SPACs face fresh SEC legal threat for overly bullish forecasts

A construction worker outside the U.S. Securities and Exchange Commission headquarters in Washington, D.C., U.S., on Wednesday, Feb. 23, 2022. Hedge funds and other investors would have less time to disclose that they've acquired a significant stake in a company under new rules proposed by the SEC. Photographer: Al Drago/Bloomberg

SPAC sponsors who embellish projections about the companies they plan to take public face a new threat in a plan from the U.S. Securities and Exchange Commission.

Wall Street’s main regulator will propose curbing the legal protections that some blank-check companies have relied on to make bullish forward-looking statements about the firms they plan to merge with, according to people familiar with the matter who requested anonymity because the plan is not yet public. The regulation, set to be released on Wednesday as part of a broader set of SPAC rules, would clarify that investors can sue over inaccurate special purpose acquisition company forecasts.

SEC Chair Gary Gensler has repeatedly raised concerns about blank-check firms, which list on public stock exchanges to raise money so they can buy other companies. He’s previously said the agency is looking into issues including disclosure inconsistencies and how investors are informed about fees. The watchdog’s enforcement lawyers have also stepped up scrutiny.

The SEC declined to comment. Limiting SPACs’ so-called safe harbor from legal liability is in line with rules that currently exist in a traditional initial public offering. The restrictions generally prevent companies from giving guidance that may not come to fruition.