Increasing SEC Enforcement Focus on SPACs
We all know the volume and profile of SPAC deals have increased substantially in the last year. Perhaps unsurprisingly, the SEC has recently signaled plans to enhance its scrutiny of SPAC transactions and resulting public operating companies. As WilmerHale covered in a white paper last week, the SEC’s Division of Enforcement recently sent requests to various financial institutions focused on their SPAC deals. According to press reports, these requests are seeking information about firms’ deal fees, deal volumes and internal controls related to SPACs. Additionally, the SEC’s Division of Corporation Finance and Office of the Chief Accountant each issued statements underscoring the need for SPACs and the companies that enter the public markets by merging with a SPAC to meet their accounting, financial report and governance obligations as public companies.
WilmerHale expects the following areas of focus as the SEC’s Division of Enforcement turns its attention to SPACs in the coming months:
- For SPAC Sponsors: the most significant enforcement risk arises from allegations of inadequate disclosures. The sponsor is expected to provide full and fair disclosure regarding potential risks, conflicts of interest, and other material facts related to each proposed transaction. The SEC’s Division of Corporation Finance staff has indicated that it will be closely scrutinizing sponsor disclosures regarding conflicts of interest, given that the economic interests of SPAC sponsors, directors and officers are not the same as, and can be at odds with, those of SPAC investors.
- For the Combined Public Company: The Enforcement staff will scrutinize whether the post-merger public operating company is abiding by the rules governing public companies and intended to offer investor protection. For example, as of the merger, combined public companies will be expected to have the necessary personnel, processes and controls in place to produce high quality financial reporting, comply with disclosure requirements, and operate with effective board oversight.
- For Underwriters and Broker-Dealer Distributors of SPACs: The SEC is likely to evaluate potential misrepresentations and omissions in offering documents, roadshow and investor presentation materials, and other disclosures on topics such as fees associated with SPAC transactions and control of funds raised in SPAC offerings, in order to evaluate whether broker-dealers have taken reasonable steps to monitor the materials used by firms to assure that they provide an accurate and balanced description of the offering.
Finally, Wilmer expects Enforcement staff to look for unusual trading patterns that could indicate leaks of material non-public information in the context of SPAC deals.
Gender Diversity in Company Creation:
This week, Deerfield published a report titled, “Gender Disparity Among Venture-backed Healthcare Companies and Their Investor Base,” which analyzed the gender composition of healthcare companies’ boards, as well as that of the investment teams that founded, diligenced and mentored them. Perhaps unsurprisingly, the findings pointed to a substantial gender imbalance. In an analysis of 140 companies that raised substantial venture financing and published the identity of their board on their corporate website, Deerfield found that:
- 48.5 percent had no female board members.
- Women make up about 10% of board director roles in venture-backed healthcare companies.
- Among the top 50 most active investment firms in the healthcare space, only about 20% of investment professionals are female (and even this percentage likely overestimates the proportion of senior female investment professionals relative to their junior counterparts);
- Of the six organizations analyzed that have 50% or more female board membership, all but one are led by female CEOs.
The report was intended as a call to action, which is well timed in the context of the increasing focus on ESG – and, more specifically, on diversity – that we’re seeing sweep the industry more broadly.
As Deerfield wrote, “Given the outsized role that investors, particularly venture investors, play in early corporate governance and thus board seat allocation and placement, the gender diversity of investment firms cannot be ignored in the context of gender diversity of private company boards. Interestingly, both analyses point to less than 1 in 5 roles at privately backed healthcare company boards and their venture investors as being held by women. Our analysis suggests private company board gender diversity is adversely affected by a corresponding underrepresentation of female senior investment professionals among the investment firms analyzed. We are aware of initiatives and due diligence guidelines that call for limited partner investors to look for diversity among both the investment teams they trust their dollars to, as well as the portfolio companies in which they invest. We are encouraged by these signs, and hope these become essential diligence items and not simply “nice to haves” as another means to improve gender diversity throughout the ecosystem.”
The overall markets were up slightly this week, with the NASDAQ, DJI and S&P 500 closing up 3%, 1% and 2%, respectively. Volatility was minimal, with the VIX closing down 2% and sitting at 16.95 as of market close on 4/8. The biotech markets performed marginally worse, with the NBI, BTK and XBI closing down 2%, 3% and 2% respectively.
While the markets were a bit quieter this week, we still saw a few deals price including:
- 1 SPAC: CM Life Sciences ($480M).
- 2 IPOs: Reneo ($94M); VectivBio ($128M).
- 6 follow-ons: Amyris ($300M); Crinetics ($75M); Homology ($50M); Otonomy ($30M); Outset Medical ($316M); Vascular Biogenics ($25M).
- Several private financings, including: Alloy (Series C, $75M); Icosavax (Series B, $100M); Inscripta (Series E, $150M), Metagenomi (Series A ext, $75M), Mineralys (Series A, $40M), ValenzaBio (Series A, $70M), Ventus (Series B, $100M).
- Additionally, we wanted to congratulate Stern IR Client Dicerna, which sold its royalty interest in OXLUMO™ (lumasiran) to Royalty Pharma for an upfront cash payment of $180M and up to $60M in contingent sales-based milestone payments.