SPACs pose added risks to investors, ESMA warns

By James Langton | July 15, 2021 | Last updated on July 15, 2021
2 min read
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Citing concerns about conflicts of interest and disclosure, the European Securities and Markets Authority (ESMA) warned that special purpose acquisition company (SPAC) offerings may not be suitable for certain retail investors.

Following an increase in these kinds of shell company offerings in the first half of 2021, ESMA issued guidance on the kinds of investor protection issues that arise in SPAC transactions and how issuers and sponsors can meet their prospectus disclosure and product governance requirements.

Among other things, the regulator said these deals may not be appropriate for certain investors due to the added risks of dilution, conflicts of interest stemming from sponsors’ incentives, underwriting fee structures, and the uncertainty involved with identifying and valuing acquisition targets.

The regulator said that given the “risk and complexity” of SPAC deals, it expects issuers and dealers of SPAC shares and warrants to consider whether retail investors should be excluded from the target market for particular transactions.

It also said SPAC prospectuses should include added disclosure to ensure that investors are capable of making informed investment decisions.

This includes disclosure on issues such as the compensation paid to deal sponsors, and their future role, after the acquisition of a target company; information on potential governance changes after an acquisition; and the scenarios that could arise if a deal’s sponsors fail to find a suitable acquisition target.

“There has been a significant rise in SPAC activity in EU capital markets this year, and with this comes growing interest from investors,” said interim chair of ESMA, Anneli Tuominen, in a release. “Therefore, it is essential that investors are provided with the information necessary to understand the structure of SPAC transactions before making any investment decisions.”

ESMA said it’s monitoring activity in the SPAC market, as are other regulators, to “determine if additional action is necessary to promote coordinated supervisory action aimed at preserving investor protection.”

Many of these same concerns have arisen in other markets that have recently seen strong SPAC issuance activity.

Earlier this week, the U.S. Securities and Exchange Commission took action against a SPAC, its sponsor and its target company, alleging that the target misrepresented the status of its business to investors, and that these misrepresentations were repeated by the SPAC and its sponsors.

That case was settled with the firms agreeing to pay US$8 million in penalties, and to implement a series of additional investor protections.

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James Langton

James is a senior reporter for and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.