Elizabeth Warren Proposes Legislation Against SPACs: What Investors Should Know

A U.S. Senator is stepping up the pressure on SPACs as an investment vehicle to take companies public. Here’s what the SPAC Accountability Act of 2022 is all about.

What Happened: A new bill called SPAC Accountability Act of 2022 is being proposed by Democratic Senator Elizabeth Warren.

A report tied to the bill is set to be released Tuesday, according to Reuters. The report will lay out how SPACs have led to a “proliferation” of bad deals and losses for investors as a result.

Under the bill, the legal liability would increase for SPACs, with calls for enhanced investor disclosures and lock up periods being extended for investors who sponsor or help finance the mergers. The bill would include SPAC sponsors and board members and the target company as listed “underwriters” on SPAC mergers.

“This investigation found that Wall Street insiders have used SPACs as their own personal piggy banks while retail investors have suffered,” Warren said in a statement obtained by Reuters. “This industry is rife with fraud, self-dealing and inflated fees and the SEC and Congress should continue to act to crack down on these abuses.”

Related Link: Exclusive: What's Next For SPACs In 2022: Experts Share Stocks To Watch 

Why It’s Important: Even if not passed by Congress, the bill from Warren could put continued pressure on SPACs, which have already been circled heavily by the U.S. Securities and Exchange Commission.

Many in the SPAC industry have pointed to increasing supply of blank-check companies, which could lead to rushed deals, poor valuation and increased liquidation events.

SPACs offer several benefits to going public versus a traditional IPO, including being able to provide forward-looking estimates, increased incentives for financing sponsors and companies and the ability to get around some SEC rules put in place for IPOs.

The legislation from Warren could prove a cautious example that companies that go public either as IPOs or SPAC mergers could still be in the startup stage and pre-revenue and should be treated as high risk investments.

Warren has been vocal in fighting for changes in the ways the rich are taxed, which drew criticism from Tesla Inc TSLA CEO Elon Musk.

Warren is also fighting to ban members of Congress from buying and selling stocks while in office. 

The Senator has also been a vocal critic of cryptocurrencies, including Bitcoin BTC/USD.

Photo: Courtesy of Gage Skidmore on Flickr