Billionaire Bill Ackman’s pitch to create a new class of special purpose acquisition companies faces hurdles in trying to woo the skeptical SEC.
Ackman recently told investors in his $4 billion SPAC, Pershing Square Tontine Holdings Ltd., that he’d return their money if the Securities and Exchange Commission approves a new vehicle he’s dubbed a “SPARC” or special purpose acquisition rights company.
Ackman’s proposal turns the traditional SPAC model on its head. In a SPAC, a sponsor gathers a pot of money through an initial public offering of a shell company with the promise to acquire a successful private company. He’s proposing to offer investors the right to buy shares in a blank-check company after a target is announced—allowing them to avoid putting in upfront capital.
Quick approval isn’t assured at the SEC, which has been skeptical of SPACs and can take months to reach a decision. The agency under Democratic Chair Gary Gensler has increased its scrutiny of blank-check companies and is looking to propose new rules for them next year.
“It is time consuming and I don’t expect this to be a short process given the level of scrutiny of SPACs,” said Jocelyn Arel, a partner at Goodwin Procter LLP.
Ackman proposed the SPARC concept in response to a lawsuit that said Pershing Square Tontine Holdings should be regulated as an investment company. The lawsuit, filed on behalf of investor George Assad by former SEC commissioner Robert Jackson and Yale Law School professor John Morley, cited the “staggering” compensation paid to SPAC management and a number of similarities to Ackman’s hedge fund business.
The SPARC is an untested product that is a “very tenuous” offering for shareholders, said William Birdthistle, a securities law professor at Chicago-Kent College of Law. “I find that a strange fallback position.”
Perhaps the most prominent skeptic is the SEC. In several appearances, Gensler has raised concerns about SPAC investor protections, disclosures, and efficiency when compared to traditional initial public offerings.
“It’s really making sure that the sponsor who is behind that is fully disclosing their take on it,” Gensler told Bloomberg Television in June. “These are very expensive, dilutive products.”
The SEC’s concerns about the blank-check market is only one of several challenges the SPARC faces in securing the agency’s approval, Birdthistle said.
A SPARC would also need the New York Stock Exchange to agree to change some of its rules to allow SPARC warrants to trade on the exchange, according to Ackman’s Aug. 19 letter to investors.
The NYSE would have to then submit the proposed changes to the SEC for approval, a process that could extend into 2022.
Ackman’s SPARC model appears to have some similarities with a private equity fund that would trigger SEC rules concerning investment companies, Birdthistle said. Such regulations would limit investments from retail investors.
The SPARC is also a novelty made in response to a legal setback, he said.
“I wouldn’t really like to be betting on the viability of a SPARC,” Birdthistle said.
While the exact details of the SPARC proposal aren’t public, it does provide interesting solutions to frictions in the existing SPAC structure, Arel said.
For example, the SPARC would eliminate the two-year post-IPO deadline for a SPAC to identify an acquisition target.
“A lot of our clients have looked at the two-year limitation to do a transaction as adding additional challenge and pressure on transactions,” said Arel, who leads Goodwin Procter’s SPAC practice.
SPAC critics have said those pressures can induce dealmakers to pursue transactions that aren’t always in the best interests of investors.
SPARCs also could bring more flexibility and reduce costs and underwriting fees, Arel said. SPAC sponsors would love to embrace a “perpetual IPO” by issuing warrants and letting people opt-in to the acquisition, rather than the current two-stage process, she said. Such tweaks wouldn’t change disclosure requirements or weaken consumer protections, Arel said.
They would improve the SPAC structure and “make it even more closely aligned to meeting the needs of operating companies and the needs of the investing public,” she said.
But allowing investors to keep cash in their pockets could make target companies reluctant to engage with SPARC sponsors, amid concerns that the capital needed to close the deal will actually come through.
“I have no idea what handcuffs are on the investor—like we don’t know what happens when the call option is being made a year later and for whatever reason they don’t have the cash, or it’s locked in the market,” said Todd Tigges, a partner at UHY LLP in Michigan.
SPARCs might only attract a small pool of dealmakers due to financing risks, said Valeska Pederson Hintz, a partner in Lowenstein Sandler LLP’s capital markets and securities group.
Ackman’s “bespoke” proposal relies on his reputation as a billionaire investor with extensive connections and the star power to raise significant funds, Pederson Hintz said.
“If you’re not a super famous person like Bill Ackman, I don’t see how you convince target companies they should announce a deal with you and spend all the time negotiating it in the hopes you’re going to be able to rally all these rights holders,” she said.
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