The Securities and Exchange Commission (SEC) has proposed new rules and changes that could significantly impact the ability of real estate technology (proptech) companies to go public. The SEC said it is proposing these rules “to improve disclosure and investor protection in initial public offerings (IPOs) by special purpose acquisition companies (SPACs) and in business combination transactions involving shell companies, such as SPACs, and private operating companies”.
These new rules and proposed changes would require, among other things, additional disclosures about SPAC sponsors, conflicts of interest and sources of dilution. They would also require additional disclosures regarding business combination transactions between SPACs and private operating companies, including disclosures relating to the equity of those transactions.
In addition, the new rules would address issues related to projections made by SPACs and their target companies, including the Private Securities Litigation Reform Act’s safe harbor rule for forward-looking statements and the use of projections in filings by the Commission and in business combination transactions.
“Nearly 90 years ago, Congress addressed certain policy issues regarding companies that raise funds from the public regarding information asymmetries, misleading information, and conflicts of interest,” said the SEC Chairman Gary Gensler in a statement. “For traditional IPOs, Congress has given the SEC certain tools, which I generally consider to fall into three categories: disclosure; standards for marketing practices; and the obligations of the custodian and the issuer. Today’s proposal would ensure that these tools are applied to SPACs.
How SEC regulations could impact proptech companies
The SPAC route to going public has been attractive to a number of companies as well as sponsors. The company can become a publicly traded company often faster than if it went through the traditional IPO process. Meanwhile, the sponsors receive significant fees for setting up the merger, even if it was successful. This last point partly explains why the SEC wants to adjust the rules regarding SPACs, the real deal reports. The commission sees the rule changes as a way to protect retail investors who may not always be aware of the risks of early-stage growth investing.
Meanwhile, some think it might be better for everyone involved if the SEC adjusted the rules surrounding SPAC. According to The real deal. This slowdown comes after the peak of the COVID-19 pandemic when some SPAC sponsors successfully sold investors on dodgy deals by touting big growth projections.
“The vintage of SPACs that hit the market in 2020 and 2021 in the proptech space has left investors with a number of messy stories to grapple with,” said Ryan Tomasello, research director at investment bank Keefe. , Bruyette & Woods. “Performance projections have not been met, and their cash burn really challenges, in some cases, their profitability schedule.”
Meanwhile, proptech SPAC stocks fell an average of 47% in the first quarter of 2022. The drop was the result of investors dumping less profitable stocks during a market sell-off, according to KBW research. These stocks were trading an average of 51% below the standard $10 SPAC buy price.
Proptech SPAC deals have become rarer, only two new deals have been announced in the past six months, but funding still exists, The real deal reports. At the end of April, there were still 10 potential sponsors interested in a proptech or property-related company, according to data firm SPAC Research. Their success in taking a proptech company public through a SPAC will depend in part on whether regulators do well with proposed rule changes.