Looking Back, Most Stocks Plunged... US SEC Halts SPAC Backdoor Listings

The U.S. Securities and Exchange Commission (SEC) has put the brakes on reverse listings through Special Purpose Acquisition Companies (SPACs). This is due to the fact that stock prices mostly follow a downward trend after SPAC mergers, causing continued investor losses. Even after the high-interest rate wave passes, the SPAC market is likely to remain in a depressed state.

According to major foreign media such as The Wall Street Journal (WSJ) on the 24th (local time), the SEC passed a regulation aimed at strengthening disclosure requirements for SPAC mergers with a vote of 3 in favor and 2 against. Going forward, companies being acquired must disclose information through SPACs using procedures and methods equivalent to an IPO. Additionally, SPACs must disclose the extent and specific details of benefits provided to investors who participated in the initial acquisition stage. This regulation will take effect in five months.

SPACs are paper companies established solely for mergers and acquisitions (M&A). They raise funds from individual and institutional investors and then list on the stock exchange. Unlisted companies to be acquired by SPACs can debut on the stock market while avoiding the complex regulations required by the exchange, and investors participating in the acquisition through SPAC shares have the advantage of principal protection as well as the potential for capital gains if the stock price rises after the merger.

However, the problem arises afterward. Many companies merged via SPACs have seen their stock prices fall. SPAC target companies attracted investor interest by presenting optimistic forecasts regarding market share or business viability, but in hindsight, few SPACs have produced successful merger outcomes.

According to SPAC market research firm SPACInsider, among 401 SPACs that completed mergers since 2021, only 27 (6.7%) saw their stock prices rise. For example, U.S. fintech company SoFi and electric vehicle maker Lucid, which garnered attention through SPAC mergers, have seen their stock prices fall by 60% and 90%, respectively, since entering the market in 2021.

The SEC has identified the primary cause of stock price crashes after SPAC mergers as information asymmetry between early investors and later investors. In this context, the SEC has also targeted the practice of SPACs offering new shares at discounted prices to early institutional investors such as hedge funds.

With the implementation of this rule, the industry expects that the SPAC market, already facing a harsh environment due to high interest rates, will now exist only in form. This is because the merits of early investors, who are key players in successful SPAC M&As, and high-quality unlisted companies have effectively disappeared.

Mark Uyeda, a GOP commissioner of the SEC who opposed the rule, said, “(It seems) this rule is intended to prevent SPACs from ever returning to the market.”