Brown questioned SEC Chair about SPACs and how they affect the market, referencing the case of Lordstown Motor Company (LMC) as one example in a broader trend
WASHINGTON, DC - United States Senators Sherrod Brown (D-OH), Elizabeth Warren (D-MA), Tina Smith (D-MN), and Chris Van Hollen (D-MD) sent letters to six creators of prominent Special Purpose Acquisition Companies, or SPACs, including David T. Hamamoto, CEO and Chairman of DiamondHead Holdings Corp., who helped create the SPAC involved in acquiring LMC.
SPACs are publicly traded shell companies that raise money to buy private companies and take them public. In the letters the senators raise concerns about abuses by the creators and operators of SPACs, including reports that insiders are taking advantage of legislative and regulatory gaps at the expense of ordinary investors. Last week during a Senate Banking, Housing, and Urban Affairs Committee hearing, Brown questioned Securities and Exchange Commission (SEC) Chair, Gary Gensler, about SPACs and how they affect the market, referencing the case of Lordstown Motor Company (LMC) as one example in a broader trend.
“We seek information about your use of SPACs in order to understand what sort of Congressional or regulatory action may be necessary to better protect investors and market integrity and ensure a fair, orderly, and efficient marketplace,” wrote the senators to each of the SPAC creators. “We are concerned about the misaligned incentives between SPACs’ creators and early investors on the one hand, and retail investors on the other.”
The senators have requested information from Howard W. Lutnick, Chairman and CEO of Cantor Fitzgerald; Michael Klein, Founder of M. Klein & Associates; Tilman Fertitta, Chairman and CEO of Fertitta Entertainment, Inc.; Chamath Palihapitiya, Co-Founder and CEO of The Social+Capital Partnership, L.L.C.; David T. Hamamoto, CEO and Chairman of DiamondHead Holdings Corp.; and Stephen Girsky, Managing Partner at VectoIQ, LLC.
SPACs have exploded in popularity in recent years, with sponsors asserting that SPACs present a faster and cheaper alternative to traditional initial public offerings (IPO). The trend is reshaping financial markets: as of last year, SPACs outpaced traditional IPOs as the preferred method for taking a company public.
However, industry insiders may be able to take advantage of retail investors, workers, and other community stakeholders throughout the SPAC process to the benefit of large institutional investors such as hedge funds, venture capital insiders, and investment banks: SPAC creators, or “sponsors,” have incentives to quickly strike merger deals, regardless of the quality of the deal or of the company to be acquired; early investors (often investment banks and hedge funds) are essentially guaranteed risk-free investments; both sponsors and early investors profit from hyperbolic, pre-merger claims about the company to be acquired; and retail investors who purchase shares based on those hyperbolic claims are often left with devalued shares. The SPAC business model does not lend itself to long-term investment in communities and can lead to less certainty for workers and potential workers at the companies being acquired.
The senators have requested responses no later than October 8, 2021.
Full text of the letters can be found here.