Um, where is the SEC when it comes to SPACs and conflicts of interest?
Earlier today, TechCrunch's 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.
The development is intriguing for a lot of reasons, including because Aurora's founders are big wheels in their industry (no pun intended), 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, the deal is also interesting because of Hoffman's involvement. 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, Korosec reports that one of the sticking points in this new deal is how much the company could conceivably be worth, writing that talk involved a $20 billion valuation at one point 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 a target. In just one similar case, famed VC Chamath Palihapitiya was an investor in insurance company Clover through his firm Social Capital and as industry watchers will know, one of his blank-check companies merged with Clover last year.
A representative for Palihapitiya 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 rules - 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, 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 witnessed to date.
There perhaps should be. SPACs already have a lousy reputation because investors lose money on the majority of them, and notwithstanding the esteem of individuals like Hoffman, these obvious conflicts of interest - let's face it - generally smell bad.
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. That inside knowledge cuts both ways, though. 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. Let's assume for now that Aurora falls into this camp. But the target could also need to bailed out by SPAC sponsors who have a vested interest in the company and know its prospects may dim otherwise.
Do most retail investors know the difference between the two? It's doubtful, and in this go-go market, they seem bound to get hurt if regulators continue to turn a blind eye to the practice. That's leaving many industry observers to wonder of the SEC: what's it waiting for?