SEC's blank-check rules coincide with market slump

The big picture: Following the SPAC mania of 2020–2021, the SEC proposed rules nearly two years ago to curb what it saw as loopholes in regulations for blank-check companies.

• Among other changes, the final rules will deny SPACs and their acquisition targets a safe harbor when making forward-looking statements (think: wild growth projections).

What they're saying: "The new rules have substantial improvements," says NYU assistant law professor Michael Ohlrogge, who has been critical of SPACs.

• "There's no justification for having two ways to go public," he added, addressing disparities in requirements between SPACs and traditional IPOs.
• Much of Ohlrogge's concerns have been about the opacity around costs for investors, which he feels the new disclosure requirements address.

Between the lines: "The new rules are more of a formalization of things that have been put into practice over the last couple of years," said Derek Kearns, a partner at Centri Business Consulting.

• That is, the SEC's comments on documents submitted by SPACs and target companies over the last two years have been broadly in line with the rules it approved this week, making it less of a sudden shock to the system.
• Kearns also expects the change to safe harbor rules to result in lower, more conservative, or even no projections at all from companies as they seek to tap markets.

Zooming out: Despite a significant slowdown in the market, SPACs continue to announce and close deals, including:

• New York AI company Fusemachines' newly announced merger with CSLM Acquisition Corp., and Lionsgate's plan to spin out its studio business to merge it with Screaming Eagle Acquisition Corp.

Yes, but: Market trends have undoubtedly changed. SPACs tend to be much smaller, notes SPAC Research founder Ben Kwasnick.

• Additionally, "we've seen financing take on a huge amount of structure over the last two years — investors want be protected," he says.
• "I was hoping to see a significant move in the direction of cash flow–positive companies.… We are not seeing that as much as I would like."

Data from SPAC Research shows how 2023's announced and closed SPAC mergers reveal a much less frothy market than in years past, with dollar values telling the story.

• A large number of those that went public in 2021 appear to have pushed through and found companies to merge with. But a significant drop in value shows that the market has indeed retreated from its former, lofty heights.
• 2021: 199 deals closed (total value of $471.4 billion), three deals announced ($2.6 billion).
• 2022: 102 deals closed ($180.3 billion), 26 deals announced ($26 billion).
• 2023: 98 deals closed ($45.5 billion), 105 deals announced ($92.1 billion).
• 2024: 3 deals closed ($200 million), nine deals announced ($400 million).

Moreover: There's a lot of disagreement over what took down the SPAC boom.

• Skeptics like Ohlrogge point to the artificially inflated valuations of target companies eventually getting a reality check, yet proponents of SPAC point to the interest rate hikes and overall stock market's downturn.
• Meanwhile, Betsy Cohen, founder of The Bancorp and a serial SPAC sponsor, tells Axios that she doesn't believe the new regulations will squash the industry. But she does predict "it will thin out and perhaps allow knowledgeable and experienced sponsors to continue in a responsible way."

The bottom line: "There's only so much the SEC can do," NYU's Ohlrogge tells Axios, noting that it would have been unlikely for the commission to pass thoughtful rules as fast as the SPAC boom took off.

• "They can't stop inventors from doing foolish things."