Weinberg & Company

BEST PRACTICE Newsletter – May 2021

Congress Joins SPAC Scrutiny

A subcommittee of the House Financial Services Committee (HFSC) has scheduled a hearing that will investigate Special Purpose Acquisition Companies, while new legislation has been introduced in the Senate. This comes just a month after the SEC gave new guidance relating to certain warrants issued in SPAC deals. The number of SPAC filings plummeted to 10 in April, compared to 109 in March.

The virtual hearing to be held by the Subcommittee on Investor Protection, Entrepreneurship and Capital Markets is titled “Going Public: SPACs, Direct Listings, Public Offerings and the Need for Investor Protections.” It is scheduled for Monday, May 24 at Noon (Eastern), and is part of a comprehensive probe into initial public offerings, particularly SPACs, amid concern over financial transparency and investor protection. The HFSC is chaired by Congresswoman Maxine Waters (D-CA).

Since 2020, the number of SPAC filings has outpaced traditional IPOs. In just the first four months of 2021, SPAC Insider reports 318 SPAC deals valued at $102.3 billion were filed, compared to 248 deals valued at $83.4 billion filed in all of 2020.

Congress’s probe of SPACs follows months of concerns voiced by the SEC that investors, particularly small investors, may not be fully informed of the potential risks associated with blank check companies. On April 12, the SEC published guidance with regard to certain warrants issued in SPAC deals, which requires those warrants to be reclassified as a liability on the company’s balance sheet, rather than as equity.

This new accounting consideration is expected to trigger financial restatements of SPACs that are already public and where warrants have not been exercised or redeemed, thus creating additional costs and headaches.

Not to be outdone by his House counterparts, Senator John Kennedy (R-La.) has introduced the Sponsor Promote and Compensation Act (SPAC Act) which would require sponsors and founders of Special Purpose Acquisition Companies to provide greater transparency, particularly in how they are compensated.

“SPACs are becoming more and more popular, but the risks that can come with these companies aren’t clear to most everyday investors. While we can all recognize that celebrities don’t tend to be paragons of sound financial planning, they’re often the public face of companies selling shares to hardworking Americans. It’s right and fair that a SPAC should disclose how its sponsors get paid and how that affects the value of its public shares, and the Sponsor Promote and Compensation Act would require this kind of transparency,” said Kennedy.

“Wall Street executives, celebrities and other public figures often serve as the founders and sponsors of SPACs,” added Kennedy. “They act as the public face of the company, use their influence to fundraise through share offerings, promote the company and help identify a private company with which to merge.”

Most SPAC sponsors award themselves “founder shares” that convert into public shares after the merger between the SPAC and a private company. The founder shares typically represent as much as 20 percent of the total share value of the company. Kennedy said that “this type of compensation does not exist as part of traditional IPOs.”

If approved, Kennedy’s SPAC Act would require the SEC, within 120 days of enactment, to issue rules on enhanced disclosures for SPACs during the initial public offering stage and the pre-merger stage to make those disclosures more transparent to investors, especially main street investors.

SEC Top Cryptocurrency Enforcer; $1.77 Billion in Penalties

The SEC has become a top regulator of the cryptocurrency space, initiating 75 enforcement actions and collecting $1.77 billion in monetary penalties.

According to a report just issued by Cornerstone Research, which covers SEC enforcement dating from the first cryptocurrency-related action in 2013 through 2020, the SEC filed 75 actions against cryptocurrency issuers, brokers, exchanges, and other service providers. Of those, 43 were litigated in US district courts and 32 were resolved as administrative procedures within the SEC. More than half of the 43 were litigated in New York State.

Cornerstone reports that the most common allegations of misconduct involved fraud (52%) and unregistered securities offerings (69%).

Initial Coin Offerings (ICOs) represented more than 50% of enforcement actions where there were allegations of unregistered securities.

Along with its enforcement actions, the SEC suspended trading of 19 issuers since 2013.

Corporate Boards Diversify Ahead of Regulators

US publicly-traded companies have stepped up diversifying their boardrooms, even though the SEC has yet to decide on a Nasdaq proposal requiring all issuers on its exchange to meet expanded board diversity and disclosure requirements.

Although the SEC has postponed action to late summer 2021, the push for diversity has been driven both by the Nasdaq proposal and by powerful outside forces, including investment bank Goldman Sachs Group, Inc.

Goldman’s Chief Executive David Solomon announced in early 2020 that the bulge bracket firm would not underwrite companies lacking a certain level of board diversity.

Nasdaq said its proposed rule change would require all its listed companies “to publicly disclose consistent, transparent diversity statistics regarding their board of directors. Additionally, the rules would require most Nasdaq-listed companies to have, or explain why they do not have, at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+. Foreign companies and smaller reporting companies would have additional flexibility in satisfying this requirement with two female directors.”

Bloomberg is reporting that since June 2020, 145 S&P 500 companies have added “at least one Black director,” and that “Latino board appointments at public companies quadrupled from a year ago.” Female representation is also on the rise with women now holding one third of all board seats on the S&P 500. When Nasdaq proposed its listing rule change at year’s end, only 25 percent of its listed companies met the proposed requirements, according to Bloomberg.

Restaurants seeking relief find empty cupboard

The $28.6 billion Restaurant Revitalization Fund (RRF), launched May 3 to provide relief to one of the hardest-hit industries affected by the COVID-19 pandemic, found itself out of cash in 10 days and more than 50 percent short of the monies requested by applicants.

The SBA, which administers the fund, reported that restaurants, bars and other businesses providing on-site food and drink, flooded the agency with 266,000 applications asking for $65 billion in total relief.

Under the American Rescue Plan Act, which created the RRF, funding priority is intended for businesses owned by women, veterans and socially and economically disadvantaged individuals.


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