Securities Industry Commentator by Bill Singer Esq

FINRA Arbitration Panel Slams Cetera Advisors with $3 Million Defamation Damages (BrokeAndBroker.com Blog)

SEC Alleges Fraud in Digital Asset Securities Offerings (SEC Release)

Medley Management and Former Co-CEOs to Pay $10 Million Penalty for Misleading Investors and Clients / Settlement Structured to Expedite Payment to Bondholders Through Related Bankruptcy Proceeding (SEC Release)

Robert Lenard Booth Convicted Of Defrauding Investors Of Nearly $2 Million /Jury Convicts Robert Lenard Booth for Conspiracies to Commit Securities Fraud, Wire Fraud, and Money Laundering (DOJ Release)

SEC Charges Promoters of "Automated Cryptocurrency Fund" with Fraud and Registration Violations (SEC Release)

SEC Charges Brazilian Mining Company with Misleading Investors about Safety Prior to Deadly Dam Collapse / Since 2016, Vale manipulated safety audits and obtained fraudulent stability certificates (SEC Release)

Founders Of Fake "Hedge Fund" Plead Guilty To Federal Charges For Orchestrating A $4 Million Ponzi Scheme (DOJ Release)

Remarks at Virtual Roundtable on the Future of Going Public and Expanding Investor Opportunities: A Comparative Discussion on IPOs and the Rise of SPACs by SEC Commissioner Caroline A. Crenshaw

After the SEC's PAUSE, We're Left Wondering Why (BrokeAndBroker.com Blog)

Pro Se Customer Sues Robinhood But Fails To Show For Round One of FINRA Arbitration (BrokeAndBroker.com Blog)

Who Opened What Type of Account Becomes a Dilemma in E*Trade Federal Court Motion (BrokeAndBroker.com Blog)

[I]n December 2017, Chiang launched NASGO, a company that claimed to have developed a blockchain-based platform on which clients could use digital asset securities called NSG tokens. Chiang and Tippetts then allegedly conducted an unregistered offering of NSG tokens to the public, in which they allegedly lied about the volume of NSG tokens sold, the number of users subscribed to NASGO's platform, and the projected value of NSG tokens. The SEC alleges that Tippetts repeated these claims at a Las Vegas blockchain convention and in videos posted to popular social media sites.

The SEC further alleges that, as investor interest in NSG tokens waned, Tippetts and Hardy created a new entity, Sharenode, to "market" the NASGO platform. According to the SEC's complaint, Tippetts and Hardy used Sharenode to launch another unregistered offering of securities issued by Sharenode called SNP tokens. As alleged, Tippetts and Hardy falsely claimed that the SNP tokens were on the NASGO blockchain and would increase in value by $.10 each week and $.10 for each new business that joined the NASGO platform. The SEC alleges that Tippetts, Hardy, and Chelliah promoted SNP tokens to investors through direct contacts, multi-level marketing strategies, and misleading video presentations posted to social media sites.

According to the SEC's complaint, the defendants misappropriated nearly $4 million of investor funds. The SEC also alleges that Chiang and Tippetts misused additional Sharenode investor funds by spending at least 133 bitcoin to list NSG tokens on an unregistered trading platform and to fund a team of captive traders to trade NSG tokens amongst themselves to create the false appearance of a robust market with increasing prices. These traders allegedly created the false impression that more than $2.5 million worth of NSGs were traded daily on BitForex during the first 60 days and that the price of NSGs was steadily increasing due to investor demand. According to the complaint, however, the manipulation scheme collapsed when investors tried to sell their NSG tokens, because there were no actual buyers, causing the token's trading price and volume to fall precipitously.

[S]ince at least August 2016, in multiple public filings, including bond offering materials, Medley overstated its assets under management by including "committed capital" amounts from non-discretionary clients, whose agreements with Medley imposed no obligation to invest with Medley and whose investing activity through Medley was minimal. The Taubes and Medley did not disclose that there was a risk that a significant amount of the clients' capital would never be invested and would therefore never generate the fee income on which Medley's financial growth depended. The order additionally finds that in June 2018 the Taubes used positive projections of Medley's likely future growth, for which they had no reasonable basis, to recommend to advisory clients a merger whereby Medley's two business development company clients would acquire Medley and give the Taubes contracts for high-paying jobs. The order finds that the materially misleading projections were incorporated into calculations of the "expected" benefit included in the proxy materials that encouraged investors to vote in favor of the transaction.

From at least June 2019 through August 2021, BOOTH ran, and conspired with others to run, a boiler room operation that impersonated Manhattan-based brokerage firms and sold investors nearly $2 million in securities that they never received. To deceive investors, BOOTH and his co-conspirators created fake identities and false and misleading webpages, email addresses, and phone numbers. On phone calls with investors, BOOTH and others pretended to be licensed brokers, lied, and used high-pressure tactics to pitch stocks for American companies. They followed up by sending the victims false paperwork to confirm the alleged stock purchases and trades.

The victims were directed to wire payments -- sometimes hundreds of thousands of dollars -- to shell company accounts in New York, Hong Kong, and Singapore. The funds were laundered and distributed to BOOTH and his co-conspirators.

The SEC alleges that the San Francisco-based Block Bits entities, Dillman and Mata raised almost $1 million from over 20 investors based on misrepresentations about an automated digital asset trading bot that was never functional. Dillman also falsely claimed that the fund's assets were invested in purported risk-free "cold storage" deals, when in reality Dillman and Mata used the funds for high-risk loans and to invest in the AML Bitcoin initial coin offering, which the Commission has alleged was a fraudulent unregistered securities offering in SEC v. NAC Foundation, LLC, et al., N.D. Cal. case no. 3:20-cv-04188, filed June 25, 2020.

The Securities and Exchange Commission today charged Vale S.A., a publicly traded Brazilian mining company and one of the world's largest iron ore producers, with making false and misleading claims about the safety of its dams prior to the January 2019 collapse of its Brumadinho dam. The collapse killed 270 people, caused immeasurable environmental and social harm, and led to a loss of more than $4 billion in Vale's market capitalization. 

According to the SEC's complaint, beginning in 2016, Vale manipulated multiple dam safety audits; obtained numerous fraudulent stability certificates; and regularly misled local governments, communities, and investors about the safety of the Brumadinho dam through its environmental, social, and governance (ESG) disclosures. The SEC's complaint also alleges that, for years, Vale knew that the Brumadinho dam, which was built to contain potentially toxic byproducts from mining operations, did not meet internationally-recognized standards for dam safety. However, Vale's public Sustainability Reports and other public filings fraudulently assured investors that the company adhered to the "strictest international practices" in evaluating dam safety and that 100 percent of its dams were certified to be in stable condition.  

[F]rom October 2020 to December 2021, Page and Teague engaged in an investment scheme that defrauded hundreds of investors, some of whom were at or near retirement age, of more than $4 million. Court documents show that the defendants falsely represented to victims that Page and Teague were running a hedge fund in Kings Mountain, N.C., D&T Investment Group (D&T), that invested in various securities, including stock of well-known companies like Apple. Contrary to representations made to victim investors, D&T was not a hedge fund and it did not hold any securities licenses or registrations. Also, Page and Teague were not licensed to sell securities and did not have a background associated with the sale of securities. In fact, prior to orchestrating the investment scheme the defendants sold campers.

According to court documents and admissions made in court, Page and Teague required investors to sign, among other documents, an investment contract with D&T. These documents contained false information, including that D&T would guarantee 100% of the investors' initial investment, and that investors would receive 70% of the trading profits. In reality, the investors' money was not guaranteed, and the purported "profits" investors received were Ponzi-style payments, whereby the defendants used new investors' money to make payments to existing investors. To cover up the fraud, Page and Teague sent victim investors monthly statements that reflected fictitious trading gains. When certain investors and D&T employees began to question the legitimacy of D&T's operations, Page created fictitious screenshots of various financial accounts that reflected inflated D&T account balances. For example, Page created a fake screenshot of a D&T brokerage account that reflected a balance of over $16,000,000, when in reality the account had a balance of less than $7.00. 

Contrary to representations made to victims, their money was not generally invested in securities. In addition to making Ponzi payments to investors, a significant portion of the funds was used to pay excessive salaries and other compensation to D&T employees, including to members of Page's family. For example, Page paid several D&T employees annual salaries of over $100,000 and also paid certain employees several thousand dollars each for getting the D&T company logo tattooed on their bodies. The defendants also squandered victims' money on personal expenses such as clothing, jewelry, travel, luxury car rentals, and to make cash withdrawals.

On December 2, 2021, as the fraudulent scheme was collapsing, the defendants traveled to Italy. On the same day, Page informed D&T employees, who did not know that D&T was a fraud, that they would be closing the company. The pair was arrested on New Year's Eve at JFK Airport in New York upon their voluntary return to the United States.

Thank you Hal [Scott] for that kind introduction and for inviting me to speak today. I am honored to precede such an esteemed panel of practitioners and academics. As always, I must give my standard disclaimer that my remarks are my own and do not necessarily represent the views of the Commission or its staff.

I cannot emphasize enough how important discussions such as today's are - thinking through some of the most pressing questions in our markets. And, one of those areas is Special Purpose Acquisition Companies, or SPACs. Now, of course, this was an issue that we were paying attention to well before the notice and comment period for the SPAC rulemaking proposal. But nothing takes place in a vacuum, and the meteoric rise in SPACs and the Commission's proposed rulemaking must be considered in the context of changes in both the public and private markets. So today's topic is particularly apt. I hope the roundtable will be one of many, and that such discussions will lead to academic work, public input, and engagement from all stakeholders and interested parties.

As you are all aware, the U.S. public markets provide many benefits, including disclosures and safeguards at the offering stage followed by periodic reporting, public trading venues that offer high degrees of liquidity, and an ecosystem of laws and regulations that provide investors with protections and remedies when needed. In 2020, 165 operating companies went public via a traditional initial public offering (IPO).[1] There were a total of 248 SPAC IPOs that same year,[2] meaning roughly 60% of all IPOs were conducted through SPACs. While that level of SPAC activity may not be sustained over the long-term, it is clear SPACs provide an alternative to the traditional IPO model, and may offer some competitive challenges. That's a good thing. But, perhaps, we need to be careful not facilitate a race to the bottom in terms of public market protections. And since the boom, the Commission and its staff identified several areas of concern with SPACs. Such concerns include misaligned incentives, several points of dilution that may disproportionately impact retail investors, and a lack of liability that may be creating an unjustified advantage in this path to the public markets over the traditional IPO.[3] The questions and challenges of how to adequately address these concerns in a balanced way remain. And I, of course, look forward to your thoughts and engagement on the SPACs proposed rulemaking.

I noted this a couple of weeks ago during prior remarks, but I think it is a point that bears repeating: there is an ongoing debate about what the right balance is between the public and private markets, and what that means for retail investors. For today's symposium, we are focused on the balance within the public markets, between the two primary paths to becoming a publicly traded company - SPACs and traditional IPOs.[4] However, these questions of balance within the public markets are really a part of a broader debate about the balance between public and private markets. The private markets are growing, with more companies remaining private for longer, while enjoying more access to private capital than at any time in recent memory.[5] I look forward to the panel, and to the future discussions and research that the panel may generate. But I would encourage the panel to contextualize their discussion about SPACs in light of the growing divide between public and private markets. I will try to do the same, as I highlight some additional observations about SPACs.

Shareholder Voting

In elections for political office, the ideal has been "one person, one vote." In corporate governance, the ideal that some cite is "one share, one vote."[6] The shareholder vote is meant to be a key check on management, on whom investors rely to generate returns and manage risks.[7] Shareholders exchange their capital for ownership shares, and depend on a board of directors and management to represent their interests in the operation and decision-making of a corporation. Shareholders generally only vote on a few fundamental events in a corporation's life, including certain proposed mergers and acquisitions. However, shareholder ownership is often dispersed, which may diffuse the incentives for individual investors to meaningfully participate in corporate governance, and diligence proposed mergers and acquisitions.[8] In SPACs, that lack of incentive to meaningfully participate in governance of the shell company and the selection of a target for de-SPAC may be especially acute.

As you know, early investors in a SPAC IPO are issued "units," which typically include redeemable shares and a fraction of a warrant. Such units are nominally priced at $10, and a full warrant entitles the shareholder to buy a share at an exercise price at a future date.[9] The shares and warrants usually begin trading separately after a certain period and, typically, investors may only exercise whole warrants, not fractions of warrants.[10] Once the SPAC sponsors identify a target for de-SPAC, there is a shareholder vote. If a de-SPAC is approved by the requisite majority vote, shareholders have the option to hold onto their shares and become shareholders of the de-SPAC'd entity - or, they can redeem their shares. Interestingly, the choice to redeem one's shares does not impact the ability to vote in favor of completing the de-SPAC. So a shareholder can vote to approve the de-SPAC transaction and redeem their shares to recoup their initial investment plus any interest earned while funds were in the SPAC's trust, and retain their warrant. In effect, a redemption but vote to approve insulates from downsides, but retains some exposure to upsides through warrants. This seemingly eliminates the incentive for shareholders to consider whether the proposed de-SPAC is actually worthwhile, and perhaps erodes incentives for sponsors to make a thorough, well-reasoned, well-supported case for the transaction to the shareholders.[11] Data collected indicates that an average of 58% of SPAC IPO shareholders redeemed in 2020-2021,[12] and reporting indicates that redemptions from the first quarter of 2022 are higher.[13]

So what is the problem here? SPACs involve sophisticated sponsors, underwriters, shareholders, PIPE investors, and private operating companies. Some may argue that, even if the voting mechanism is a rubber stamp, diligence of the proposed transaction still occurs at a couple of levels. First by the sponsors and other SPAC related advisors, and then by the PIPE investors who come in at a later-stage. And the SEC has a proposal out that seeks to address these concerns. So why am I talking about SPAC voting today? One reason is that SPACs were not always structured to allow for unlimited redemptions, and observers have noted that allowing SPACs to consummate a de-SPAC even when a substantial majority of shareholders redeems its shares creates and contributes to poor incentives, increases potential for dilution, and raises investor protection concerns.[14]

Stock exchanges are self-regulatory organizations and gatekeepers that provide investor and corporate governance protections. As part of that gatekeeping function, the exchanges establish listing standards designed to protect financial markets and the investing public. With regard to SPACs, one exchange formerly had listing standards that required certain redemption thresholds, or really non-redemption thresholds, to be met in order for a de-SPAC'd company to be publicly listed.[15] In other words, a certain amount of shareholders had to stay in order for the de-SPAC'd company to be listed as a public company.[16] At that time, this was industry practice, and it was codified as a listing standard.[17] However, that industry practice, and the listing standard that enshrined it, has changed.[18] While there may have been valid reasons for allowing the redemption threshold requirement to lapse, it may be appropriate to reconsider the balance of equities in light of the recent experience with SPACs, the high-rates of redemption, and a de-SPAC merger approval vote that increasingly seems pro-forma rather than an actual check that helps ensure only well-considered acquisitions proceed.[19] To be clear, the option to redeem is an important investor safeguard, it is one safety valve against potential misaligned incentives between sponsors and shareholders; and illiquidity in shell company shares. The right to redeem should likely be protected. However, it is another question as to whether redeeming shareholders should retain the ability to vote to approve the de-SPAC after recouping their capital. As the Commission's proposal notes, "cases where. . .the shareholders are able to vote in favor of a merger but also redeem their shares. . .could present a moral hazard problem, in economic terms, because these redeeming shareholders would not bear the full cost of a less than optimal choice of target."[20]

Further, in a scenario of high redemptions, the SPAC affiliates,[21] may still be incentivized to consummate a merger and may rely upon new PIPE investors to offer later-stage funding, potentially at the cost to those shareholders that did not redeem.[22] As the SEC's Office of the Investor Advocate recently noted in public recommendations, current listing standards contribute to "an inherent conflict of interest in the consummation of the SPAC's proposed business combination. . .permit[ing] these [de-SPACs] to occur even when assets are depleted by significant exercise of conversion rights, and early investors have economic incentives to allow deals of questionable quality to occur."[23] Importantly, the Investor Advocate has urged all exchanges that list SPACs to implement a conversion threshold of at least 50 percent, similar to a previous listing standard, to "ensure at least half of the outstanding shares of the SPAC" keep skin in the game. This would help protect against a redemption of the majority of shares depleting the SPAC trust and raising the potential for dilution for those investors that do not redeem.

So as you discuss these issues today, I am curious about your thoughts. What impact do redeemable shares without limitations on conversion thresholds have on the different investors in the SPAC? And what impact does this have on the integrity of the public markets and investors' confidence in those markets?[24] When PIPE investors step-in to replace the financing that exits when there are high-redemptions - how does that shape the negotiations, and to what extent are remaining investors harmed by dilution because PIPE investors demand better terms? Do these combined circumstances contribute to momentum for sub-optimal or inefficient de-SPAC transactions? Further, I'm interested in understanding who the shareholders who choose not to redeem and convert their investment into the de-SPAC'd operating company are. Do those shareholders represent a minority view that the proxy disclosures represent an outlook that outweighs the risk of non-redemption? Or are those investors remaining for other reasons?

SPACs -- The Equity "Complex Product"

Investing in a SPAC IPO share is fundamentally different from investing in equity shares of publicly listed operating companies.[25] The optionality of the redemption, second layer of diligence about the private company that the shell company targets, and potential for dilution, among other factors, add complexities. Calculating the potential for dilution is not straightforward and may be impacted by multiple considerations, including the amount of redemptions,[26] the sponsor's promote,[27] the equity overhang from warrants,[28] and the negotiating dynamics of the PIPE investors.[29] As one of today's panelists recently stated, it initially took his colleagues and him eight hours to calculate dilution,[30] which indicates the opaqueness of the dilutive effect and how difficult it may be for investors who choose not to redeem their shares to understand the extent of dilution. A SPAC shareholder must decide whether or not to redeem, in part, given the potential for dilution and the prospects of the future de-SPAC'd company. The Commission's proposal seeks to address concerns around dilution through enhanced disclosures, including a table showing the potential for dilution based upon percent of redemption, a requirement to disclose each material potential source of additional dilution that non-redeeming shareholders may experience, and greater information about financing arrangements.[31]

Simply stated, SPACs are complex,[32] and some of the purported benefits, such as a cheaper and more efficient path to the public markets for private companies, have been questioned.[33] Studies have found that the cost of going public via SPAC costs may actually be higher than a traditional IPO.[34] Indicating that a detailed understanding of the costs and benefits of this avenue to the public markets is not widely agreed upon. Hopefully, the SEC's proposal, if approved, will provide certainty and disclosure where it is needed most, but I'd be interested to hear further input on how the SEC could ameliorate these concerns. And I will continue to follow the work being done on all these questions.

SPACs & Other Paths

Practitioners, academics, and policy-makers should continue to think holistically about the public markets. As many have pointed-out, an increasing trend is that fewer companies are going public, small- and mid-sized IPOs are less frequent, and companies are staying private for longer.[35] Ensuring that companies, particularly small- and medium-sized companies, have adequate access to the public markets is an important policy objective. It provides investors more opportunities to diversify, more entrepreneurs access to the capital they need, and promotes market integrity and investor protections. The recent SPAC boom raised concerns about the rigor of forward-looking statement disclosures, potential conflicts of interests, and whether adequate liability attached to the key second-phase of a SPAC, the de-SPAC. In some cases, SPACs may have elevated companies to the public markets sub-optimally.[36] One question I will be thinking through is whether this alternative path to the public markets provides unjustified opportunities for legal or regulatory arbitrage when compared to the traditional IPO. In other words, whether the form, an IPO through merger rather than offering, has been elevated over substance.

All of this being said, the traditional IPO process is not free from critique. While there are certain safeguards built into that process, it is well-documented that there are areas of friction and inefficiency with a traditional IPO, including high fees imposed on issuers. As counsel to former Commissioner Robert Jackson, I worked with him on a speech about the middle-market IPO "tax," describing fees for middle-market companies to go public, which have remained stagnant at 7% for decades. We worked with one of the panelists today to revisit whether the middle-market IPO 7% fee was still observable, and found that from 2001-2016, over 96% of mid-sized IPOs had a spread of 7%.[37] Another area of friction in the traditional IPO is the pricing of the stock. Recent academic work has noted that "IPOs tend to be underpriced, relative to aftermarket prices, and that the underpricing phenomenon is persistent over time and across countries."[38]

So I am also interested in understanding how we can provide competitive pressure to reduce such frictions. Whether that is through improvements to the traditional IPO or ensuring well-calibrated disclosures and investor protection safeguards are incorporated into alternative avenues such as SPACs and primary direct listings.[39]

Finally, I encourage everyone at this symposium to think about the ever-growing divide between the public and private markets and how the paths to public markets can be improved and made more efficient while preserving key investor and market integrity protections. Part of the underlying problem in many, if not all, discussions about public market paths such as SPACs, is that the public securities markets are declining in terms of overall market share.[40] Increased exemptions to public offering registration requirements have put into place strong incentives to remain private for longer than ever before, and more capital is raised in the private markets than in the public markets. But at what cost? As I noted a couple of weeks ago, the unicorn is no longer a unique or novel creature found in the woods of the private market. Rather, they have become larger and more common, with the largest unicorn valuation exceeding $400 billion.[41] I think we cannot have a conversation about integrity of the public markets, without acknowledging that more capital is raised in the private markets every day, and there are fewer public companies than in recent memory.

I know all of these are difficult, big, questions with no easy answers. But I also know that today's panelists, and the symposium attendees, are among the individuals that can help us answer these questions.

Thank you.

[1] See, Ghang, Ritter & Zhang, SPACs at 1 (Dec. 14, 2021).

[2] Id.

[3] See, e.g., Special Purpose Acquisition Companies, Shell Companies, and Projections, Release Nos. 33-11048; 34-94546; IC-34549 at 13-22 (proposed Mar. 30, 2022) [hereinafterthe Release]; Recommendations of the Investor Advisory Committee Regarding Special Purpose Acquisition Companies at 4-5 (Sept. 9, 2021).

[4] Of course, another path to going public is through primary direct listings.

[5] See, e.g., McKinsey & Company Global Private Markets Review 2022,Private Markets Rally to New Heights, at 2 & 6, Exh. 1.

[6] See, e.g., Council of Institutional Investors, Dual-Class Stock ("'One share, one vote is a bedrock principle of good corporate governance.").

[7] See Cox, Mondino & Thomas, Understanding the (Ir)relevance of Shareholder Votes on M&A Deals, at 511 (in a sample of 1,620 proposed M&A transactions at US public companies from 1996-2017 only 0.3% of mergers failed a shareholder vote).

[8] See id; John Coates, The Problem of 12 at 14 (Sept. 20, 2018) (noting that the rise of indexation has led to an indirect concentration of control, and index provides are relatively hands-off in terms of monitoring the governance of the public companies in their portfolios).

[9] See, e.g., Ghang, Ritter & Zhang at 1.

[10] See, e.g., id.

[11] See, e.g., Rodigues & Stegemoller, Redeeming SPACs at 28-32 (U. of Georgia Sch. L. Research Paper No. 2021-09); Eric Ver Ploeg, Tech SPAC Redemption Rates (Jan. 11, 2022) (concluding that an attractively priced transaction, followed up with a well-managed analyst and investor outreach program, has a high probability of achieving a low redemption rate).

[12] See Klausner, Ohlrogge & Ruan, A Sober Look at SPACs at 19 (ECGI Fin. Working Paper No. 746/2021).

[13] See Joanna Makris, SPAC Market Review, March 2022, Boardroom Alpha (April 1, 2022) ("Redemptions were 82% in [March 2022], down from 89% in February.").

[14] See, e.g., Office of the Investor Advocate, Letter to NASDAQ on listing standards for Special Purpose Acquisition Companies (Apr. 21, 2022) [hereinafter OIAD Letters]; Office of the Investor Advocate, Letter to NYSE and NYSE American on listing standards for Special Purpose Acquisition Companies (Apr. 21, 2022) [hereinafter OIAD Letters]; Rodriguez & Stegemoller at 28-32; Ghang, Ritter & Zhang at 12 (noting that the unbundling of the redemption and voting rights of shareholders contributes to an "incentive to approve a bad merger and redeem their shares, whereas previously, [public shareholders] had an incentive to vote down a bad merger so that they could redeem their shares")

[15] See OIAD Letters.

[16] See id.

[17] See id.

[18] See id.

[19] For a well-articulated analysis and historical background, please refer to the OIAD Letters.

[20] See the Release at 172 (proposed Mar. 30, 2022).

[21] Here, SPAC affiliates is a reference to SPAC sponsors and their advisors.

[22] See Klausner, at 21 (finding that "where redemption rates are high, public equity is often replaced by PIPE investment. In our 2019-20 Merger Cohort, 77% of SPACs had PIPE investments. Of those that did, 83% included third-party investors, 61% raised equity from their sponsor, and 44% raised equity from both sources. Across all SPACs, the mean equity infusion from the total of sponsor and third-party investments at the time of the merger was 40% of the cash a SPAC delivered in its merger. In over a third of SPACs, the majority of cash delivered to targets came from such equity infusions.").

[23] OIAD Letters at 11.

[24] See Rodriguez & Segemoller at 45.

[25] Professors Rodriguez & Stegemoller notes that SPACs are not equivalent to public companies, "not with respect to liquidity, not with respect to alignment of incentives between large and small shareholders, not with respect to the vetting and disclosure practices the next Section will discuss. Current SPACs claim all the benefits of public markets without providing the liquidity and disclosure we expect from them." See id. at 45.

[26] See, e.g., the Release at 36; Ghang, Ritter & Zhang at 2.

[27] See Klausner, Ohlrogge & Ruan at 22.

[28] See John Coates, SPAC Law & Myths at 9 (Feb 11, 2022).

[29] See e.g., Banerjee & Syzdlowski, Harnessing the Overconfidence of the Crowd: A Theory of SPACs, at 32 (Dec. 8, 2021).

[30] See James Thorn, This Skeptic Exposed Flaws in SPACS. The SEC Listened, PitchBook (Apr. 1, 2022). And now, after writing and publishing a paper detailing the dilutive effects associated with a full life-cycle SPAC, they are able to complete such calculations in two to three hours. See id.

[31] See the Release at 18, 36-38, 39,

[32] I certainly have not captured every complexity here. Others include managing warrants. The terms of a given warrant vary across SPACs, but typically warrants have their own redemption date - or date after which the warrants are no longer exercisable and are of no value. Not all brokerage firms notify investors that the deadline to exercise a warrant is on the horizon. The laws governing SPACs are a mix of private contracts, common law, listing standards, regulation, statutory law, and standards with pockets of ambiguity and questions on application. The capital structures can also be complicated, with public warrants, private warrants, forward purchase warrants, and working capital warrants.

[33] See, e.g., Coates, SPAC's Law & Myths.

[34] See Klausner, Ohlrogge & Ruan at 29-31; Ghang, Ritter & Zhang at 5 ("from a private operating company's point of view, we find that merging with a SPAC is a much more expensive way of going public than a traditional IPO").

[35] See, e.g., George Georgiev, The Breakdown of the Public-Private Divide in Securities Law: Causes, Consequences, and Reforms, 18 NYU L. Bus. J. 221, 262, 269-277.

[36] See, e.g., Rodriguez & Segemoller at 45.

[37] See Robert J. Jackson, Jr., The Middle-Market IPO Tax, (April 25, 2018) ("[M]y Staff and I asked Professor Ritter to help us take a closer look with more recent data. He kindly worked with us to examine more than 700 middle-market IPOs over a fifteen-year period starting in 2001. We found that the problem he documented years ago has, if anything, gotten worse.As the figure below shows, from 2001 through 2016, we found that over 96% of midsized IPOs featured a spread of exactly 7%.")

[38] See Chang, Chiang, Qian & Ritter, Pre-market Trading and IPO Pricing, 30 Rev. Fin. Studies 835 (Mar. 2017).

[39] To discuss primary direct listings briefly, we only have a small sample size of those direct listings since the Commission approved NYSE's rule change in late 2020, with an analogue from NASDAQ that followed shortly thereafter. And, while primary direct listings remain another potential avenue for accessing the public markets, it is an avenue that may need further scrutiny. As of today, there have only been a dozen or so primary direct listings, and many of them have been high-profile private companies. This may indicate that the direct-listing option is available or desirable mainly to those companies that can proceed without a robust marketing process, and may not be accessible for a wider range of companies seeking to go public. Further, I remain concerned about the sufficiency of the due diligence on the company in the absence of a firm-commitment underwriter. While there may be benefits to not utilizing an underwriter in the listing process-potentially relating to costs and flexibility, among other benefits-underwriters can also provide an important backstop to ensure a robust diligence process and a thorough registration statement. And, because they bear Section 11 and Section 12(a)(2) liability, they are incentivized to perform their task fully and accurately. Finally, direct listings also raise questions around traceability. Courts have traditionally held that shareholders seeking to recover damages for false or misleading statements in a registration statement must show that the shares they purchased were sold pursuant to the misleading registration statement. But, in direct listings, shares issued pursuant to exemptions (such as Rule 144) and not subject to the registration statement of the newly public company, may be sold immediately following the direct listing. This makes it nearly impossible to determine whether any given shareholder purchased shares pursuant to a registration statement. The question therefore becomes whether these shareholders have standing to sue for misleading registration statements. Last year, in Pirani v. Slack Technologies, 13 F.4th 940 (9th Cir. 2021) the Ninth Circuit held that the plaintiff did in fact have standing to bring Sections 11 and 12 claims even though he did not know if he had purchased registered or unregistered shares in a direct listing. Nonetheless, this was a case of first impression and other courts could weigh in differently on this subject, potentially eroding an important means of holding companies to account for misstatements in direct listings. But, these are just a few of the issues surrounding direct listings, andI would encourage the panel, and all observers, to write, discuss, and engage on these three paths to the public market.

[40] See, e.g., Office of the Advocate for Small Business Capital Formation 2021 Annual Report at 11; Kat Tretina and Benjamin Curry,The Wilshire 5000: Invest in the Entire U.S. Stock Market,Forbes Advisor (Sept. 9, 2021).

[41] See CB Insights - the Complete List of Unicorn Companies.

• Securities Industry Commentator
• Bill Singer