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The purpose of this summary is to provide excerpts of selected Financial Industry Regulatory Authority (FINRA) regulatory notices issued from September to November 2008.

The paper provides excerpts from FINRA Regulatory Notice 08‐54, Guidance on Special Purpose Acquisition Companies; Regulatory Notice 08‐62, Limit on Close Case Submissions; 08‐66, Retail Foreign Exchange; and 08‐70, FINRA Investigations.

Notice 08‐54: Special purpose acquisition companies (SPACs) are shell companies that raise capital in initial public offerings (IPOs) for the purpose of merging with or acquiring an operating company. Notice 08‐62: Effective November 24, 2008, FINRA will limit the circumstances under which parties may make submissions to arbitrators in closed cases. Notice 08‐66: The retail over‐the counter foreign currency exchange (retail forex) market is opaque, volatile and risky. Broker‐dealers who engage in forex business with their retail customers must comply with the FINRA rules that apply to those activities. Notice 08‐70: FINRA is issuing this guidance to apprise firms of the circumstances in which extraordinary cooperation by a firm or individual may directly influence the outcome of an investigation.

These are direct excerpts designed to provide a useful digest for the reader and an indication of regulatory trends. The FINRA staff is aware of this summary but has neither reviewed nor edited it. For further detail as well as other useful information, the reader should visit www.finra.org

The authors examine one special focus of Special Purpose Acquisition Companies (SPACs), namely environmental, social and governance (ESG) related investments. The authors document the performance of SPACs with and without ESG focus.

The authors collect data, from several sources, on 1,737 SPAC IPOs formed between 2003 and 2022. A SPAC's focus on ESG is classified based on declared focus in Securities and Exchange Commission (SEC) filings and in post-merger annual reports. The authors examine operational and financial performance of SPACs with and without ESG focus.

In the study's sample, only 50% of SPACs that announced an intention to acquire an ESG target ended up consummating a merger with an ESG private firm. ESG SPACs exhibit worse operating performance than non-ESG SPACs. Furthermore, they experience 11.6% lower 1-year post-merger excess returns than their non-ESG counterparts.

The study provides an examination of ESG firms that came to market via mergers with SPACs, which is an alternative method to traditional initial public offerings (IPOs). The study also provides a comparison of both operational and stock performance of ESG and non-ESG SPACs.

The purpose of this paper is to explain the Securities and Exchange Commission's recently proposed amendments to Rule 10b‐18 under the Securities Exchange Act of 1934 that are intended to modernize Rule 10b‐18 to reflect changes in the market since the Rule's adoption.

The paper provides an overview of Rule 10b‐18, which provides an issuer that is buying its own stock a safe harbor from liability for market manipulation if the issuer satisfies the purchase, timing, price and volume conditions defined in Rule 10b‐18. It outlines the proposed amendments to the timing condition, price condition, limitation on disqualification, and the time in which the safe harbor is available in connection with an acquisition by a special purpose acquisition company.

The proposed amendments are intended to modernize Rule 10b‐18 to reflect changes in the market since the Rule's adoption.

The proposed amendments to the price condition and the disqualification provisions will likely be welcome by issuers and brokers who have been challenged by the evolution of market practices and technology, but the amendments to the timing condition and the restrictions on SPACs could result in fewer opportunities for issuers to purchase their own shares under the safe harbor.

The paper provides practical guidance from experienced securities lawyers.

The purpose of this paper is to study how institutional characteristics of specified purpose acquisition companies (SPACs) are related to their post-merger survival. SPACs are unique financial firms that conduct the initial public offering (IPO) with the sole purpose of using the proceeds to acquire another private company. The paper finds that institutional characteristics of SPACs are important in determining post-merger outcomes of new company, specifically when it comes to their survival/failure, i.e., increases in pre-merger commitment by SPAC stakeholders and initial positive market performance increase post-merger survival likelihood; on the contrary, mergers with higher transaction costs and focused on foreign companies exhibit increased likelihood of failure.

Using unique sample of companies conducting an IPO, namely, SPACs, with the sole purpose to execute an acquisition in the future date within limited time, this paper presents additional evidence on the survival and acquisition frequency of IPOs, and determinants of these choices.

Observing unique set of specified purpose companies, this paper documents that SPACs’ failure rate is at the level of 58.09 percent, higher than any previously reported failure rate in the post-IPO survival literature and comparable only to failure rates found by Hensler et al. (1997) at 55.10 percent for general companies. In addition, the paper documents similar findings to Bhabra and Pettway (2003) that prospectus and market characteristics of original companies have predictive power with respect to survival.

This study extends the literature on post-IPO survival in following ways. First, the paper documents survival rates for unique set of companies organized with the sole purpose to acquire another company. Second, the paper presents evidence on how institutional characteristics of SPAC determine their post-merged outcomes, specifically when it comes to their failures. Finally, paper contributes to the scant literature on SPACs providing new evidence on their post-merger outcomes and performance.

This paper aims to explain the fundraising and valuation processes of startups and discuss the conflicts of interest between entrepreneurs, venture capital (VC) firms and stakeholders in the context of startup corporate governance. Further, this paper uses the examples of WeWork and Zenefits to explain how a failure of stakeholders to demand an external audit from an independent accounting firm in early stages of funding led to an opportunity for fraud.

The methodology used is a literature review and analysis of startup valuation combined with the Fraud Triangle Theory. This paper also provides a discussion of WeWork and Zenefits, both highly visible examples of startup fraud, and explores an increased role for independent external auditors in fraud risk mitigation on behalf of stakeholders prior to an initial public offering (IPO).

This paper documents a number of fraud risks posed by the “fake it till you make it” ethos and investor behavior and pricing in the world of entrepreneurial finance and VC, which could be mitigated by a greater awareness of startup stakeholders of the value of an external audit performed by an independent accounting firm prior to an IPO.

An implication of this paper is that regulators should consider greater oversight of the startup financing process and potentially take steps to facilitate greater independence of participants in the IPO process.

Given the potential conflicts of interest between VC firms, investment banks and startup founders, the investors at the time of an IPO may be exposed to the risk that the shares of the IPO firms are overvalued at offering.

This study demonstrates how startup practices can be extended to the Fraud Triangle and issue a call to action for the accounting profession to take a greater role in protecting the public from startup fraud. This study then offers recommendations for regulators and standards entities.

There are few academic papers in the financial crime literature that link the valuation and culture of startup firms with fraud risk. This study provides a concise explanation of the process of valuation for startups and highlights the considerations for stakeholders in assessing fraud risk. In addition, this study documents an emerging role for auditors as stewards of proper valuation for pre-IPO firms.

The purpose of this study is to assess how the information disclosed in prospectuses impacted the initial public offering (IPO) underpricing at a time of high government interference amid the ongoing pandemic.

The design of this study has several tracks, namely, a macro-level track, which is represented by the government measures to halt the pandemic; a micro-level track, which is followed by textual analysis of IPO prospectuses; and, finally, a machine learning track, in which the authors use state-of-the-art tools to improve their linear regression model.

The authors found that strict government anti-COVID-19 measures indeed contribute to the reduction of the IPO underpricing. Interestingly, the mere fact of such measures taking place is enough to take effect on financial markets, regardless of the resulting efficiency of such measures. At the micro-level, the authors show that prospectus sentiments and their significance differ across prospectus sections. Using linear regression and machine learning models, the authors find robust evidence that such sections as “Risk factors”, “Prospectus summary”, “Financial Information” and “Business” play a crucial role in explaining the underpricing. Their effect is different, namely, it turns out that the more negative “Risk factors” and “Financial Information” sentiment, the higher the resulting underpricing. Conversely, the more positive “Prospectus summary” and “Business” sentiments appear, the lower the resulting underpricing is. In addition, we used machine learning methods. Consisting of more than 580 IPO prospectuses, the study sample required modern and powerful machine learning tools like Isolation Forest for pre-processing or Random Forest Regressor and Light Gradient Boosting Model for modelling purposes, which enabled the authors to gain better results compared to the classic linear regression model.

At the micro level, this study is not confined to 2020, but also embraces 2021, the year of the record number of IPOs held. Moreover, in this paper, these were prospectuses that served as a source of management sentiment. In addition, the authors used a tailor-made government stringency index. At the micro level, basing the study on behavioural finance hypotheses, the authors conducted both separate and holistic analysis of prospectuses to assess investors’ reaction to different aspects of IPO companies as well as to the characteristics of the IPOs themselves. Lastly, the authors introduced a few innovations to the research methodology. Textual analysis was conducted on a corpus of prospectuses included in a study sample. However, the authors did not use pre-trained dictionaries, but instead opted for FLAIR, a modern open-source framework for natural language processing.

This study aims to investigate the link between audit committee characteristics and the liquidity of initial public offerings (IPOs) in Malaysia, which is an emerging economy in Southeast Asia. Another purpose of this study is to examine the moderating effect of the revised Malaysian code of corporate governance (MCCG) on the link between audit committee characteristics and IPO liquidity.

The final sample consists of 304 Malaysian IPOs listed in 2002–2017. This study uses ordinary least squares regression method to analyse the data. To confirm this study’s findings, a hierarchical or four-stage regression analysis is used to compare the t-values of the main and moderate regression models.

The findings show that audit committee characteristics (size and director independence) have a positive and significant relationship with IPO liquidity. Also, the revised MCCG positively moderates the relationship between audit committee characteristics and IPO liquidity.

This study’s findings indicate that companies with higher audit committee independence have a more effective monitoring mechanism that mitigates information asymmetry, thus reducing adverse selection issues during share trading.

Policymakers could use the results of this study in developing policies for IPO liquidity improvements. Additionally, the findings are useful for traders and investors in their investment decision-making. For companies, the findings highlight the crucial role of the audit committee as part of the control system that monitors corporate governance.

To the authors’ knowledge, this work is a pioneering study in the context of a developing country, specifically Malaysia that investigates the impact of audit committee characteristics on IPO liquidity. Previously, the link between corporate governance and IPO liquidity had not been investigated in Malaysia. This study also contributes to the IPO literature by providing empirical evidence regarding the moderating effect of the revised MCCG on the relationship between audit committee characteristics and IPO liquidity.

The author addresses the looming question in the digital era: Can long-established firms adopt an existential mindset that enables them to survive and prosper?

Disruptors take advantage of significant changes in the traditional value drivers in an existing market. The success of long-established companies often inhibits innovation, and most mature organizations struggle to excel.

Greater reliance on controlled experiments can mitigate the failures of innovation based primarily on focus group research.

Competitors can be transformed into collaborators in many parts of the value chain, and alliances are outperforming the more conventional business development approaches.

The author’s powerful message: Today’s leaders must adopt a new mindset in which bureaucracy is repudiated and responsiveness and adaptability are rewarded.

Most entrepreneurs are continually concerned about their finances. Their companies perhaps not yet profitable, they may have a fear of “running out of dry powder.” These entrepreneurs often have fallen in love with their company's technologies, products, and potential markets, but they require more resources. Invariably these emerging ventures shroud their fear of the grueling capital raising marathon by presenting voluminous business plans to potential investors. They often flaunt their “optimized business models.”” Investors, however, typically want to know why the potential investment is such a good deal. The entrepreneur often wants guidance regarding what to say to whom in a changing financing environment.

In this article, our “Practitioner's Corner” associate editor Joe Levangie collaborates with a long-time colleague Paul Broude to address how businesses should “make their capital-raising initiatives happen.” Levangie, a venture advisor and entrepreneur, first worked with Broude, a business and securities attorney, in 1985 when they went to London to pursue financing for an American startup. They successfully survived all-night drafting sessions, late-night clubbing by the company founder, and even skeet shooting and barbequing at the investment banker's country house to achieve the first “Greenfield” flotation by an American company on the Unlisted Securities Market of the London Stock Exchange. To ascertain how the entrepreneur can determine what financing options exist in today's investing climate, read on.