Apr. 4, 2022
Christopher Peterson retired securities trader I've extensive experience in the investment world. I've been a member and a floor trader on the old CBOE and the PHLX. Additionally I've passed the old NASD series 4,24 and 27 exams . I'd like to make some preliminary comments on S7-13-22. The new SPAC's provide the richest compensation in the history of modern finance to their organizers. In the 1980's and 90's ( an ERA when interest rates might be 5-7%), a hedge fund might charge investors 2 and 20 - a 2% annual fee plus a 20% performance fee. For the hedge fund management to earn 22% in a year it would have to invest the investors contribution in a portfolio of stocks that went up 100% in a year ( leaving the investor with a 78% profit after fees). The SEC has correctly observed that new SPAC's award themselves about a total compensation of about 25% to simply buy one stock. The SEC notes that these are generous terms to simply act as the investor's agent to buy one stock. In the 80's , the NASD rules of fair practice ( #2154 ) held that a reasonable markup for the purchase of a security was 5% or under. Numerous SEC decisions from this era provide support ( NASD manual 1988 2154.10 and following). Modern FINRA rules 2121.01 - particularly (c)(4) support that this still applies to transactions executed as an agent. I suggest that a modern SPAC directly violates these rules. A SPAC is comparable to a fund of funds (FOF) that invests in other hedge funds.. However, it only invests in one stock! The old FOF's only charged 1% or less per year with a 5- 10% profit share performance fee for a portfolio of hedge funds. This was an extra fee that an investor paid simply to invest in a hedge fund selected by the FOF . A SPAC charges over 5-10 times as much simply to buy one private stock- not a portfolio. Unlike the old hedge funds, the management of a company selected by a SPAC charges generous fees to the past and future investors. For example, the current Gogoro (GGR), going public April 5, 2022 in a SPAC transaction, awards management about 3% of the outstanding stock yearly for 10 years! They do state in their prospectus that one of the companies they should be compared to for valuation purposes is TSLA- which may make all of their charges seem reasonable ( though TSLA had a much less generous stock compensation plan). Another comparison- according to the 1988 NASD manual Rules of Fair Practice ( p2172), the total amount of underwriting compensation from whatever source for a direct participation program should be under 10% plus a maximum of .5% due diligence fees ( Notice to Members 82-51 1982 ). This directly compares to NASD rule 2810 published by FNRA in 2008. The SEC proposal tries to address the application of the Investment Company Act to SPAC's. Completely ignored is the application of the Investment Advisers Act - which seems to be a bare minimum of regulation which must be applicable.