The Further Erosion of Investor Protection : Expanded Exemptions, SPAC Mergers and Direct Listings

This article examines the decades-long decline of investor protections enshrined in the Securities Act of 1933, most notably Section 11, which imposes near strict liability on corporate insiders and certain secondary actors, primarily underwriters. The provision, the most potent in the federal securities regulatory arsenal, popularized the concept of outside gatekeepers and transformed practices in securities offerings, making due diligence a byword for careful investigation of facts whether required by legal process or otherwise. The measures required by Section 11 restored confidence in US capital markets in the wake of the Great Depression and have been instrumental in these markets’ long standing as the world’s deepest and most liquid.We argue that the deterrent force of these protections has diminished significantly. The SEC and Congress have all but encouraged this decline by expanding exemptions from registration under the Securities Act, putting the vast majority of capital raised today beyond the reach of these protections. More recently, corporations have increasingly avoided these protections by turning to SPAC mergers and direct listings instead of traditional IPOs.We assess the perceived benefits of these recent developments alongside the threats they pose to investor protection, arguing that many of the purported benefits of SPAC mergers and direct listings are overstated and, in any case, fail to justify the erosion of investor protection implicit in these transactions—a further degradation of critical safeguards. Our focus on deal structure is novel and key to understanding the risks these transactions pose to investors. We suggest reforms governing SPAC mergers and direct listings