Lynn E. Turner, a former chief accountant for the Securities and Exchange Commission, described the proposed fix as “an excellent idea.” Because sponsors are promoting, “here’s what we’re going to do during this period,” he said, “they should be bound by it.”
Mr. Palihapitiya was less enthusiastic.
“That’s not a very good idea,” he told me. “Why would a sponsor agree to a five-year ban if management wouldn’t and other investors, including PIPE investors, wouldn’t?” (At the time of the transaction, institutional investors are often asked to buy shares on favorable terms through what is known as a private investment in public equity (PIPE).)
This is true. Management can usually sell shares after a short vesting period. But, as Mr. Turner pointed out, isn’t it the sponsor who is selling the deal to the public?
“What if management lied?” Mr. Palihapitiya argued. “Should the sponsor be hooked now for bad management behavior?” He said there are “too many corner cases where this fails”.
Mr. Palihapitiya said he had a better idea, “Have a sponsor invest at least 10 percent the size of the business,” which is far more than most sponsors. “The more you invest, the more you have to question the projections,” he said. “This has always been the only sensible way to bring sponsors, management and investors into harmony.”
In a way, the market is already forcing some sponsors to agree to longer bans. Michael Klein, a former banker turned serial SPAC deal maker, recently agreed to hold on to his stake in Lucid Motors, a high-flying electric vehicle maker, for at least 18 months to seal the deal.
And as SPACs lose their luster – most SPACs that went public in the past few weeks are now trading below their asking price – investors may be asking for more from sponsors, maybe even before regulators do.
Ultimately, however, investors shouldn’t have to ask sponsors to commit to their own businesses.