Lynn E. Turner, a former chief accountant for the Securities and Exchange Commission, called the proposed fix “an excellent idea.” Because sponsors are the ones advertising “here’s what we’re going to do in this time period,” he said, “they should be locked into that.”
Mr. Palihapitiya was less enthusiastic.
“This isn’t a very good idea,” he told me. “Why would a sponsor agree to a five-year lockup when management wouldn’t, nor would other investors including PIPE investors?” (At the time of the deal, institutional investors are often invited to buy shares with favorable terms through what’s called a private investment in public equity, or PIPE.)
That is true. Management can typically sell shares after a short restricted period. But, as Mr. Turner pointed out, isn’t it the sponsor that is selling the deal to the public?
“What if management lied?” Mr. Palihapitiya argued. “Should the sponsor now be on the hook for bad behavior of management?” He said there were “too many corner cases where this fails.”
Mr. Palihapitiya said he had a better idea: “Make a sponsor invest at least as much as 10 percent of the deal size,” which is far more than most sponsors do. “The more they invest, the more they would need to scrutinize the projections,” he said. “This has always been the only meaningful way to align sponsors, management and investors.”
In some ways, the market is already forcing some sponsors to agree to longer lockups. Michael Klein, a former banker who has become a serial SPAC deal-maker, recently agreed to keep his stake in Lucid Motors, a high-flying electric vehicle maker, for at least 18 months as a way to seal the deal.
And with more and more SPACs losing their shine — most SPACs that went public in recent weeks are now trading below their offering price — investors may demand more from sponsors, perhaps even before regulators do.
But, in the end, investors shouldn’t have to ask sponsors to commit to their own deals.