With the speed of the SPAC process comes the downside of some added risk, according to Erik Gordon a finance professor at the University of Michigan’s Ross School of Business.
Gordon, who has a focus in public market activity among other areas of research, said the SPAC process means that activity such as what the ELMS executives are found to have done is less likely to be uncovered in a timely fashion. In a traditional IPO, investment bankers working on a deal have a financial liability and incentive to ensure that such activity is disclosed to investors, Gordon said.
That’s not always the case in SPAC deals, he said, noting that investment banks typically end their work at the point of the sponsor firm — essentially a shell company — going public, and are not involved at the point of the actual merger, the point where Taylor and Luo were said to have improperly acquired shares.
“In a regular IPO, the investment bankers conduct an excruciating amount of due diligence,” Gordon said. “That doesn’t mean the company is a better company. But it means that fishy stuff is dug up.”
To that end, top financial regulators have highlighted such risks as an area for potential regulatory reform.
In a speech last December to the Healthy Markets Association, SEC Chair Gary Gensler noted the role that “gatekeepers,” such as investment bankers and other advisers, typically play in the IPO process, and said SPACs should not be viewed as a way to curtail those obligations.
“Make no mistake: When it comes to liability, SPACs do not provide a ‘free pass’ for gatekeepers,” Gensler said, according to a transcript of the speech.
Gensler added that he’s asked officials at the regulatory agency about how the SEC can “better align incentives between gatekeepers and investors, and how we can address the status of gatekeepers’ liability obligations.”
The SPAC route has been popular for EV companies for a handful of reasons, but particularity due to the ability to make more forward-looking projections about future business than is allowed under regulations for companies going public via IPO.
That ability, however, is causing problems with myriad publicly traded EV companies.
Newark, Calif.-based Lucid Group Inc. late last year disclosed that it had received a subpoena from the SEC regarding its SPAC merger, according to a Bloomberg report.
Before Lucid, the SEC opened investigations into Nikola Corp., Lordstown Motors Corp. and Canoo Inc., all of which have gone public since 2020 following mergers with SPACs.
