May 31, 2022

New Report from Senator Warren: The SPAC Hack: How SPACs Tilt the Playing Field and Enrich Wall Street Insiders

Warren Conducted the First Congressional Investigation of SPACs; Release Comes As SEC Considers New Rules to Rein in Abuses

Senator Warren plans to introduce the SPAC Accountability Act of 2022 to build on the SEC’s March 2022 proposed guidelines for SPACs 

Report (PDF)

Washington, D.C. - United States Senator Elizabeth Warren (D-Mass.) today released a new, 26-page report on special purpose acquisition companies (SPACs) based on the findings of her investigation of high-profile SPAC creators. In September 2021, Senator Warren and her colleagues wrote to six creators of prominent SPACs, raising concerns about abuses by SPAC creators and operators, including reports that insiders were taking advantage of legislative and regulatory gaps at the expense of ordinary investors. In November 2021, the Senator asked the Securities and Exchange Commission (SEC) to conduct a review, based on reports of potential securities fraud, of Digital World Acquisition Corp., the SPAC that proposed merging with former President Trump’s Truth Social. This report, the first detailed congressional investigation of SPACs, is based on the information provided by high-profile SPAC creators, the SEC, and experts in the field.

In response to the findings of her investigation, Senator Warren plans to introduce the SPAC Accountability Act of 2022 which would build on the SEC’s March 2022 proposed guidelines for SPACs by codifying expanded definitions of SPAC “underwriters” into law and closing loopholes that SPACs have long exploited to make overblown projections. This forthcoming legislation would vastly increase the disclosures required for a de-SPAC transaction and level the playing field for retail investors. 

“This investigation found that Wall Street insiders have used SPACs as their own personal piggy banks while retail investors have suffered. This industry is rife with fraud, self-dealing, and inflated fees, and the SEC and Congress should continue to act to crack down on these abuses,” said Senator Warren.

SPACs are publicly traded shell companies that raise money with the sole purpose of buying a private company to take it public. SPACs have exploded in popularity in recent years, raising $145 billion in 2021 and outpacing traditional IPOs as the preferred method for taking a company public. This meteoric rise was concerning because SPACs are structured to benefit institutional investors -- such as hedge funds, venture capitalists, and investment banks -- at the expense of retail investors. 

Senator Warren’s investigation revealed several major findings on the structural and regulatory weaknesses of SPACs: 

  • SPAC sponsors’ incentives and outcomes do not align with retail investors, leading to low-quality deals that harm investors. The sponsor’s “promote,” a 20% share in the public company that sponsors pay a fraction of market value for, almost always guarantees a profit for sponsors, who frequently pay tens of thousands of dollars for nearly hundreds of million in stock. Since SPACs face time pressure to complete a merger, SPAC sponsors are incentivized to push low-quality deals to ensure they receive their promote. 
  • SPAC shortcuts give institutional investors and Wall Street insiders profitmaking opportunities that dilute shares for retail investors and put underlying companies at risk. Institutional investors are given early access to information and discounted stock before retail investors can participate on the open market, and frequently invited to participate in PIPEs, or private investment in public equity, that widen the information and access gap. These “shortcuts,” which practically guarantee profits for Wall Street insiders, dilute retail investors’ stock and reduce the capital available to companies after they are taken public.
  • Financial institutions profit off SPACs through hidden fees that outstrip those of a traditional IPO. Although SPAC sponsors touted lower fees as a benefit of SPAC transactions, financial institutions charge a host of fees – including an underwriter fee, a PIPE placement agent fee, and a financial advisor fee – which outstrip a traditional IPO and guarantee millions in profits for the institutions even when the businesses they take public fail.
  • SPACs incentivize inadequate and even fraudulent disclosures. Regulatory loopholes, lax requirements, and the misaligned incentives of the decision-makers have created an environment where SPACs are rife with disclosures that border on or cross into outright fraud.
  • SPACs allow for rampant self-dealing at the expense of retail investors and the health of the market. SPAC sponsors take advantage of the flaws in SPAC rules to benefit themselves in multiple steps of the process: paying advisory fees to themselves and companies they are associated with, participating in PIPEs, and private investment rounds despite their clear insider knowledge, and even choosing their own companies as acquisition targets.
  • Further regulation and federal legislation is needed to protect retail investors and the market from the impact of SPACs. In March 2022, the SEC proposed several new rules for SPACs that would increase disclosures required for companies going public through SPACs, and increase liability for SPAC sponsors and acquisition companies. While an important step, Congress should act to codify these rules into law and encourage the implementation of these rules.