CFA Institute calls for stricter disclosure rules for Spac sponsors

The investment industry trade body is urging regulators to toughen disclosure requirements for Spac sponsors to make blank check companies more transparent.

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

Improving sponsor disclosures is one of seven recommendations made by the organization which is best known for overseeing popular tests to become a chartered financial analyst, and comes after the SEC outlined Spacs sweeping reforms in March . The CFA’s recommendation on sponsors goes further than the regulator’s proposals by requesting 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 enhanced disclosures are important “because of the opacity of so many Spacs and the potential for conflicts of interest.”

“There are a lot of details that investors need that they’re not getting from Spacs now,” she added.

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

Special purpose acquisition companies rose in popularity during the height of the coronavirus pandemic and have become Wall Street’s most sought-after investment product. Sponsors raise funds from investors and publicly list the vehicles as a cash shell before seeking a private company to take public through a merger.

Spac’s boom has since died down as investors soured on investment vehicles after a series of scandals, poorly performing deals and increased regulatory scrutiny. Global market volatility caused by rising interest rates and the war in Ukraine has also led investors to shy away from growth companies that are typically listed via a Spac merger.

According to data from Dealogic, more Spac listings have been withdrawn in the past two months than there have been new listings, showing just how far out of favor investment vehicles have fallen.

Pipe’s crucial financing market also dried up and negotiators were forced to soften the terms on offer or seek more expensive financing. The pipes, or private equity investments, help raise additional funds 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 optimistic revenue projections to potential investors and requiring banks entering into deals to be potentially liable for inaccuracies. The proposals are subject to public comment, after which the regulator will decide whether or not to adopt them.

“Sponsors frequently enter into side deals to induce certain hedge funds not to buy back, or give shares at discounted prices to Pipe investors,” said Jay Ritter, a Cordell professor of finance at the University of Florida and a member of the group. of work.

“These types of side payments aren’t always transparent and I definitely support the idea that there should be more disclosure there,” he added.

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