Wednesday’s announcement by the Securities and Exchange Commission (SEC) included a series of rules regarding SPACs. If enacted they would be the largest attempt to crack down on the huge market for blank-check businesses.

Investors have been critical of SPACs (special-purpose acquisition corporations) in recent years. They claim that they often exaggerate the businesses outlooks for the companies they are trying to buy. Many companies in this category include startups that are not yet profitable.

SEC’s new rules aim to resolve complaints regarding incomplete information and inadequate protection against fraud and conflict of interest. These issues may not be as prevalent in an initial public offering (IPO).

SPACs, which are shell companies that seek to raise capital through an initial public offering (IPO), have the aim of purchasing a private firm and making it public. This allows often young firms to avoid the strict scrutiny that comes with a traditional first public offering.

Gary Gensler (SEC Chair) stated in a statement that “Functionally the SPAC Target IPO is being used to conduct an IPO.” Investors should be afforded the same protections as traditional IPOs when it comes disclosure, marketing, gatekeepers, or issuers.

Some of the SEC’s suggested rules might:

• To make forward-looking statements (such as business forecasts) safe from liability, amend the definition of “blank cheque company”. Investor lawsuits could be filed against SPACs for making the assumptions of the blank check company too bullish.
• When the blank-check company files an S-4/F-4, it must require that the SPAC’s private target business be co-registered.
• It is better to police conflict of interest and reduce investor holdings.
• To limit financial statements that shell companies may make about potential business combinations or merger targets, update the Securities Act of 1933

Gensler’s concerns have been expressed since May. However, Wednesday’s rules are the first rulemaking by Wall Street’s watchdog. However, the SEC launched an independent investigation into several SPACs as well as blank-check merger transactions. One of these deals involved a former President Donald Trump’s social media project.

One of the hottest markets in 2021 was the U.S. SPAC. A flurry of hundreds of transactions in the first six months of 2018 slowed down as the SEC tightened its grip and deals failed to perform well.

This proprietary CNBC SPAC Post Deal IndexThe consists of SPACs who have successfully merged and made their targets companies public. It has fallen 44.8% in the last year, and 20% just for 2022.