Lynn E. Turner, former chief accountant of the Securities and Exchange Commission, described the proposed reform as “an excellent idea”. Because it is the shepherds who announce, “This is what we will do in this period of time,” he said, “They should be locked in it.”
Mr. Palihapitiya was less enthusiastic.
“This is not a very good idea,” he told me. “Why would the sponsor agree to a five-year closing when the management does not, and neither does the other investors including PIPE investors?” (At the time of the deal, institutional investors are often invited to buy shares on favorable terms through so-called private equity investment, or PIPE.)
It is true. Management can usually sell shares after a short, limited period. But, as Mr. Turner pointed out, is it not the sponsor selling the deal to the public?
What if the administration lied? Mr. Palihapitiya argued. “Should the sponsor now be in trouble because of the bad behavior of the management?” He said there were “too many cases where this fails.”
Mr Palihapitiya said he had a better idea: “Have the sponsor invest at least 10 percent of the deal size,” which is much more than most sponsors do. “The more they invest, the more scrutiny they will need,” he said. “This has always been the only meaningful way to align sponsors, management and investors.”
In some ways, the market is already forcing some sponsors to agree to longer closures. Michael Klein, a former banker who became a serial SPAC dealmaker, recently agreed to keep his stake in Lucid Motors, a manufacturer of high-altitude electric cars, For at least 18 months As a way to close the deal.
And with more and more SPACs losing their luster – most SPACs that have gone public in recent weeks are now Trading below the bid price Investors may demand more sponsors, perhaps even before regulators do.
Ultimately, however, investors should not require sponsors to commit to their own deals.