Disclosures & Dollars

Contributor Post by Nikita Arora

Sunday, September 12, 2021

Hi Folks!

Ok so I started writing this letter with an intro that wasn’t necessarily ‘rooting’ for Djokovic to win as much as it was ‘assuming’ that he was going to. But What. The. Fuck. Just. Happened??!! Sure I had to re-do my intro but I thought and so did every damn celebrity who was sitting at the Arthur Ashe stadium today that Djokovic was going to win the calendar year Grand slam! OMG.

Tbh, I absolutely love and respect Djokovic’s game and his mental acuity but have always struggled to be his true fan because he doesn’t exude the same warmth as Federer or Nadal. But then you guys also know, I am Lady Rognik. And this morning, I did wake up reminiscing of Serena Williams in 2015, when she was so close to winning all four Grand slams in one year before she lost…also at the US Open. And so, without betting, I was kinda low key rooting for Medevedev. But I wasn’t expecting him to win! (And definitely not in three straight sets.) Because I thought Djokovic would literally not let that happen!! He felt invincible this season. But from Medvedev losing to Djokovic at the Australian Open Finals this year to then Djokovic losing to him at the US Open now. Wow it came full circle (or square).

And, the women’s final yesterday between Leylah Fernandes and Emma Raducanu was just as wildcard and stupendous! Both teenagers and both breaking so many records and making new ones. I am particularly impressed by Raducanu who started with a WTA ranking of 338 at the beginning of Wimbledon, which then improved to 150 by the time she arrived at US Open, and tomorrow, she will be ranked World No. 23. Like holy shit. Also, impressive is that she just went to a traditional high school, completing her coursework on time and did not train at a full-time tennis academy, whereas Leylah has been training full time in Florida for the last couple of years. Again, I’m fangirling over both girls but Raducanu is just marginally ahead in my crush-meter. 

I’m too jazzed but I think that’s enough tennis talk, and I do realize that not all of you may share the same enthusiasm for the sport as I do. So let’s switch to the topic of our mutual interest!

The SEC’s Investor Advisory Committee met on Thursday and came out with their recommendations for SPACs, which do not feel as punitive as were initially feared to be. The biggest fear was that if the SPACs ended up in the Congressional dog house, then that would have most likely triggered legislative action to eliminate or restrict the asset class altogether but given these recommendations are more ‘pro-reform’, it is a positive start and less likely that it will go up to Capitol Hill.

It appears that SPACs have found a permanent home in the SEC household and now they just need to abide by the house rules. It’s like when you’ve been dating a while and decide to move in together. Initially there is some friction (natural & necessary), and both parties need to figure out how they will cohabit the place and get used to each other. But if you make it past the month together without the relationship falling apart, then it’s generally a good indicator because that means you align on the values and principles, and just need to figure out the semantics.

So I think SPACs and SEC are similar. They have been dating for a while, things got hot and steamy back in February and then they decided to move in, but then there was the crash in March and the naysayers were like yeah, this relationship ain’t gonna last. But seems like they’ve made it past the probationary period and can survive as long as they provide all the ‘disclosures’.

The word ‘disclosure’ is used 31 times in the IAC recommendations paper, and the gist is below –

  1. 1. The IAC recommends stricter enforcement of the Securities Act of 1934 in relation to the disclosure around the role of SPAC Sponsors, conflict of interest w.r.t retail investors, the use of Celebrity advisors, process timeline, targets, PIPE funding, risks…basically everything. If you’ve read through S-1s before, they all generally look very similar. It’s like there is one template which is lawyer approved and everyone is using that. Now, they are recommending that the Sponsor actually enlist all the reasons what qualifies them to launch a SPAC besides just the ability and the network to do so.

  2. 2. Another recommendation is for SEC to do its own research as well in analyzing different SPAC Sponsor profiles, and studying their compensation and incentives. So would that mean that a Sponsor has to submit a proposal to SEC to see if they qualify as a ‘SPAC Sponsor’? That’s probably long ways from happening still, but I think directionally that’s where we are heading. To prevent any Tom Dick and Harry from launching a SPAC.

Of course, Gary Gensler is not required to adopt any of these recommendations, but I think its safe to assume that he will. In fact, I wouldn’t be surprised if he topped these off with some more stringent measures. I guess that will be the new risk to watch out for and see how it evolves in the next 9-12 months.

There was another interesting highlight from the IAC Recommendations paper that caught my attention. Below is their observation of the evolution of SPACs in the last few months:

  1. 1. Reduction in average volume of SPAC IPOs.

  2. 2. Increased participation of retail investors prior to the de-SPAC transaction has evolved (increased) which has impacted the ability to obtain quorums in voting the merger transaction.

  3. 3. Increased pricing for D&O insurance reflecting increased awareness of potential risk.

  4. 4. Decrease in the availability of PIPE funds and increase in PIPE investor negotiating leverage.

  5. 5. Increase in the length of sponsor’s investment in the post-merger entity.

  6. 6. An increasing percentage of SPAC investors seeking redemptions at the de-SPAC transaction.

  7. 7. The emergence of SPAC opportunities in other jurisdictions; for example, the United Kingdom, Hong Kong, Singapore, and India are exploring facilitating SPACs in their jurisdictions.

That was interesting highlight as it entails a more macro view of how the SEC is looking at the asset class and the fact that just the perceived notion of increased regulatory scrutiny has put each of the building blocks out of equilibrium, and the trickle down effect that it has. It is quite interesting because it points to the stoic philosophy of that “we suffer more in imagination than in reality”. SEC hasn’t even issued any reforms yet but the fear that its coming and the SPAC market has been suffering since March.

Overall, I think this pro-reform approach is net positive and it was assuring to read that this paper is only focused on regulation and disclosure concerns of the asset class and deems the “commentary whether the asset class represents an irrational bubble” to be outside its scope. My read of that is: No, SEC doesn’t deem it to be an irrational bubble. Because if that was a potent concern, then the committee would be analyzing its viability first before figuring out ways to regulate it. An asset class has to remain in existence for it to reformed and regulated. And that’s why, I think that despite the rocky start, the SPAC x SEC relationship is here to survive.

  1. Ok, off to my tennis game. Have lots to learn from Raducanu. Loved this piece on her serve- return strategy . And I’m also kinda glad that Djokovic didn’t surpass Federer and Nadal just yet.

Let’s see what the next 365 days bring! Have a great week ahead!


Nikita's Substack Feed

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