One of the big challenges with traditional IPOs is price discovery and public information disclosure. These go hand-in-hand, as the more complete and widely distributed issuers provide disclosures and forecasts, the better price discovery we will have.

But, that’s not what happens in a traditional IPO. Instead, research analysts jump through hoops to get financial forecast information from the issuer; as a result, the information is imperfect. And then, they only disclose that information to large, institutional clients.

Why? B/c of the 2003 Global Research Analyst Settlement. Basically, the SEC felt as though the investment bankers and the research analysts had become too cozy – potentially compromising the independence of research. The SEC dialed this back significantly under the Settlement.

We still operate under the Settlement rules today – with one change. The 2012 JOBS Act loosened the strings a bit on the research analysts. They can publish research sooner post-IPO than pre-JOBS Act, but they still have friction in getting financial forecasts from issuers.

It doesn’t have to be this way.

In fact, SPACs – often touted as an alternative to a traditional IPO – don’t work this way. Instead, the company going into the SPAC traditionally provides more detailed (and longer-dated) forecasts to potential investors and research analysts. Often sharing up to 5-yr forecasts.

How do they get away with this? Because of regulatory factors. The SPAC is acquiring a company into an existing public structure (the SPAC itself). As a result, the SPAC discloses info via Form S-4 – the document that outlines the financial/strategic rationale for the acquisition

This – at least in theory – makes for better/more complete information disclosure and improves price discovery. The SPAC investors know more about the company’s future prospects. So to the extent that volatility comes from imperfect information, volatility should be reduced .

But, why restrict this advantage to SPACs? We shouldn’t. Maybe it’s time to re-look at the Settlement to determine whether the problems it was solving back in 2003 can be addressed differently in 2020.