WASHINGTON—A senior regulator warned companies going public through deals with special-purpose acquisition companies against issuing enticing but misleading statements about their growth.
The statement Thursday by John Coates, an acting director at the Securities and Exchange Commission, is a shot at the frenzy over SPACs and how their growth has enabled many startups to go public at an early stage. Some of the public companies that result from the merger, including some electric-vehicle startups, have then touted plans to reach billions of dollars in annual sales within a few years.
Special-purpose acquisition companies, or SPACs, are publicly traded shell companies formed to pursue deals. After such a firm merges with a target company, that company gets the SPAC’s spot on a stock exchange, enabling it to sell shares to the public—including to mom-and-pop investors who have rushed into the market during the rally that followed the coronavirus panic in early 2020.
SPACs have become a hot alternative to initial public offerings, the traditional way that private companies list shares for public trading. Companies doing IPOs don’t broadcast future sales or earnings estimates in their key filings.
Sales projections are particularly helpful for zero-revenue companies going public through a SPAC, as they have a short track record to show investors in an IPO.
At least 15 companies with no revenue have listed publicly this year or have said they hope to in coming months, all at valuations of above $1 billion. That would be by far the largest number of non-biotech listings above $1 billion in valuation since the dot-com boom, according to data from Jay Ritter, a finance professor at the University of Florida who studies public stock listings.
Even entirely new products in unproven markets are able to raise enormous sums in SPAC deals. Three electric-aircraft companies have struck deals to go public in recent months, including Joby Aviation and Archer Aviation Inc., which are building helicopter-like electric vehicles marketed as future flying taxi services. Both have struck deals to raise over $1 billion as part of a listing through a SPAC, and both told investors they expect billions of dollars in revenue within years of their product launch.
SEC officials have voiced concerns that the SPAC boom is leading some young companies not ready to be public to list on stock exchanges.
“There is a lot of soul searching now at the SEC because the floodgates were wide open over the last nine months and now the new administration wants to normalize the process a little bit,” said Ari Edelman, a SPAC attorney at firm Reed Smith LLP.
He added that the motivation for the SEC comments now comes from the troublesome performance of the electric-vehicle sector, where companies made lofty projections while raising money and quickly missed them after going public.
Mr. Coates signaled the SEC would give SPAC deals the same scrutiny as IPOs, a more cumbersome process that can be avoided through a SPAC deal. The public pushback on such deals is an abrupt change from the approach during the Trump administration, which wanted to encourage more startups to go public before they became so-called unicorns valued at $1 billion or more.
One advantage of SPACs is they allow companies going public to project revenue and earnings years into the future, as any merger would. Some deal makers and lawyers have said SPACs do that because they qualify for protection under a 1995 law that shielded public companies from being sued by investors over projections as long as they qualified their forecasts with cautionary language. The law doesn’t give the same shield to IPOs, so companies using that process don’t tout such figures.
Mr. Coates said that perceived distinction may be wrong. SPAC deals might not have that protection, he said, because the merger functions like an IPO.
“That is the transaction in which a private operating company itself ‘goes public,’” he said.
Other protections also apply for investors, he said. Projections have to be based on reasonable assumptions, and the law doesn’t allow companies to promote growth figures they know aren’t true.
“Any simple claim about reduced liability exposure for SPAC participants is overstated at best, and potentially seriously misleading at worst,” Mr. Coates said.
Numerous companies going public through SPACs have given investors projections that imply record-setting growth. At least five have forecast that they will go from no revenue to $10 billion in annual revenue in less than seven years. Alphabet’s Google Inc. reached that figure in eight years, the fastest U.S. startup ever to do so, according to a Wall Street Journal analysis of data provided by research firm
Morningstar Inc.
Some SPAC sponsors and venture capitalists have defended the ability of companies to give projections, saying it lets them better communicate the promise of their business to investors, who wouldn’t have enough information to do so in a traditional IPO. The SPAC boom, they say, has allowed small traders to get into young companies at early stages before valuations rocket upward, an opportunity that otherwise would be restricted to large investors.
Write to Dave Michaels at dave.michaels@wsj.com and Eliot Brown at eliot.brown@wsj.com
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