Shares of special purpose acquisition companies, including Forum Merger II (FMCI), Tortoise Acquisition (SHLL) and DiamondPeak Holdings (DPHC), are under pressure on Thursday after Securities and Exchange Commission Chairman Jay Clayton said on CNBC that the agency is looking into the disclosures of these investment vehicles. While the chairman recognized that "competition to the IPO process is probably a good thing," Clayton pointed out that he is "particularly focused on incentives and compensation to the SPAC sponsors."
DISCLOSURE CONCERNS: In an interview with CNBC's Andrew Ross Sorkin, Securities and Exchange Commission Chairman Jay Clayton said that the agency is looking into the disclosures of these investment vehicles. "A SPAC structure is an alternative to a traditional IPO and in some ways is very healthy as it creates competition around the way we distribute shares widely to the public market. Competition to the IPO process is probably a good thing. But for good competition and good decision making you need good information. And one of the areas in the SPAC space that I'm particularly focused on is the incentives and compensations to SPAC sponsors, how much of the equity do they have now, how much of the equity they have at the time of the transaction. We want to make sure investors understand those things and at the time of transaction when they vote, that they are getting the same rigorous disclosure that you get when you bring an IPO to market," Clayton said.
SPAC CRAZE: A special purpose acquisition company, or SPAC, is an investment vehicle that goes public despite having no real business. The goal is to raise money and use it to buy into another company, typically private. This year alone, more than 80 SPACs went public to raise a record $32B. Among companies that have merged with SPACs to become listed stocks are DraftKings (DKNG), Nikola (NKLA) and Virgin Galactic (SPCE).
Online sports betting company DraftKings became a public stock back in April after completing a merger with Diamon Eagle Acquisition in a $3.3B deal. Last year, the Richard Branson-founded space tourism company Virgin Galactic went public also via a blank check.
Earlier this month, QuantumScape (QS), the battery supplier for electric vehicles backed by Microsoft (MSFT) co-founder Bill Gates and Volkswagen (VWAGY), announced plans to go public through a special purpose acquisition company, CNBC's Michael Wayland reported. QuantumScape said it had entered into a definitive agreement to merge with blank check company Kensington Capital Acquisition (KCAC) to become a publicly traded company in the fourth quarter, the author noted.
The deal mirrors that of Nikola, which went public in June through a reverse merger with VectoIQ, and that of Lordstown Motors (RIDE), which will merge with DiamondPeak Holdings, another SPAC. Meanwhile, electric vehicle start-up Fisker announced last month that it would merge with Spartan Energy Acquisition (SPAQ), a special purpose acquisition company sponsored by an affiliate of Apollo Global Management (APO). The deal is expected to close in the fourth quarter.
PRICE ACTION: In morning trading, shares of Forum Merger II have dropped over 12% to $20.01, Tortoise Acquisition has slipped more than 8% to $40.95, and DiamondPeak Holdings has slid about 13% to $21.20. Also trading lower, Spartan Energy Acquisition has dropped almost 7% to $13.05.