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Special purpose acquisition companies, better known as SPAC, have single-handedly re-launched the market for initial public offerings, bringing small businesses to the stock exchange by the dozen. So far this year, there have been about twice as many announcements from these blank check companies as traditional offers.

And since those cash shells – which raise funds during an IPO on the promise to merge with a private company in a few years, going public – often target emerging tech companies, this market has returned to its glory years. .

Why, then, are the regulators trying to kill him?

The assault was swift and focused. First, the head of corporate finance at the Securities and Exchange Commission said that a merger of an SPAC and its target company should be considered. the “real IPO”, which would remove the safe havens that SPACS has for forward-looking statements. This means that PSPC mergers would not be accompanied by financial forecasts or other projections, a key difference from traditional IPOs.

Then, SEC officials issued a bulletin questioning the accounting treatment of warrants, which they believe should be viewed as liabilities rather than equity. It could delay IPOs and mergers a large number of SPACs as they modify their accounts.

The effect of these announcements, both in April, is easy to see in the numbers.

IPO SPAC, rolling four-week total

The regulatory review of SPACs was sparked by whether they are too risky for retail investors, a question recently asked by Gary Gensler, chairman of the SEC.

Damn, back in 2008 I was writing about the dangers of SPACs and their role in that year’s merger boom (which ended badly). While some companies that recently went public through a SPAC have been big hits, like betting group DraftKings, others have collapsed, like electric truck maker Lordstown Motors, which said this week it could not having enough money to survive.

And with over $ 130 billion in cash in PSPCs chasing takeover targets, competition for deals will undoubtedly drive up buyer’s prices, making it harder to generate returns for them. investors, especially newer ones.

But all of this misses the point. PSPC, which has been around for decades, has brought back the IPO market for innovative small businesses. Despite the recent slowdown, there have been over 330 SPAC IPOs this year, raising just over $ 100 billion.

Back to the end of the 90s. Four horsemen boutique banks – Alex. Brown, Hambrecht & Quist, Robertson Stephens and Montgomery Securities – totaled around 130 IPOs per year at the time. It was a market where brokers could offer smaller stocks to investors (think “Boiler room“).

After the dot-com bubble burst and the Sarbanes-Oxley Act ushered in reforms aimed at reducing conflict between brokers, the small IPO practically disappeared, the subject of one of my studies. Since then, the pace of IPOs has been much slower, almost all major companies.

Eventually, the idea that regulations had become too strict gained prominence, which led to the Employment Act of 2012. This made the IPO easier, but the goal of giving public investors faster access to innovative start-ups has proven elusive.

Annual volume of IPOs in the United States

Enter the SAVS, which brings many small businesses to the market. SPACs have found a way to raise ready capital through an IPO, long before approaching a company to acquire and transfer the funds. And there are also often additional investments from outside investors at the time of the merger, which allows transactions to be validated.

Hedge funds are drawn to the post-IPO stage, pre-acquisition of SPACs, as they earn interest on the amount they invest, receive warrants to capture more potential by buying more shares once that the company merges with a target and can buy back their shares at the IPO price if they don’t like the acquisition.

It is a decent investment. Where service providers may encounter problems is during their second stage: when they make an acquisition. However, there is the aforementioned option to repurchase the shares at the time of acquisition if the shareholders do not like it. A bigger problem is that if shareholders who invest in SPACs after acquisitions get a particularly bad deal, what some research suggests.

Are they? After-sales services put more risky companies on the market. The Stock Market 101 suggests that with more risk comes more rewards and more failure.

Should investors be exposed to these types of companies, which are inherently riskier? Make your own judgment, but not too long ago people worried that start-ups were going private too long, denying public investors exposure to potential earnings. Now that PSPC fixes this problem, regulators are backing down.

And just as many people are new to PSPCs, they are changing. Bill Ackman’s recent deal with Universal Music Group is complicated, to say the least, and the hedge fund manager’s SPAC will give a new twist to SPAC, which he calls a SPARC (rights company). ‘special purpose acquisition). This fixes some shortcomings in the current operation of SPACs, removing a time limit on finding a takeover target and not locking up investor funds before a deal is closed. According to my calculations, this is the third generation of the evolution of PSPC.

There should be more disclosure of the compensation that SPAC sponsors receive. And some PSPCs are too aggressive or go public too early or with flawed (or even fraudulent) business plans. But the same can happen with traditional IPOs. That’s no reason to kill off the one thing that has revived the market for emerging growth small business IPOs in 20 years.

Steven Davidoff Solomon, aka Deal Professor, is a professor at the University of California, Berkeley School of Law and co-chair of the faculty at the Berkeley Center for Law, Business and the Economy.

What do you think? Are PSPCs useful or are they too risky and need to be brought under control? Let us know: dealbook@nytimes.com.


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