Research in Action: The SEC looks to Haas research on SPAC rule change to protect investors

Special Purpose Acquisition Companies, known as SPACs, were a hot new investing trend over the past couple of years. 

In this short video, accounting professor Omri Even-Tov explains how Special Purpose Acquisition Companies (SPACs) work, how his concerns that they harming individual investors drove his research, and how that research influenced the U.S. Securities and Exchange Commission to tighten up rules.

Even-Tov’s recent paper,  Are SPAC Revenue Forecasts Informative?“,  is co-authored with Michael Dambra of the University at Buffalo School of Management and Berkeley Haas PhD Kimberlyn Munever (George) and forthcoming in the The Accounting Review. (See full video transcript below.)


Hi everyone, my name is Omri Even-Tov and I’m an accounting professor at the Haas School of Business. You might have heard about SPACs, which was a pretty hot trend until recently. So my colleagues and I actually wrote a paper about SPACs because we had a feeling that they might harm investors.

But before we begin I want to describe to you a bit what a SPAC is and how it works. Let me go to my slides here for some help.

So SPACs are, first, Special Purpose Acquisition Companies. Those are blank-check companies that raise money via an IPO for the sole purpose of acquiring a private company. This transaction is also known as a de-SPAC. Now those SPACs are usually managed by a sponsor. The sponsor can be a private equity firm, a venture capital firm, a hedge fund, or in some cases it can also be an individual—like in the case of Chamath from Social Capital that you all know from the “All-In” a podcast.

So let’s assume in our case there’s a SPAC and this SPAC is called “Just another SPAC.” So this SPAC goes public via an IPO and they raise money. In our case they raise $500 million. Now the SPAC has between 18 to 24 months to try and identify a suitable target to acquire. So let’s assume that they managed to find this target. This target is called, “Some Private Company.” Now once they found the target, the shareholders of the SPAC need to vote on this transaction. If they vote yes, then we have an acquisition and this process is called a de-SPAC transaction and then good luck to all of us.

In the case that the shareholders vote no, or in the case that the SPAC wasn’t able to identify a suitable target, then there is no transaction and all of the money that was initially raised by the SPAC is returned to investors.

Now why is why are SPACs so interesting? They’re very interesting because in the last few years they actually outpaced the number of traditional IPOs.  So if we look at this figure you can see that this line counts the number of SPAC IPOs and this line is actually higher than the line of the traditional IPOs—and not just in terms of numbers but also in terms of volume and proceeds raised using the SPAC process. We can see that those bars that reflect SPAC IPO proceeds are actually higher than those of the traditional IPO proceeds.

So why are SPACs so unique that we decided to explore them and examine what’s happening with them? So a main difference between traditional IPOs and SPACs is that traditional IPOs do not have any protection from liability if they provide future-looking statements. So if they provide projections that are misleading or inaccurate, they’re going to be liable for them. In the case of SPACs, those are basically mergers as you saw in the in the in the slide, so they are entitled to a protection under the Safe Harbor rule that came out in 1995. And because of that many SPAC sponsor thought, ‘we basically have a shield from liability if we provide future projections of the companies.

So in our case, what we felt is that because of this theoretical shield, sponsors are going to take advantage of that and they’re going to issue very optimistic projections in order to entice retail investors and investors in general to invest in those companies. And this is exactly what our research finds. We find that SPAC companies, on average, provide very optimistic projections, and in most cases, they underperform. And unfortunately those projections lead to the attraction of a lot of retail investors—not so much institutional investors that are likely are able to steer away from those very optimistic projections. And because retail investors are attracted to those companies, they invest and in the long term they suffer from under performance. We also find that those companies are actually more likely to be sued in a class action lawsuit because this shield doesn’t shield you from everything. If you provide misleading information that is inaccurate then you’re going to be liable for that.

And so our paper was actually very instrumental in a new rule that the SEC issued just a few days ago about amendments being made to the rule about SPACs. And the SEC sites both a common letter that we wrote and our paper by stating that some of the amendments are directly related to that. The first change is to level the playing field between SPAC IPOs and traditional IPOs, and remove this protection from SPAC IPOs from providing future projections. The second thing is basically adding much more disclosure to the projections. How are they being made, who’s making those assumptions, what assumption are being made.

And this is in the hope of helping investors have better information about the companies they invest in. So hopefully this really helps protect retail investors.  We believe it does. Thank you for listening.