April 08, 2021 at 04:43PM

SPACs may be flying high, but risks lie beneath the surface. As reported in The Wall Street Journal on Thursday (April 8),  John Coates, acting director at the Securities and Exchange Commission’s corporate finance unit, warned of “some significant and yet undiscovered issues” with SPACs.

Coates made his comments at a legal conference on Wednesday (April 7), saying that the issues include “relatively as yet incompletely worked through mechanisms, despite the fact [SPACs] have been around for a while,” but noting that those issues would not stop SPAC deals and listings. Though Coates did not elaborate on his concerns, the regulatory scrutiny that surrounds SPACs may be poised to gather steam.

This is not the first time that Coates (and, by extension, the SEC) has expressed some concern with the SPAC model. Early last month, the SEC’s Office of Investor Education and Advocacy put out a release cautioning investors “not to make investment decisions related to SPACs based solely on celebrity involvement.” The SEC warned that “celebrities, like anyone else, can be lured into participating in a risky investment or may be better able to sustain the risk of loss.”

In a tweet that accompanied the release, Coates wrote that “the rapid increase in the volume of SPACs represents a significant change, and we are taking a hard look at the disclosures and other structural issues surrounding SPACs.” More recently, the SEC said it was launching a probe into how big banks are managing the risks tied to SPACs.

The deluge has brought more than 300 SPACs to market in 2021 alone, per data from SPAC Research – and we’re barely past the first quarter. As an absolute number, the sheer volume of listings is impressive; as a relative number, it might be termed downright dizzying – in all of 2020, there were 248 listings, and only 59 in all of 2019.

As for the risks: The SPAC itself, as a blank-check firm, may not have any real operations yet, but the risk might lie in the targeting and acquiring of the (typically) high-growth, smaller companies. If growth is the name of the game – no matter the vertical, whether it’s payments or. rocket ships – it may be tough to gauge just how well the promise of growth translates into real numbers, including revenues and, eventually, operating profits. One hallmark of the SPAC listing process is that the private firms that are taken public are allowed to file documents that use forward-looking projections to shed light on nascent business models and roadmaps.

As the Journal reported this week, Coates said in his recent remarks that there will be more comments from the SEC about SPACs coming out over the next several weeks. It’s not too far-fetched to think that the more scrutiny is levied on SPAC activity, the more cautious at least some stakeholders – the blank-check firms, and the companies that may want to come public through that mechanism – may become. That’s not necessarily a bad thing in a market that is still taking shape, and where guardrails are still taking shape as well.

Read More On SPACs:

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