Um, where is the SEC when it comes to SPACs and conflicts of interest?
Today, my colleague Kirsten Korosec reported that the autonomous vehicle startup Aurora is close to finalizing a deal to merge with one of three blank-check companies that have been formed to date by renowned entrepreneurs Reid Hoffman and Mark Pincus and a third partner in these deals, Michael Thompson, who long managed special situation funds.
This one is intriguing for a lot of reasons, including because Aurora’s founders are big wheels in their industry (no pun intended) and their moves are widely watched, and having already acquired the self-driving unit of Uber in a complicated arrangement, Aurora could, as a publicly traded entity, snap up even more rivals, given it would have a more liquid currency than it does right now.
Possible merits of the deal aside, it’s worth zooming in on Hoffman here. His venture firm, Greylock, is an investor in Aurora and has been since co-leading its Series A round in 2018, at which point Hoffman joined the board as a director. Now Hoffman’s SPAC is looking to take Aurora public at what we can safely assume is a much, much higher valuation than where it was valued back then. In fact, Kirsten reports that one of the sticking points in this new deal is the targeted valuation, writing that it had been as high as $20 billion during one point of its current talks and is now closer to $12 billion, with the deal expected to be announced as early as next week.
This isn’t the first time a SPAC sponsor has pursued an existing investment as its target. In just one similar case, Chamath Palihapitiya was an investor in insurance company Clover through his VC firm Social Capital and as industry watchers will know, one of his blank-check companies merged with Clover last year.
Palihaptiya declined to disclose to Bloomberg whether or not he sold the stake prior to the SPAC deal, but legally, it doesn’t matter anyway. All a SPAC sponsor need do right now is write a lengthy disclosure when raising a SPAC that ultimately says, ‘Hey, I might use the capital I’m raising for this blank-check company to buy another company where I already have a financial interest, and here’s how that’s going to work.’
The question is whether such rules around potential conflicts — or lack of them — will continue to exist indefinitely. The SEC is clearly taking a closer look right now at SPACs, and while it offered guidance specifically around conflicts of interest last December, saying that they make the agency a little nervous and could sponsors please disclose as much as possible to everyone involved in a deal about any pre-existing financial relationships and who is going to own how much, there’s a new administration in Washington and a new agency head in SEC Chief Gary Gensler, and it wouldn’t be surprising to see more being done on this front than we’ve seen to date.
There seemingly should be. SPACs already have a lousy reputation because investors lose money on the majority of them, and notwithstanding the esteemed reputation of people like Hoffman, these obvious conflicts of interest — let’s face it — generally stink.
Yes, there’s a strong argument that a SPAC sponsor who has been long involved with a target company knows better the value of that company than anyone else, but that inside knowledge cuts both ways. The target could be an amazing company that just needs a way to go public more quickly than might be possible with a traditional IPO; the target could also need to bailed out by SPAC sponsors with a vested interest in not losing their shirts on their earlier investment.
Do most retail investors know the difference between the two? It’s really doubtful, and in this go-go market, they seem bound to get hurt if regulators continue to turn a blind eye to the practice. So, SEC, what are you waiting for?