Securities and Exchange Logo

Securities and Exchange Logo

Nicholas Walters 

  1. Introduction

On March 30, 2022, the Securities and Exchange Commission (the “SEC”) announced its proposed rule to enhance disclosure and investor protection in initial public offerings (“IPO”) by special purpose acquisition companies (“SPAC”) for business combinations involving shell companies and private operating companies.[1] This rule came in response to an unprecedented spike in private companies merging with SPACs to bypass the traditional IPO process.[2] SPACs present investors and companies with a lot of risk. Investors in SPACs commonly incur financial losses while the sponsors of the SPACs profit.[3] Additionally, many companies who went public using the SPAC route struggle to turn profits.[4] Through the SEC’s proposed rule on SPACs, shell companies, and projections, the Commission aims to uphold its mission statement of protecting investors and maintaining efficient markets by further regulating the volatile SPAC marketplace.[5]

  1. What is a SPAC?

A SPAC is a publicly traded corporation formed with the sole purpose of combining with a privately held business so that the business may trade its shares publicly without going through the lengthy and expensive IPO process.[6] SPACs are sometimes referred to as shell companies because they have no operations or tangible assets—its sole purpose is to provide an alternative path for a private company going public.[7] The transaction that takes the private company public through combination with the SPAC is referred to as a “de-SPAC transaction.”[8]

SPACs first emerged in the 1990s following the SEC adopting Rule 419 of the Securities Act, which required blank check companies to provide certain disclosures and comply with other requirements.[9] The Penny Stock Reform Act of 1990,[10] passed by Congress in October of that year, sought to regulate the trade of penny stocks and prompted the SEC to adopt Rule 419 for blank check companies issuing penny stocks.[11] Blank check companies are very similar to SPACs except that a blank check company must be issuing “penny stocks” whereas SPACs do not.[12] Thus, SPACs arose as a work around of Rule 419. This is reflected in the SEC’s proposal by defining SPACs as securities not subject to Rule 419 that plan to complete a de-SPAC transaction.[13]

Following the SPAC going public through an IPO, the funds generated from the IPO are generally placed in a trust or escrow account, and shares of the SPAC are sold on a national securities exchange.[14] SPACs are generally given 24 months to find a private company to combine with, otherwise the SPAC dissolves and the assets return to the investors.[15] If the SPAC finds a company to combine with, the shareholders in the SPAC may either redeem their shares and receive a pro rata return of their investment, or remain a shareholder in the company following the de-SPAC transaction.[16] Generally, SPACs are managed by a sponsor, who is often compensated by a percentage of the SPAC’s proceeds following the de-SPAC transaction.[17]

Private companies are attracted to going public through a de-SPAC transaction because of the potential for a shorter time frame for going public than the standard IPO process and the infusion of capital from the de-SPAC transaction.[18] Additionally, SPACs offer reduced liability when providing shareholders with projections for the de-SPAC transaction as compared to projections in an IPO.[19]

One critical issue with SPACs is that the SPAC sponsor and the SPAC shareholders have misaligned interests at the time of the de-SPAC transaction.[20] The SPAC sponsor profits from the de-SPAC transaction while the non-redeeming SPAC shareholders often lose value from the same transaction.[21] Because the sponsor’s profit is reliant on conducting a de-SPAC transaction, not the long-term success of the merger, sponsors aggressively seek merger partners.[22] At the same time, the sponsors profit more when less shareholders redeem their shares, so sponsors discourage the redemption of shares by romanticizing the potential profits from the de-SPAC transaction through projections.[23]

  1. SPAC Boom of 2020 and 2021

Traditionally, smaller companies who were not quite ready for the rigors of going public through the IPO process were the primary SPAC targets.[24] This led to a track record of poor performance for companies going public through SPACs, keeping SPACs as a niche vehicle for companies going public.[25]

            Enter Covid-19.

In 2020, SPACs raised $83 billion dollars in total, a figure greater than all of the money previously raised by all SPACs in history combined.[26] That figure was shattered when, in 2021, the total funds raised by SPACs nearly doubled to 162 billion dollars. [27] 2020 saw a total of 248 SPAC IPOs and 2021 saw another 613. The previous high in one year was 66 SPAC IPOs in 2007. In 2020, 2021, and 2022, public launches through SPACs outnumbered total launches through the traditional IPO process.[28]

The volatility caused by Covid-19 increased the difficulty for companies to go public through the IPO process, so some turned to SPACs to go public because they offered a quicker and reliable route.[29] The low interest rates during the early years of the pandemic made SPACs more appealing to investors because other assets such as government bonds were limited in upside.[30] Many investors were simply riding the stock market boom in 2020 and 2021—investors were looking for the next opportunity to capitalize, and SPACs provided that.[31]

However, the SPAC bubble had to burst at some point. SPACs are already riskier and more speculative than other investments because of the nature of the companies sought for business combinations, but this trend became even more drastic during the SPAC boom.[32] Only 15% of the companies that did SPAC deals during 2021 were profitable, down from 30% of companies going public through SPACs from 2013-2020.[33] At least 12 were already bankrupt by April of 2023, with many more in poor financial health.[34] The large financial investments and hype surrounding companies electing for the de-SPAC transaction left them vulnerable to over valuation, which resulted in disappointing outcomes during the poor economic conditions that followed the covid boom.[35]

SPACs as a whole, measured by the De-SPAC index, fell by 75% in 2022.[36] The more than 300 companies that went public through de-SPAC transactions from January of 2018 to April of 2022 have averaged a loss of 33% from the IPO price. The other ~1,000 companies to go public through the traditional IPO process during that time are averaging a loss of about 2%.[37] This obviously harms those investors who remained throughout the de-SPAC transaction as well as the stakeholders in the companies.

As a result, de-SPAC transactions seem to have fallen back to pre-pandemic levels. Only 86 SPACs IPOs occurred in 2022 and a mere 22 in the first eight months of 2023.[38] The value of all SPAC transactions drastically fell to 13 billion in 2022, and even more so with only 2.7 billion total raised in 2023 as of August.[39] Though the SEC cannot respond to the harms caused to investors by the SPAC boom, it can still mitigate future harms by finalizing the enhancement to investor protections regarding SPACs.

  1. The SEC’s Proposed SPAC Disclosures

In response to the swath of companies bypassing the IPO process and the resulting harm to investors, the SEC proposed rules to enhance investor protections in SPAC IPOs and in subsequent de-SPAC transactions.[40] These rules would add or enhance disclosure requirements for a variety of different facets of SPAC transactions.

At the SPAC IPO stage, the SEC would beef up disclosures regarding SPAC sponsors, conflicts of interests, and the fairness of de-SPAC transactions to SPAC investors.[41] The new rules would also deem the private company as a co-registrant to the SPAC, placing the private company firmly within the scope of SEC regulations.[42] The common theme for these disclosures is providing more information to the investor on what the SPAC owners and sponsors plan to do with the SPAC. This helps curb many of the issues leading to investors losing money on SPACs, particularly those issues stemming from investors and sponsors holding conflicting interests when preparing for a business combination.

The Commission places a good deal of emphasis on its enhanced projections disclosures for future economic performance of SPACs.[43] These enhanced disclosures would allow investors to better assess the true merits of the SPAC and make a better decision on whether to approve the target private company and whether to redeem their shares prior to the de-SPAC transaction.[44] This addresses the issue of sponsors romanticizing the outlook of a de-SPAC transaction to entice investors to not redeem their shares and instead remain through the business combination.

The proposed rules regarding the de-SPAC transaction stage—when the SPAC and private company merge to take the company public—are relatively straight forward. The SEC plans to treat the business combination similarly to an IPO.[45] This would eliminate most differences between going public through a SPAC or an IPO. That would likely remove many of the perceived benefits of going public through a SPAC and effectively eliminate SPACs as an IPO workaround. Companies may still pursue SPACs for reasons such as the quick capital infusion, but the process would no longer be a quick way for a company to go public with minimal SEC oversight.

[1] SEC Proposes Rules to Enhance Disclosure and Investor Protection Relation to Special Purpose Acquisition Companies, Shell Companies, and Projections, Securities and Exchange Commission, (Mar. 30, 2022)

[2] Statista Research Department, Number of SPAC IPOs in the U.S. 2003-2023, Statista (Aug. 21, 2023),

[3] Michael Klausner et al., A Sober Look at SPACs, 39 Yale J. on Regulation 228, 232 (2022).

[4] Amrith Ramkumar, SPACs Delivered Easy Money, but Now Companies are Running Out, The Wall Street Journal (Apr. 26, 2023),

[5] The Role of the SEC,,,Facilitate%20capital%20formation (last visited Nov. 9, 2023).

[6] Max Bazerman & Paresh Patel, SPACs: What You Need to Know, Harvard Bus. Rev. (2021),

[7] David Luther, What Is a De-SPAC Transaction?, Oracle Netsuite (Sept. 14, 2022),; Will Kenton, What is a Shell Coporation? How It’s Used, Examples and Legality, Investopedia, (last visited Nov. 9, 2023).

[8]  Luther, supra note 7.

[9] Special Purpose Acquisition Companies, Shell Companies, and Projections, Securities Act Release No. 11048, Exchange Act Release No. 94546, 87 Fed. Reg. 29458, at 8 (proposed Mar. 30, 2022).

[10] Pub. L. 101-429, 104 Stat. 931 (Oct. 15, 1990).

[11] Special Purpose Acquisition Companies, Shell Companies, and Projections, Securities Act Release No. 11048, Exchange Act Release No. 94546, 87 Fed. Reg. 29458 (proposed Mar. 30, 2022).

[12] 17 CFR 230.419(a)(2) (defining “blank check company” as a development stage company that has no specific business plan or purpose or that has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies, and that is issuing “penny stock,” as defined in 17 CFR 240.3a51-1 (Exchange Act Rule 3a51-1)).

[13] Special Purpose Acquisition Companies, Shell Companies, and Projections, Securities Act Release No. 11048, Exchange Act Release No. 94546, 87 Fed. Reg. 29458, at 24-25 (proposed Mar. 30, 2022).

[14] Id. at 10.

[15] Id. at 8, 10.

[16] Id. at 11.

[17] Id. at 9.

[18] Bazerman, supra note 6.

[19] Id.

[20] Klausner, supra note 3.

[21] Id. at 234.

[22] Id.

[23] Id.

[24] Devin Sullivan, A Look at SPACs: From the 90s to Covid-19, IR Magazine (Aug. 11, 2020),

[25] Id.; Statista, supra note 2.

[26] Statista Research Department, Size of SPAC IPOs in the U.S. 2003-2023, Statista (Aug 21, 2023),

[27] Id.

[28] Cameron McVie, The State of the SPAC Market, Russell Investments (Apr. 27, 2023),

[29] Alexander Osipovich, Blank-Check Boom Gets Boost from Coronavirus, The Wall Street Journal (Jul. 13, 2020),

[30] Amrith Ramkumar, 2020 SPAC Boom Lifted Wall Street’s Biggest Banks, The Wall Street Journal (Jan. 5, 2021),

[31] How did the Pandemic Usher in One of the Stock Market’s Greatest Runs?, CBS News (Mar. 23,  2021),

[32] Ramkumar, supra note 4.

[33] Id.

[34] Id.

[35] Id.

[36] McVie, Supra note 28.

[37] Michelle Celarier, SPACs are Sputtering. Desparate New Terms Could Send Them Into a Death Spiral, Institutional Investor (May 16, 2022),

[38] Statista, supra note 2.

[39] Statista, supra note 26.

[40] Special Purpose Acquisition Companies, Shell Companies, and Projections, Securities Act Release No. 11048, Exchange Act Release No. 94546, 87 Fed. Reg. 29458 (proposed Mar. 30, 2022).

[41] Id.

[42] Id.

[43] Id.

[44] Id.

[45] Specifically, the proposed rules would deem a de-SPAC transaction as a sale of securities to the SPAC’s shareholders. It would also require similar financial statements from the private company as those required from companies going through the IPO process. Id.

By Ben Woessner 

The last few decades have seen significant debate surrounding the generous compensation of the top executives of publicly-held corporations.  While some view the current system of pay as functional and driven by market forces like scarce executive talent,[1] many watch the upward trajectory of an increasingly disproportionate gap between executive pay and the average American’s salary with equally growing dismay.[2]

Some commentators point to the fact that executive compensation packages have increasingly utilized stock-based compensation to account for the trending upward spiral of executive pay, which may pose a threat to a company by potentially misaligning the interests of its directors with those of its shareholders.[3]  For example, while stock-based compensation attempts to award executives based on stock performance, thereby motivating higher returns to shareholders, it can also incentivize hedging transactions that permit directors to shield themselves from stock declines while still benefiting from compensation.[4]

In response to concerns regarding corporate transparency in the wake of the Financial Crisis of 2008, Congress instituted disclosure reforms through the Dodd-Frank Act of 2010, which, among other measures, included provisions for “clawback” recovery of incentive-based pay awarded on the basis of erroneous accounting reports.[5]  The implementation of a provision of the Act requiring a clawback of executive pay based on inaccurate reports regardless of whether the errors are “due to fraud, error, or any other factor” was delayed until recently.[6]

On Wednesday, October 26, the Securities and Exchange Commission (“SEC”) voted 3-2 in favor of a provision of the Dodd-Frank Act requiring publicly held companies to implement clawback policies to recover erroneously awarded incentive-based compensation paid to directors, even where the director had no responsibility over the inaccurate accounting statement.[7]  The new rule will require exchanges to “prohibit the listing of issuers that do not develop and implement policies to recover erroneously awarded incentive-based compensation.”[8]  These policies will be triggered whenever companies are forced to issue financial restatements for later-discovered accounting errors and will apply to compensation awarded up to three years from the policy’s implementation.[9]

The SEC intends the rule to “return erroneously awarded compensation to the issuer and its shareholders.”[10]  In so doing, the Commission hopes to realign the interests of executives and shareholders by increasing corporate accountability regarding the distorted incentives potentially created by stock-related forms of incentive-based compensation.[11]

However, the clawback rule may suffer from overbroad definitions that potentially undercut its goals to align executive and shareholder interest.  The first of these definitions concerns what qualifies as an accounting restatement that would trigger a recovery of incentive-based compensation.  Under the original proposal of the rule, only “Big R” restatements, or those that are “material to previously issued financial statements,” would trigger a clawback.[12]  However, the newly adopted rule also requires recovery of pay after so-called “little r” restatements—those that correct nonmaterial errors that could constitute material errors if left unreported.[13]

While the SEC hopes that including both material and immaterial restatements will incentivize executives to assert more control over accounting, thereby reducing instances of accounting error and allowing shareholders to put greater trust in the financial reporting of a company,[14] the rule contains another expansive definition that potentially undermines this goal.  The rule’s definition of “executive officer” not only includes the President, CFO, and principal accounting officer, but also “any other officer who performs a policymaking function.”[15]  As a result, even individuals who may have no actual control over the company’s compliance with accounting rules, and therefore no practical way to ensure greater accountability, are at risk of a compensation clawback.[16]

Furthermore, the clawback rule includes an expansive definition of what qualifies as incentive-based compensation that is subject to recovery if a company issues a financial restatement, including “any compensation that is granted, earned, or vested based wholly or in part upon the attainment of any financial reporting measure.”[17]  Therefore, at-risk compensation could include not only bonuses and equity-based compensation, but also nonqualified deferred compensation and long-term incentive compensation, so long as it is granted at least in part on the attainment of a financial reporting measure.[18]

Accordingly, critics of the rule argue that companies are likely to significantly decrease the amount of at-risk incentive compensation offered to executives, who will instead elect for a compensation restructuring to retain executive talent with higher salaries or increased discretionary bonuses unrelated to performance goals.[19]  Such restructuring would tend to go against the very heart of the clawback rule’s purpose—while clawbacks hope to align executive and shareholder interests through increased accountability, a shift away from performance-based compensation altogether may untie executive incentives from stock performance to the shareholder’s detriment.

When the rule goes into effect in about one year, the increasing trend toward shareholder activism may serve to keep potentially detrimental compensation restructuring in check.[20]  In fact, at least one study has shown that clawback policies required by the new rule are popular with shareholders as demonstrated by positive stock returns for companies following the initial 2015 announcement of the newly adopted clawback rule.[21] Nevertheless, in addition to being “burdensome to administer,” the rule may increase the divide between executive and shareholder interests as a result of its sweeping definitions, raising doubts as to whether its proposed benefit will outweigh its costs.[22]

[1] See generally Randall S. Thomas, Explaining the International CEO Pay Gap: Board Capture or Market Driven?, 57 Vand. L. Rev. 1171 (2004).

[2] Josh Bivens & Jori Kandra, Economic Policy Institute, CEO Pay Has Skyrocketed 1,460% Since 1978 (2022),

[3] Luis A. Aguilar, Aligning the Interests of Company Executives and Directors with Shareholders, Harv. L. Sch. F. on Corp. Governance (Feb. 16, 2015),

[4] Id.

[5] Gary Gensler, Statement by Chair Gensler on Final Rules Regarding Clawbacks of Erroneously Awarded Compensation, Harv. L. Sch. F. on Corp. Governance (Oct. 30, 2022),

[6] Id.

[7] Paul Kiernan, Accounting Errors to Cost Executives Their Bonuses Under SEC Rule, Wall St. J. (Oct. 26, 2022),

[8] Sec. & Exch. Comm’n, Listing Standards for Recovery of Erroneously Awarded Compensation 125 (2022),

[9] Id. at 86.

[10] Id. at 80.

[11] Id.

[12] Id. at 28.

[13] Meredith O’Leary et al., What SEC Bonus Clawback Rule Means For Public Cos., Law360 (Nov. 1, 2022, 4:52 PM),

[14] Id.

[15] Id.

[16] O’Leary et al., supra note 13.

[17] Sec. & Exch. Comm’n, supra note 8, at 57.

[18] O’Leary et al., supra note 13.

[19] Kiernan, supra note 7.

[20] Id.

[21] Id.

[22] O’Leary et al., supra note 13.