Bill Ackman Gets More Pushback From the SEC

The regulator is asking questions about the hedge fund manager’s novel SPARC.

Illustration by II (Zach Gibson/Bloomberg)

Illustration by II

(Zach Gibson/Bloomberg)

The Securities and Exchange Commission is pushing back against hedge fund manager Bill Ackman’s effort to create a new-fangled security called a SPARC, or special purpose acquisition rights company.

Ackman, the CEO of Pershing Square Capital, had hoped to get the approval from the SEC last week on his SPARC, which he says is an improvement on special purpose acquisition companies because investors don’t have to put up their money until the sponsor decides on an acquisition target.

Instead of either approving the security or turning it down as expected, however, the SEC asked for more time — and more information — before making its decision. In a 17-page release, the regulator said that it is worried about the new security’s potential for manipulation in part because of comment letters it received from three people, one of whom was anonymous. The vast majority of the comments on the new security, which was put forth by the New York Stock Exchange, were supportive. But the SEC is asking for more details from the NYSE on how its concerns will be addressed.

“The price of subscription warrants would appear to be particularly susceptible to rumors about potential acquisition targets and the terms of potential transactions,” the SEC said in the filing. Because the prices of these warrants could be low, a “bad actor” could manipulate them at little cost, the regulator warned.

Of course, the same could be said about any of the hundreds of the SPACs in the market. Moreover, investors trade weekly options on SPACs, leading to losses as SPACs have tanked this year.

But the SEC is in the midst of a crackdown on SPACs, and doesn’t seem keen to let another product enter the mainstream without scrutiny.

“The SEC doesn’t want to create a penny stock that will trade on the exchange,” said one participant in the SPAC market. The way to solve this problem, he suggests, would be for the SPARC to require a minimum price in order to be listed on the NYSE.

Ackman declined to comment.

The heightened scrutiny on Ackman’s SPARC comes after the SEC torpedoed his plans for his SPAC, Pershing Square Tontine Holdings, to invest in Universal Music Co. ahead of its partial spinoff from French conglomerate Vivendi. The SEC decision pummeled the SPAC, which accounted for the greatest percentage of losses in Ackman’s hedge fund’s portfolio so far this year, according to a recent investor call.

Ackman came up with the SPARC idea as a way to reward investors for sticking with his SPAC, which is now on the hunt for another partner. “We are working hard to try to consummate a transaction,” Ackman said on the investor call. “There’s one thing in particular that we think is interesting, but we’re still nowhere in a position to have a view as to its executability.”

Previously he said that if the SPARC is approved, he might dissolve the SPAC and give investors their money back while rewarding them with warrants on the new vehicle.

Ackman isn’t the only SPAC actor coming under the harsh glaze of the SEC, which is targeting misleading information some SPACs are giving investors regarding the companies they plan to merge with.

Last week, investigations of two other high-profile SPACS came to light through company disclosures. Lucid, the luxury electric vehicle company that merged with Michael Klein’s fourth SPAC, Churchill Capital IV, disclosed in a regulatory filing early this month that it is under investigation. The financial projections about Lucid that boosted the stock before the deal was announced were downgraded almost immediately thereafter.

In addition, the SPAC that has agreed to merge with Donald Trump’s media company, Trump Media & Technology Group, last week disclosed an SEC probe. A slide deck in the filing raised some eyebrows when it listed corporate executives only by their first names and the initial of their last names. Later that day, Rep. Devin Nunes, a staunch Trump ally in Congress, announced he was retiring to become Trump Media’s CEO.

SPAC sponsors, target companies, and their advisers have long argued that they can take advantage of what’s called the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995, which limits the ability of investors to sue them over their financial projections. That loophole is not available to IPOs.

But the SEC has warned SPAC participants not to count on it. Earlier this year General Counsel John Coates (then the acting director of corporate finance) called the argument “overstated at best and potentially seriously misleading at worst.”

SEC Chair Gary Gensler repeated Coates’ comment last week at a conference in Washington run by the Healthy Markets Association, an organization that represents U.S. and Canadian institutional investors.