Safe-Harbor Rules and Forward-Looking Projections in Special Purpose Acquisition Companies

Posted on Jan 29, 2022

Jonathan Pry

 

Taking a company public can provide it important benefits. Such benefits include increased liquidity and information on share price.[1] But legislation such as the Security Exchange Acts and Sarbanes-Oxley and Securities and Exchange Commission (SEC) regulations require heightened transparency and a minimum level of disclosures by public companies.[2] Further, when a company initially goes public, the method in which they choose to go public can affect what they must disclose and what requirements they must follow.[3] For instance, during a traditional IPO process, companies cannot make forward looking statements without potential private liability should they prove incorrect.[4]

Alternatively, if a company goes public through a SPAC, it is technically merging with a public company and can make forward-looking projections by using safe harbor rules without private liability under the Private Securities Litigation Reform Act (PSLRA).[5] This article specifically looks at the issue of forward-looking projections made by de-SPACing companies[6] and argues that such projections should be allowed without private liability even though the rules are not equal to those of IPOs. It does so by providing data on how often de-SPACing companies make forward looking projections, revise those projections, and what that does to the stock price of the newly minted public company.

 

 

 

 

 

 

 

  1. Data

This article examines seventy-six different companies that went public through the de-SPACing process.[7] Of those seventy-six de-SPACed companies, fifty-eight made forward-looking projections and only sixteen explicitly revised those projections. Sixteen seems like a shockingly small number of companies that are transparent about their forward-looking projections. However, there seems to be no correlation between a revision in forward-looking projections and stock price. Out of the sixteen revisions, nine revisions led to negligible changes in the company’s stock price, five resulted in downward shifts in stock prices, and two resulted in immediate upward shifts in the stock price. Further, when examining the overall stock price of the companies over time, ten of the revised companies are down overall, five are up overall, and one has a negligible difference in price from going public to the present.[8] This data all seems to indicate that forward-looking projections simply do not matter much to most investors because such revisions created no strong indicator that investors reacted poorly to the news. They likely in fact ignored such revisions.

  1. Policy Considerations

Investors do not rely heavily on forward-looking statements. Retail investors are by definition a non-professional investor who trades in securities.[9] They likely do not look through various S-4 filings and 8k reports to see whether a company is making forward-looking projections or what their future customer acquisition projections are.[10] Even if they did use such projections, they would risk misusing the information anyway. They likely do not know how to use the information and if they did, they would likely steer clear of using the information, much like an analyst or experienced investor would, because it is useless.[11] As shown in the findings section, the stock price does not change much as a result of revisions to the forward projected profits and revenues therefore most retail investors are not hurt by any revision. So, this probably is not very much of a problem for retail investors.

Some retail investors probably do look toward forward-looking statements and use them in their investment decision contrary to what this article has provided. However, because they are complex and difficult statement to decipher, these individuals likely do not use such statements correctly.[12] It is unfortunate that these investors lose some amount of money by investing in the de-SPACed company. However, The S-4 contains explicit language stating that the forward projections are cautionary and should not be relied upon and that they are subject to change.[13] Thus, while the practice of making forward-looking statements hurts some retail investors, it is certainly not a significant number of them.

Institutional investors are also likely not hurt by the practice of forward-looking projections. Analysts and experienced investors already know the projections are effectively meaningless. They are able to filter important from unimportant data and build accurate models and projections. So, even though companies are making forward-looking projections, this would not affect their decision making in basically any capacity.

Much like with the retail investor analysis, should an institutional investor rely on the forward-looking statements, then they are likely at fault. They are experienced investors and analysts with the ability to interpret and model complex companies. If they are using a metric that is nearly certainly faulty, then the fault lies upon them and not anyone else. So, if anything this actually helps an efficient economy. Capital should not be allocated to inefficient institutional investors who are incapable of filtering important information from useless information. So, there does not seem to be any specific harm to institutional investors presented by de-SPACing companies providing forward-looking projections in their S-4s.

III. Recommendation

Given the considerations regarding retail investors and institutional investors it seems that forward-looking statements do not propose any substantial risk. Unless an empirical study can show a distinct causal reliance on such statements, it would be unintuitive to say investors rely on such statements. As such, there is no true need for Congress or the SEC to get involved. They should utilize their resources elsewhere.

  1. Conclusion

The data clearly show that de-SPACing companies make forward-looking statements and often do not revise those projections. However, because investors likely do not often rely on such statements, the SEC and Congress should not concern themselves with the difference in treatment between SPACs and IPOs. Instead, they should allocate their resources elsewhere barring some scenario that may arise in which investors would begin to rely on such forward-looking projections.

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[1] Morgan Hunsaker, IPO Advantages and Disadvantages, IPOHub (Nov. 28, 2017), https://www.ipohub.org/ipo-advantages-disadvantages/.

[2] Exchange Act Reporting and Registration, SEC (last modified Oct. 28, 2018), https://www.sec.gov/smallbusiness/goingpublic/exchangeactreporting, Public Company SEC Reporting Requirements; Anthony L.G., PLLC, http://www.legalandcompliance.com/securities-resources/sec-requirements-for-public-companies/ (last visited Jan. 6, 2022).

[3] See infra. Part I.

[4] Michael Klausner, et al., A Sober Look at SPACs 52, Yale J. on Regul. Forthcoming, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3720919

[5] Id.

[6] The process in which private companies go public through SPACs is commonly called “de-SPACing”. See De-SPACing: Overview, Special Securities Law and Financial Statement Considerations and Derisking the Process with a PIPE Transaction, Mayer Brown (Jan. 27, 2021), https://www.mayerbrown.com/en/perspectives-events/events/2021/01/de-spacing-overview-special-securities-law-and-financial-statement-considerations-and-derisking-the-process-with-a-pipe-transaction.

[7] Data collected from Completed SPAC Screener, SPAC Track, https://spactrack.net/closedspacs/ (last visited Jan. 6, 2022); List of Companies That Went Public by Merging with a Special Purpose Acquisition Company, Stock Market MBA,https://stockmarketmba.com/listofcompaniesthathavemergedwithaspac.php (last visited Jan. 6, 2022).

[8] The data was collected as of December 13th, 2021. So, there may be slight differences.

[9] Adam Hayes, Retail Investor, Investopedia (Dec. 17, 2021), https://www.investopedia.com/terms/r/retailinvestor.asp.

[10] Alastair Lawrence, et al. Investor Reliance on the Crowd (Working Paper, 2017), https://ssrn.com/abstract=2945411

[11] Id.

[12] H. David Sherman & S. David Young, Where Financial Reporting Still Falls Short, Harv. Bus. Rev. (July 2016),https://hbr.org/2016/07/where-financial-reporting-still-falls-short

[13] 15 U.S.C. § 78u–5