Senator Elizabeth Warren (D. MA) and founder and CEO of Social Capital Chamath Palihapitiya. Michael Kovac/Getty Images Vanity Fair (Palihapitiya), and Evelyn Hockstein–Pool/Getty Images(Warren).
Chamath Palihapitiya was asked about possible conflicts of interest by other SPAC sponsors.
These letters were directed to the "range of maneuvers" - some of which are downright amazing to the uninitiated.
Senators stated that they expected a response by October 8th.
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Senator Elizabeth Warren, along with three other Democratic legislators, asked Chamath Palihapitiya and five other blank check company sponsors about conflicts of interests and business practices that are detrimental to retail investors.
The letters referred to the "range of maneuvers" - some of which are downright amazing to the uninitiated to win even when investors lose.
The letters stated that they wanted to know more about SPACs and what regulatory or Congressional action might be required to protect investors and market integrity, and ensure a fair and orderly marketplace.
Warren and Sens. Tina Smith, Sherrod Brown and Chris Van Hollen each sent identical letters dated September 22, to Palihapitiya. They were addressed to Palihapitiya as co-founders and CEOs of The Social Capital Partnership, Michael Klein, founder and CEO at M. Klein & Associates, Stephen Girsky, managing Partner at VectoIQ, Tilman Fertitta chairman and CEO, Fertitta Entertainment, Howard Lutnick chairman and CEO, Cantor Fitzgerald, and David Hamamoto CEO and chairman of DiamondHead Holdings, CEO and chairman of DiamondHead Holdings.
Senators stated that they expected a response by October 8th.
Palihapitiya’s Social Capital declined to comment. Instead, it pointed Insider at an opinion piece that Palihapitiya's Social Capital wrote in May calling for more regulation and oversight of SPACs. Palihapitiya stressed the importance of "clear, rigorously enforced standards" to promote high deal quality and investor protections.
SPACs (special purpose acquisition companies) are shell companies that list in order to merge with private companies and make them public. SPACs have been used by many major companies, such as Virgin Galactic or DraftKings.
SPACs are a quicker and more cost-effective way for companies to go public than traditional IPOs. They have been supported by Wall Street heavyweights, pop stars and professional athletes. They also require fewer disclosures that IPOs.
SPACs have been around for many decades and are now gaining prominence. The trend is expected to accelerate in 2021. SPAC issuance for the year has far exceeded full-year 2020 totals.
The letters stated that "this meteoric rise" was concerning. "The SPAC process is often designed to exploit retail investors for the benefit of large institutional investors like hedge funds, venture capital insiders and investment banks."
Senators stated that industry insiders could "take advantage" of ordinary investors during this process, such as making "overly optimistic comments about target companies" - something which is not permitted in a traditional IPO route.
The senators stated that statements made by SPAC sponsors in order to persuade shareholders to vote for a merger might not need to comply with the same disclosure standards.
These concerns are not the first time that authorities have raised questions about SPACs.
Under the Acting Chair Allison Herren Lee of the US Securities and Exchange Commission in March, an inquiry was launched into Wall Street's Blank-Check Company craze. It sought voluntary information.
Current Chair Gary Gensler stated in July that the SEC was looking into major banks for conflicts of interest in relation to the SPAC deal-making, which has exploded over the past year.
SPACs seem to be the subject of other controversies. Former SEC Commissioner Robert Jackson sued Bill Ackman, a billionaire hedge fund manager, and Pershing Square Tontine Holdings, a blank check company, for failing to operate as a SPAC. John Morley, Yale law professor, also sued Pershing Square Tontine Holdings.
