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Sean Griffith's Comment Letter to the SEC re Climate Change Disclosure

Sean Griffith (Fordham) sent a great comment letter to the SEC on its pending Climate Change Disclosure Proposal. In it, Sean makes a compelling argument that the proposal would violate the First Amendment and that the SEC commissioners would be violating their oaths of office by adopting it. Download Griffith Comment Letter re Proposed Climate Disclosure Rule[86].pdf (474.8K)

Is the SEC's Proposed ESG Disclosure Regime Constitutional?

The perspicacious Sean Griffith on the SEC's ESG disclosure proposal:

This Article uses the SEC’s recent foray into ESG to illuminate ambiguities in First Amendment doctrine. Situating mandatory disclosure regulations within the compelled commercial speech paradigm, it identifies the doctrinal hinge as “controversy.” Rules compelling commercial speech receive deferential judicial review provided they are purely factual and uncontroversial. The Article argues that this requirement operates as a pretext check, preventing regulators from exceeding the plausible limits of the consumer protection rationale.

Applied to securities regulation, the compelled commercial speech paradigm requires the SEC to justify disclosure mandates as a form of investor protection. The Article argues that investor protection must be conceived on a class basis—the interests of investors qua investors rather than focusing on the idiosyncratic preferences of individuals or groups of investors. Disclosure mandates that are uncontroversially motivated to protect investors are eligible for deferential judicial review. Disclosure mandates failing this test must survive a form of heightened scrutiny.

The SEC’s recently proposed climate disclosure rules fail to satisfy these requirements. Instead, the proposed climate rules create controversy by imposing a political viewpoint, by advancing an interest group agenda at the expense of investors generally, and by redefining concepts at the core of securities regulation. Having created controversy, the proposed rules are ineligible for deferential judicial review. Instead, a form of heightened scrutiny applies, under which they will likely be invalidated. Much of the ESG agenda would suffer the same fate, as would a small number of existing regulations, such as shareholder proposals under Rule 14a-8. However, the vast majority of the SEC’s disclosure mandates, which aim at eliciting only financially relevant information, would survive.

Griffith, Sean J., What’s “Controversial” About ESG? A Theory of Compelled Commercial Speech under the First Amendment (May 24, 2022). Available at SSRN: https://ssrn.com/abstract=4118755 or http://dx.doi.org/10.2139/ssrn.4118755

In Defense of SPACs

Rodrigues, Usha and Stegemoller, Michael A., Why SPACs: An Apologia (2022). University of Georgia School of Law Legal Studies Research Paper No. 2022-04, Available at SSRN: https://ssrn.com/abstract=4072834 or http://dx.doi.org/10.2139/ssrn.4072834

Special purpose acquisition companies (SPACs) dominated the initial public offering (IPO) market in recent years, but the Securities and Exchange Commission (SEC) has proposed rules that have chilled the SPAC market and, if made final, will likely strangle it completely. It is time to examine what, if anything, SPACs offer the capital markets.

Most commentators and regulators view SPACs as a mere regulatory sleight of hand. This Article focuses on SPACs’ fundamental—but overlooked—innovation. Traditional securities law views average investors as prone to hysteria, and therefore relegates them to investment in public companies, reserving investment in private firms for the wealthy. The traditional securities law regime thus has the effect of preventing the general public from investing in private companies until after more wealthy investors have had their turn. But SPACs allow the public to trade based on information about a still-private company. Allowing free trading of this information is a radical departure from the basic structure and original purposes of U.S. securities law.

SPACs thus challenge securities law at its core. We use an original empirical dataset to argue that their success—or, to be precise, the success of some of them—is evidence that securities law may be overly paternalistic in its attitude toward the general public. Our data provide evidence that, as long as the SEC implements reforms that realign shareholders’ interests with those of SPAC managers, SPACs can offer a valuable new opportunity in the markets.

Coverage of the law Professor Comment Letter Opposing the SEC's Climate Change Disclosure Proposal

Epoch Times, ‘Small But Powerful’ Group Pushing SEC Climate Disclosures: Professors (May 13, 2022)

ICR Inc. D.C. Insider, The SEC Climate Disclosure Plan (May 11, 2022)
Intrinsic Value by Roger Lowenstein, The SEC Should Stay in Its Lane (May 11, 2022)

Argus, US Gives more Time for Climate Disclosure Input (May 9, 2022)

Roll Call, Legal Debate over SEC’s Authority Clouds Climate Rule Proposal (May 5, 2022)
Mayer Brown, Academics from 17 Universities Question US SEC’s Authority to Adopt Proposed Climate Disclosure Rules (May 5, 2022)
Crowd Fund Insider, SEC Climate Risk Disclosure: What are People Saying About Proposed Rules? (May 4, 2022)
Ballotpedia News, Economy and Society: Academic pushback against SEC climate action (May 3, 2022)
Wealth Briefing, You're Out of Line Over Climate Disclosure Rule, Academics Tell SEC (May 3, 2022)
Business Law Prof Blog, To Say They Are Shareholders Only Begins Analysis (May 2, 2022)

Law 360, SEC Climate Plan Caters to Profit-Driven Funds, Profs Say (April 29, 2022)
Business Law Prof Blog, Twenty-Two National Professors Urge SEC to Withdraw Climate Disclosure Proposal (April 29, 2022)
Professor Bainbridge, Twenty-Two Leading Law & Finance Professors Urge SEC to Withdraw Climate Disclosure Proposal, including yours truly (April 28, 2022)

 

Roger Lowenstein: "The SEC Should Stay in Its Lane"

Great critique of the SEC's climate change disclosure proposal:

The SEC has a very important but distinct mission. The agency was conceived in the spirit of Louis Brandeis’s memorable dictum: “Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”

The Depression-era Securities Acts directed the agency to prescribe disclosure “necessary or appropriate in the public interest or for the protection of investors.”

The “public interest” was certainly mentioned, but it was interpreted to mean the public interest consistent with the agency’s mission of investor protection. The SEC did not seek data on the spread of infectious diseases, or on all sorts of other public concerns.

The SEC was not even an omnibus corporate policeman. It left antitrust concerns to the FTC and Department of Justice; labor issues were left to the NLRB.

The SEC’s charter was to compel disclosure of corporate information relevant to an investor, and bring enforcement against violators. This was a full-time job. Greed may not be good, but it is enduring. Markets need the policeman’s flashlight.

Go read the whole thing.

The SEC Climate Disclosure Proposal: The 22 Critics Get More Attention

From WealthBriefing.com:

A group of 22 law and finance professors in the US have urged the Securities and Exchange Commission to scrub plans to force publicly listed companies to disclose the climate impact of their activities. The academics say the SEC is significantly exceeding its authority. ...

“We respectfully urge the SEC to withdraw the Proposal. We are concerned that the passions of this topic have led the SEC to overzealous rulemaking that exceeds its authority. Governments, above all, must adhere to the rule of law, especially when officials believe honestly and fervently in a specific agenda. The federal securities laws focus on investor protection generally, while the Proposal prioritizes the demands of a subset of the global investment industry. We encourage the SEC to focus on all American investors, not just the most vocal and activist voices,” the letter said.

The letter is signed by figures such as Stephen M Bainbridge (UCLA), Bernard S Black (Northwestern), Jessie M Fried (Harvard), Paul G Mahoney (Virginia), Julia D Mahoney (Virginia), and Todd J Zywicki (George Mason). 

Twenty-Two Leading Law & Finance Professors Urge SEC to Withdraw Climate Disclosure Proposal, including yours truly

Professor Lawrence Cunningham sent out the following press release today:

You can access the comment letter here.

Corporate disclosures are supposed to be about informing investors, not to effect progressive policy goals

Atinuke Adediran at Harvard law School Corporate Governance Forum:

In my paper, Disclosing Corporate Diversity, I use machine-learning techniques to analyze 3,461 CSR/ESG reports for 1,288 public companies listed on Nasdaq Stock Market LLC (Nasdaq) and the New York Stock Exchange (NYSE) for the five-year period between 2017 and 2021. I provide empirical evidence that in the last five years, public companies have firmly integrated diversity disclosures into their CSR/ESG disclosures.

I argue that these disclosures are important not only for shareholder transparency, but that they can be used instrumentally to increase corporate diversity for other stakeholders, including employees, suppliers, customers, community members, advocacy groups of various types, activists, reformers, and the public. I note that scholars and others have underappreciated this possibility for two reasons. The first is that scholars routinely write about disclosures in the context of CSR/ESG, but not often in the context of corporate diversity, even though diversity is part of CSR/ESG. The second is about the limits of the securities laws. Like other forms of disclosures under the securities laws, diversity disclosure rules often focus on shareholder transparency rather than to address concerns about the lack of diversity in corporations for all stakeholders.

Maybe disclosures focus on shareholder transparency because that is the purpose of disclosure. The purpose of corporate disclosure rules is to inform investors, not to remake the world in Gary Gensler's image.

What Professor Adediran is advocating is known as therapeutic disclosure. In other words, she proposes using disclosure requirements not to inform shareholders, but to affect substantive corporate behavior.

Therapeutic disclosure requirements undoubtedly affect corporate behavior. Therapeutic disclosure, however, is troubling on at least two levels. First, seeking to effect substantive goals through disclosure requirements violates the Congressional intent behind the federal securities laws. When the New Deal era Congresses adopted the Securities Act and the Securities Exchange Act, there were three possible statutory approaches under consideration: (1) the fraud model, which would simply prohibit fraud in the sale of secu­rities; (2) the disclosure model, which would allow issuers to sell very risky or even unsound securities, provided they gave buyers enough information to make an informed investment decision; and (3) the blue sky model, pursuant to which the SEC would engage in merit review of a security and its issuer. The federal securities laws adopted a mixture of the first two approaches, but explicitly rejected federal merit review. As such, the substantive behavior of corporate issuers is not within the SEC’s purview.

Second, in this case the SEC’s rules overstep the boundaries between the federal and state regulatory spheres. In Business Roundtable v. SEC, 905 F.2d 406 (D.C. 1990), the DC Circuit made clear that federal securities regulation has two principal goals. First, and foremost, it regulates the disclosures shareholders receive when they are asked to buy or sell or vote. Second, it regulates the procedures by which certain transactions such as tender offers or proxy solicitations are conducted. But the securities law's purposes do not include regulating substantive aspects of corporate governance. Questions such as the composition of the board of directors are properly the subject of state corporate law not federal securities law.

Recommended reading: Fisch's "GameStop and the Reemergence of the Retail Investor"

Fisch, Jill E., GameStop and the Reemergence of the Retail Investor (February 8, 2022). U of Penn, Inst for Law & Econ Research Paper No. 22-16, Boston University Law Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4049896

The GameStop trading frenzy in January 2021 was perhaps the highest profile example of the reemergence of capital market participation by retail investors, a marked shift from the growing domination of those markets by large institutional investors. Some commentators have greeted retail investing, which has been fueled by app-based brokerage accounts and social media, with alarm and called for regulatory reform. The goals of such reforms are twofold. First, critics argue that retail investors need greater protection from the risks of investing in the stock market. Second, they argue that the stock market, in term, needs protection from retail investors.

This Article challenges calls for broad-based regulatory reform. It argues that, although retail investing is likely to impact the capital markets, claims about the harms from increased retail investing are overstated. More importantly, the debate overlooks potential benefits from retail investing both to investors themselves and the capital markets. Regulators should not be clamping down on the conditions such as commission-free trading, gamified trading platforms, and the expanded use of social media, that have enabled a generation of new investors to participate in the capital markets. These innovations, through their ability to facilitate direct market participation by retail investors have the potential to democratize the capital markets and increase the connections between ordinary citizens and U.S. businesses. Regulators should instead be focusing on how to facilitate the effectiveness of that process.

The Article defends the reemergence of the retail investor and its potential promise in enabling citizen capitalism – providing ordinary citizens with a stake in the nation’s productivity while, at the same time, increasing the accountability of those businesses to societal interests. It explains that retail investment can reduce the increasing problematic power of institutional intermediaries. It also holds the possibility of increasing corporate consideration of stakeholder interests without the need for formal structural changes or heavy-handed regulation.

Critically, however, effective citizen capitalism requires retail shareholders to participate in the capital markets on an informed basis. Although the extent to which the GameStop frenzy reflected rational investing behavior is questionable, its effect has been to draw retail investors to the market, and there is evidence that retail investment and engagement will both continue and evolve. The Article identifies opportunities to improve the retail investing experience, including greater oversight of sources of investment information, limiting the manipulative use by brokers of customer information, and the extension of fintech innovation to mechanisms for improving financial literacy. Attention to these concerns, rather than heavy-handed efforts to discourage retail investing, will increase the effectiveness of the retail investor.

Another serious problem with the Securities and Environmental Commission climate change disclosure plan

From Bloomberg News:

The proposed language would require companies to disclose to the Securities and Exchange Commission any analyses they use to measure the resilience of their business strategies to climate risks....

Scenario analyses are “dress rehearsals” that companies use to test how potential, hypothetical future scenarios could affect their business.

But the provision would put companies in the position of having to share highly speculative forecasts that may end up being disconnected from reality, according to Cynthia Mabry, a partner at Akin Gump Strauss Hauer & Feld LLP.

“If you had a crystal ball, what would the world look like—how is that helpful to investors?” Mabry asked. “I really struggle with this one. On a Tuesday you could be thinking you see a market opportunity and it’s great, and on Wednesday the war on Ukraine breaks out and you’re not going to do business in Poland.”

If this absurd requirement stays in the rules, one important question will be whether the safe harbor in the 1995 PSLRA cover these scenario analyses.

SEC Releases Climate Change Disclosure Proposal: Too Costly, Too Far Outside the SEC's Authority

I have just started reviewing the SEC's climate change proposal, which is over 500 pages, which tells you something right there. 

The WSJ reports:

The Securities and Exchange Commission formally offered a 534-page proposal Monday that would force publicly traded companies to report greenhouse-gas emissions from their own operations as well as from the energy they consume, and to obtain independent certification of their estimates.

In some cases, companies also would be required to report greenhouse-gas output of both their supply chains and consumers, known as Scope 3 emissions. An SEC official said most companies in the S&P 500 would likely have to report Scope 3 emissions. Companies would have to include the information in SEC filings such as annual reports.

Some thoughts. (1) This is yet another example of the increasing use of regulatory end-runs by Presidents of both parties. With Congress deadlocked and unable to move on addressing climate change, Biden is using executive orders and regulatory actions to effect change without Congressional action. In doing so, however, he perverts the Constitutional scheme of checks and balances. 

(2) Retail investors are already overwhelmed by mandated disclosure. In an era of 100-page proxy statements and annual reports, owning just 20 stocks subjects one to thousands of page of disclosure--vetted if not written by lawyers. The proposal thus represents another shift in the SEC away from its historic mission of protecting retail investors. Instead, as the Journal opined:

SEC Chairman Gary Gensler is redefining materiality as whatever BlackRock and progressive investors want to know.

(3) The requirement that companies disclose Scope 3 emissions will make the rule even more costly and burdensome than the absurd combat mineral disclosures companies have been struggling with for the last decade:

For example, Exxon Mobil would have to report its direct emissions as well as any from fossil fuels burned to generate the electricity it uses. It may have to quantify emissions from the combustion of its products, the tankers that deliver them, and the manufacturing of its rigs and plastic products when they degrade.

Scope 3 emissions have no clear definition. The agency says it has “not proposed a bright-line quantitative threshold for the materiality determination” for Scope 3 emissions because this “would depend on the particular facts and circumstances, making it difficult to establish a ‘one size fits all’ standard.”

Yet the overall rule would impose a one-size-fits-all regulation on thousands of public companies.

There is a significant risk of double counting Scope 3 emissions. An upstream issuer discloses emissions by its customers, while a downstream issuer reports the same emissions (as well as those its supplier).

In other words, we're going to make you companies undertake a hugely burdensome process with no guidance as to whether you're doing it right. But if we decide you did it wrong, we sue you. Heads, the SEC wins; tails, the company loses.

And, speaking of the analogous disclosure regime on conflict minerals, is there any evidence that that regime has educed the use of conflict minerals or made anybody's life better? Or helped investors make more money? I am not aware of any.

(4) As SEC Commissioner Hester Peirce explained in opposing the regulations, the proposals are way outside the SEC's wheelhouse and probably exceed the SEC's authority. (You really need to go read her statement, which is a brilliant dissection of the proposal.)

Congress gave us an important mission—protecting investors, facilitating capital formation, and fostering fair, orderly, and efficient markets—and granted us sufficient regulatory authority to achieve that mission.  Effective execution of that mission forms the basis for healthy capital markets and, in turn, a healthy economy.  Congress, however, did not give us plenary authority over the economy and did not authorize us to adopt rules that are not consistent with applicable constitutional limitations.  This proposal steps outside our statutory limits by using the disclosure framework to achieve objectives that are not ours to pursue and by pursuing those objectives by means of disclosure mandates that may not comport with First Amendment limitations on compelled speech.

All the disclosure mandates we adopt under authority granted to us by Congress are at bottom compelled speech, and this one in particular prescribes specific content for the speech that it mandates. ...

Large asset managers—who are paid to invest other people’s money—some institutional investors, and some retail investors have been vocal proponents of climate change disclosures.  But why are they asking?  If they are asking for information to help them assess the financial value of companies in which they are considering investing, this information may be material and is likely covered by existing disclosure rules.  But many calls for enhanced climate disclosure are motivated not by an interest in financial returns from an investment in a particular company, but by deep concerns about the climate or, sometimes, superficial concerns expressed to garner goodwill.

I will have more to say about the proposal as it goes forward. But for right now, it's shaping up to be a disaster,

Recommended Reading: Paul Mahoney, The Economics of Securities Regulation: A Survey

An important and very well done review of the literature:

This paper reviews the academic literature that analyzes securities regulation from an economic perspective. It begins by describing the institutional foundations of securities law in the U.S. and distinguishing securities regulation from the private law of contracts, property, and fraud. Section 2 discusses the theoretical literature on mandatory versus voluntary disclosure in securities markets, focusing on information asymmetry and agency problems as justifications for mandatory disclosure. Section 3 surveys empirical work on the efficacy of actual mandatory disclosure rules. The remaining sections describe particular aspects of the U.S. regulatory system, including the regulation of public offerings, publicly-traded companies, trading markets, securities fraud, insider trading, market manipulation, and mutual funds and other collective investment vehicles, and surveys important theoretical and empirical work on each. The paper is intended to offer both institutional background and a summary of key research findings that may provide useful starting points for future research.

Mahoney, Paul G., The Economics of Securities Regulation: A Survey (August 24, 2021). Foundations and Trends in Finance, forthcoming, Virginia Law and Economics Research Paper No. 2021-14, Available at SSRN: https://ssrn.com/abstract=3910557

Lawrence Cunningham Posits that the SEC has Lurched Left "Off the Political Rails"

GW law professor Lawrence Cunningham has a new column out (sadly behind a paywall), in which he criticizes the SEC for designing its recent regulatory proposals so as to facilitate efforts by progressive political activists to influence corporations to achieve social justice and ESG issues that they cannot achieve politically.

Under Chairman Gary Gensler, the SEC is backing the team that views corporations mainly as social institutions, while trying to defeat the team that views corporations as primarily economic ones. ...

Cunningham focuses on the SEC's proposed changes to the rules under Sections 13(d) and 13(g) of the Securities Exchange Act. Those rules basically require investors who own 5% or more of a company's shares to file a disclosure document setting out their holdings, plans, and intentions.

... the SEC would make it easier for political activists to use corporate shareholder voting in campaigns promoting climate control, civil rights and board diversity — policies championed by the environmental, social and governance, or ESG, movement. For instance, the proposal narrows the concept of "group" for this cohort to make it easier for social activists to coordinate campaigns with each other and increase votes for ESG proposals.

... The SEC seeks to handicap traditional economic activists in favor of ESG activists. This runs counter to the SEC's historical mandate to serve the economic interests of Main Street shareholders, not put its weight behind particular political philosophies.

... Starting this year, the SEC has [also] liberalized its approach to the topics shareholders may require companies to put on the corporate ballot. Historically, companies could omit proposals pushing broad social policy unrelated to a company's business.

But now anything having to do with ESG must go on the ballot, with updated guidance noting staff will disregard "the nexus between a policy issue and the company" and instead focus on "the social policy significance of the issue" raised in the proposal. Expect novel proposals spanning from internal civil rights audits to disclosures of every director's sexual preference.

... While most shareholders will vote against such proposals as nonstarters ... the costs the SEC is imposing on shareholders are nontrivial.

In short, Gary Gensler has turned a historically apolitical federal agency into an arm of the progressive wing of the Democratic Party.

The Problem of Disclosing Scope 3 Emissions of Greenhouse Gases

An interesting article in today's WSJ reports that:

Apple Inc. says it produced 47,430 tons of greenhouse gases in a recent year. The production of its computers and phones by its suppliers, plus their transportation and use by customers, generated an estimated 22 million tons. ...

At issue are so-called Scope 3 emissions, which are mostly greenhouse gases produced by a company’s suppliers and by customers using its products. How to handle these indirect emissions has emerged as a sticking point inside the Securities and Exchange Commission as it deliberates on the new rules. ...

Not including these Scope 3 emissions can paint an incomplete picture of a company’s impact.

As the term Scope 3 suggests, climate change disclosure analysts generally divide a company's emission schedule into 3 categories:

A Scope 1 footprint analysis includes direct emissions of a system or activities; a Scope 2, indirect emissions associated with electricity, heat, and steam purchased to support the system or activities; and a Scope 3, indirect emissions resulting from operations that do not originate at sources owned or controlled by the company, e.g., transportation by suppliers or the use of sold products and services.

Jeff Civins & Mary Mendoza, The Carbon Revolution Answering the Call, 72 Tex. B.J. 272, 274 (2009).

Scope 3 emissions often make up the vast bulk of a company's disclosed emissions. As the WSJ reported:

The 47,430 tons of greenhouse gases Apple emitted in its financial year that ended Sept. 26, 2020, is barely more than the average emissions each year from a Boeing Co. twin-aisle aircraft delivered in 2020, according to The Wall Street Journal’s analysis of the plane maker’s data. Apple’s Scope 3 emissions are 475 times as large.

It strikes me that there a couple of problems with requiring Scope 3 disclosures.

First, requiring companies to include Scope 3 emissions in their disclosures would be extremely costly. Companies would have to gather data from companies in their supply chain. For companies with complex multi-national supply chains would incur expenses that would dwarf the controversial conflict mineral disclosure regime. The Harvard Business Review reports that "Scope 2 emissions [were carved] out of Scope 3 because they are easily measured and allocated to specific companies." In contrast, "the difficulty of tracking emissions from multiple suppliers and customers across multitier value chains makes it virtually impossible for a company to reliably estimate its Scope 3 numbers."

Consider the challenges faced by a manufacturer of car doors. Protocol for Scope 3 reporting requires the company to track all GHG emissions from the processes of its upstream suppliers, including the extraction of metallurgical coal and iron ore, the transport of those minerals to a steel producer, the production of sheet steel from the coal, iron ore, and other inputs, and the transport of that steel to its own production facility. The car-door company must also estimate the GHG impact of downstream activities, including transport of the car door to its customer (the automotive-assembly factory), manufacture of the finished car, transport of the car to a showroom, and operation of the vehicle, for perhaps 15 years, by the end-use consumer.

Estimating all those upstream and downstream emissions—especially for companies with long, complex, and multi-jurisdictional value chains—introduces high measurement error, opening the door to bias and manipulation.

Second, wouldn't disclosing Scope 3 emissions result in confusing double (or more) disclosure?. Suppose Apple has to include the carbon emissions of Supplier One Inc.--a company in its supply chain--in its carbon disclosures. Suppose Supplier One is publicly held, so that it must disclose its carbon emissions. Those emissions would be double counted. Meanwhile, Supplier Two Inc. is in Supplier One's supply chain. Supplier Two is also publicly held. So it's carbon emissions would be disclosed in its 10-K, but if Scope 3 emissions must be disclosed, those emissions would also be counted in Supplier One's and Apple's disclosures. A portfolio holding all three stocks would appear to be emitting way more carbon than it actually is.

This problem needs to be fixed before we have a disclosure fiasco that makes conflict mineral disclosure look like petty cash.

Usha Rodrigues on the Problems with SPACs

Estimable securities law scholar Usha Rodrigues has posted an article coauthored with Mike Stegemoller on SPACs that focus on the problems inherent in the insider dominance of the vehicles:

Proponents have hailed special purpose acquisition companies (SPACs) as the democratization of capitalism. In a SPAC, a publicly traded shell corporation acquires a private target, thereby taking it public in a manner that circumvents the rigors of a traditional initial public offering (IPO). Known as the “poor man’s private equity,” SPACs have been touted for giving the masses an otherwise rare chance to invest in private companies, and thereby reap the high returns usually reserved for the wealthy. Our original hand-collected data tell a different story.

We focus on two harms that SPACs present. First, they are singularly illiquid investments—even when nominally public, SPACs are generally owned and traded by the very few. Second, SPACs evolved to eliminate meaningful shareholder voice on the acquisition of a private target, using instead a species of “empty voting,” meaning that any such vote had no economic impact. By rendering the shareholder vote a nullity, SPACs can now virtually guarantee that a target will go public. This laxity of process creates the risk that subpar firms will trade side by side with quality public companies, tarnishing the market as a whole.

We are the first to examine this absence of liquidity and shareholder power, both of which are products of SPACs’ domination by insiders. This Article’s original data on SPACs’ empty voting, delinquent public filings, and thin-to-nonexistent trading provide empirical evidence that a small group of insiders use SPACs to manipulate the merger process, free of traditional IPO safeguards. We conclude with a reform proposal to reunite shareholders’ economic interest with voting power. This potential reform addresses the concerns of liquidity and lack of selectivity, while also providing a viable alternative to the traditional IPO.

Rodrigues, Usha and Stegemoller, Michael A., SPACs: Insider IPOs (2021). Available at SSRN: https://ssrn.com/abstract=3906196 or http://dx.doi.org/10.2139/ssrn.3906196