total of about $100 billion in the process. In perhaps the clearest sign yet of their utility in the capital markets, a SPAC was able to salvage the epic boondoggle of the WeWork offering, which infamously crashed in 2019 under the scrutiny of the traditional IPO process.

The SPAC explosion is adding urgency to critics’ claims that the SEC isn’t moving decisively enough to get a handle on the market. In the aptly titled column “SEC’s Stodgy SPAC Alerts Won’t Protect Investors,” Bloomberg’s Alexis Leondis exhorted the SEC and like-minded regulators to “bring their investor education tactics into the 21st century” when it comes to policing the investing vehicles. Leondis argues regulators also need to beef up oversight of brokers, give retailers more information and lay down the law vigorously in the enforcement realm.

For those who share Leondis’s views, Coates’s meditation on SPAC regulation and some guidance from the Division of Corporation Finance and the SEC’s chief accountant won’t be good enough. In remarks at a legal conference, Coates hinted at “some significant and yet undiscovered issues” with SPACs. Even then, he acknowledged that whatever those unspecified issues may be, they won’t kill off SPACs.

SPACs aren’t new, which makes it difficult for the SEC to take a wait-and-see approach here. And assuming SPACs are here to stay, pressure will probably only build for more vigorous SEC oversight.

Just ask the guy standing behind the catcher: In a game with high stakes, it’s never easy to be the umpire.