SEC’s Disclosure Rules Point to Chilling Effect for SPACs

New rules proposed by the Securities and Exchange Commission (SEC) governing disclosure won’t necessarily sound the death knell for special purpose acquisition companies (SPACs).

But a chilling effect looms.

We’re almost at the end of the first quarter of 2022, and market volatility reigns.

Part of that has to do with macro concerns, but part of that also has to do with the signals being sent by the companies themselves.

Backing up for a minute, the SEC has proposed a rule that would change disclosures made by the SPACs. The rule is not set in stone yet, and it will be subject to a commentary period spanning 60 days. Then the rule will likely be finalized.

Read more: Investors Can Sue Over Inaccurate SPAC Forecasts

Wall Street lives on projections and guidance — in the form of estimates on market opportunity, market share, revenue growth rates and, trickling down (maybe), operating profits.

Now comes the SEC rule, which would make the SPACs have to mirror the discussions commonly held within traditional initial public offering (IPO) documents for other (non-SPAC) firms that go the traditional routes to be listed on U.S. exchanges.

In a nutshell, this means that SPACs will have to disclose all sorts of things they didn’t have to previously, such as possible dilution when those SPACs find target companies and make acquisitions. And they risk being held liable for misrepresentations and the projections that they disclose in those SEC documents.

FOMO

Forward projections are a tricky thing. No one knows the future, so sanguine ideas of those metrics may be optimistic but ultimately unrealistic. Eventually, when earnings reports do come and actual numbers fall short of the projections, well, shares get punished.

If investors’ appetites are stoked by the idea of hyper growth, and they pile in on the back of that age-old FOMO (fear of missing out), throwing some cold water on those projections will likely have a chilling effect on the SPAC filings themselves. After all, how much is too much when it comes to crafting projections?

SPAC vehicles generally have two years in which to make an acquisition, or they risk dissolving and giving the money raised back to investors. We’re seeing some arguably desperate measures tied to keeping investors in place, including issuing an ever-widening pool of equity to investors, which does several things. Chiefly, the “newer” tranches of investors’ ownership dilutes the holdings of older tranches of investors, especially the original SPAC holders.

See more: SPAC Efforts to Keep Investors Aboard May Not be Enough to Calm Turbulence

Last year, PYMNTS own tracking showed more than 70 listings across traditional IPOs and SPACs in the banking sector alone. This year, and as is germane to the payments space, seven firms have withdrawn their listings, with an average would-be market cap of about $425 million.

With the heightened scrutiny on the part of the SEC on projections, Grab stands out as a key exhibit in the cautions tied to “busted” IPOs. Grab went public late last year, and on the first day of trading, shares tumbled 20% to $8.75. Recent quotes had the company’s shares changing hands at $3.55.

Read more: Grab Goes Public as Super-App Competition in SE Asia Heats Up

As detailed earlier this month in its first quarterly earnings report as a public company, Grab Holdings posted a decline in revenue as spending increased to offer higher commissions to attract drivers and greater incentives to users and partners.

See more: IPO Overhead, Driver Incentives Take Bite out of Grab’s Earnings

Gross merchandise volume (GMV) went up by 29% year over year to hit $16.1 billion, with the fourth quarter up 26% to reach $4.5 billion, the fourth consecutive record quarter. Revenue — net of consumer, merchant and driver-partner incentives — went up 44% year over year to $675 million. Fourth-quarter revenue was $122 million, down 44% year over year.

But in Grab’s F-4 filings with the SEC, the company had projected net revenues for this year at $3.3 billion — coming from 2021 when revenues were $675 million (and the filings had looked for net revenues of $2.3 billion last year).

The devil is in the details, as they say, and the details are in the projections.