The Securities and Exchange Commission (SEC) proposed new rules and amendments that could significantly impact property technology (proptech) companies’ ability to go public. The SEC said it proposed these rules “to enhance disclosure and investor protection in initial public offerings (IPOs) by special purpose acquisition companies (SPACs) and in business combination transactions involving shell companies, such as SPACs, and private operating companies.”
These proposed new rules and amendments would require, among other things, additional disclosures about SPAC sponsors, conflicts of interest, and sources of dilution. They also would require additional disclosures regarding business combination transactions between SPACs and private operating companies, including disclosures relating to the fairness of these transactions.
Additionally, the new rules would address issues relating to projections made by SPACs and their target companies, including the Private Securities Litigation Reform Act safe harbor for forward-looking statements and the use of projections in Commission filings and in business combination transactions.
“Nearly 90 years ago, Congress addressed certain policy issues around companies raising money from the public with respect to information asymmetries, misleading information, and conflicts of interest,” SEC Chair Gary Gensler said in a statement. “For traditional IPOs, Congress gave the SEC certain tools, which I generally see as falling into three buckets: disclosure; standards for marketing practices; and gatekeeper and issuer obligations. Today’s proposal would help ensure that these tools are applied to SPACs.”
How SEC regulations could impact proptech companies
The SPAC route for going public has been an attractive one for a number of companies as well as sponsors. The business can become a publicly traded company often faster than if it went through the traditional IPO process. Meanwhile, sponsors collect sizeable fees for setting up the merger regardless of it was successful. That last point is partly why the SEC wants to adjust the rules around SPACs, The Real Deal reports. The commission sees the rule changes as a way to protect retailer investors who are not always aware of the risks that come with an early-stage, growth investment.
Meanwhile, there’s some belief it might be better for everyone involved if the SEC were to adjust the rules surrounding SPAC. Proptech companies that went public during the last two years through SPAC mergers have been on a downward slide into 2022, according to The Real Deal. This downturn comes following the height of the COVID-19 pandemic when some SPAC sponsors managed to sell investors on questionable deals by touting big growth projections.
“The vintage of SPACs that came to market in 2020 and 2021 in the proptech space have left investors with a number of messy stories to deal with,” said Ryan Tomasello, research director at the investment bank Keefe, Bruyette & Woods. “Performance projections have not been met, and their cash burn really calls into question, in some cases, their timeline to profitability.”
Meanwhile, shares of proptech SPACs dropped an average of 47% during the first quarter of 2022. The decrease was the result of investors deserting less profitable stocks during a market sell-off, per KBW research. These stocks were trading at an average of 51% below the standard $10 SPAC buy-in price.
Proptech SPAC deals have become rarer, only two new deals were announced in the last six months, but funding still exists, The Real Deal reports. In late April, there were sill 10 possible sponsors interested in a proptech or real estate-related company, according to data firm SPAC research. Their success in taking a proptech company public through a SPAC will partially depend on if regulators succeed in their proposed rule changes.