Chamath Palihapitiya among SPAC sponsors asked by senators about potential conflicts of interest

Founder/CEO of Social Capital, Chamath Palihapitiya, speaks onstage during the Vanity Fair New Establishment Summit at Yerba Buena Center for the Arts on October 19, 2016 in San Francisco, California, and Senator Elizabeth Warren (D-MA) speaks during a Senate Finance Committee hearing June 8, 2021 on Capitol Hill in Washington, D.C.
Senator Elizabeth Warren (D-MA) and Founder and CEO of Social Capital, Chamath Palihapitiya. Michael Kovac/Getty Images for Vanity Fair (Palihapitiya) and Evelyn Hockstein-Pool/Getty Images (Warren)

Chamath Palihapitiya, once dubbed the “SPAC King,” and five other blank-check company sponsors were asked by Senator Elizabeth Warren and three other Democratic legislators about conflicts of interest and business practices that disadvantage retail investors.

The letters pointed to the alleged “range of maneuvers – some of them downright astonishing to the uninitiated – to win even when investors lose.”

“We seek information about your use of SPACs in order to understand what sort of Congressional or regulatory action may be necessary to better protect investors and market integrity and ensure a fair, orderly, and efficient marketplace,” the letters added.

Warren as well as Sens. Sherrod Brown, Tina Smith, and Chris Van Hollen sent identical individual letters dated September 22 to Palihapitiya, co-founder and CEO of The Social Capital Partnership; Michael Klein, founder of M. Klein & Associates; Stephen Girsky, managing partner at VectoIQ; Tilman Fertitta, chairman and CEO of Fertitta Entertainment; Howard Lutnick, chairman and CEO of Cantor Fitzgerald; and David Hamamoto, CEO and chairman of DiamondHead Holdings.

The senators said they expect a response by October 8.

Palihapitiya’s Social Capital declined a request for comment. Instead, it pointed Insider to an opinion piece the venture capitalist wrote in May, calling for greater regulation and oversight in SPACs. Palihapitiya highlighted the need for “clear and rigorously enforced standards to push for high deal quality and appropriate investor protections.”

SPACs, or special purpose acquisition companies, are shell companies that list with the aim of merging with private companies and taking them public. Several major companies such as Virgin Galactic and DraftKings have debuted via SPACs.

Touted as a faster and cheaper alternative for companies to go public compared to the traditional IPO, SPACs have garnered support from Wall Street heavyweights as well as pop icons and professional athletes. But they also require fewer disclosures than IPOs do.

SPACs, which have been around for decades, rocketed to prominence last year with the trend accelerating in 2021. Year-to-date SPAC issuance has far outpaced full-year 2020 totals.

“This meteoric rise is concerning,” the letters said. “The SPAC process often appears to be structured to exploit retail investors to the benefit of large institutional investors such as hedge funds, venture capital insiders, and investment banks.”

The senators said industry insiders can “take advantage of ordinary investors throughout this process,” such as making “overly optimistic statements about target companies” – something not allowed in a traditional IPO route.

“Statements by SPAC sponsors to convince shareholders to vote in favor of a merger may not have to meet the same disclosure standards,” the senators added.

The concerns raised by the lawmakers aren’t the first time authorities have questioned the process of SPACs.

The US Securities and Exchange Commission, under then Acting Chair Allison Herren Lee, began an inquiry in March into Wall Street’s blank-check company craze by seeking voluntary information.

And current Chair Gary Gensler said in July the SEC was investigating major banks over conflicts of interest in the SPAC deal-making process that exploded in the past year.

Other controversies seem to follow SPACs. In August, billionaire hedge fund manager Bill Ackman’s blank check firm, Pershing Square Tontine Holdings, was sued by former SEC Commissioner Robert Jackson and Yale law professor John Morley for not operating as a SPAC.