After shooting to the moon in 2021, the market for special purpose acquisition companies is falling back to earth in 2022.

SPAC mergers, which bring private companies into public markets without a traditional IPO, have fallen in value from a record 2021 and fewer new SPACs are coming to market, according to S&P Global Market Intelligence data.

While still above the historical pace, the combined value of $38.79 billion for announced deals in 2022 as of May 9 is less than a quarter of the $223.35 billion in the same period in 2021. There were 117 SPAC IPOs in 2022 as of May 9, compared with 351 for the same period in 2021, a record year for SPAC market debuts, according to the data.

Some investment banks have pulled back on their SPAC businesses and private investment in public equity financing for SPACs has slowed, experts say. Stricter SPAC rules proposed in March by the SEC are weighing on the SPAC market. The retreat in the SPAC market comes amid a broader drop in IPOs as investors become more risk-averse in the face of tightening credit conditions, stock market sell-offs and rising inflation.

"This is probably the bottom of the SPAC market, or as close to the bottom as you could possibly get," said Yelena Dunaevsky, a SPAC specialist at the insurance brokerage and consulting firm Woodruff Sawyer.

Changing market conditions

SPACs completed or announced 350 deals in 2021, compared with 77 completed or announced deals in 2022 as of May 9, according to Market Intelligence. The deals being struck with SPACs and private companies, what is often called a de-SPAC, are at lower valuations than previous years as well, said Bill Dooley, director of the M&A and activism advisory group at Morrow Sodali, a business consulting firm.

"Companies that want to go this route are going to have to understand they may not get the valuation they were looking for," Dooley said.

SPACs for many years were operating at the fringes of the financial market as a nontraditional way for companies to go public. Things changed in 2020 as the Fed slashed interest rates and equity valuations soared. Large banks and institutional investors entering the SPAC market gave it added legitimacy, said Jared Kelly, a partner in the capital markets and securities practice of Lowenstein Sandler.

"A lot of these hedge funds and investors who came into the initial rounds of these SPAC IPOs didn't have anywhere else to put their money," Kelly said in an interview.

Companies in the technology, healthcare and industrials industries that went public by merging with SPACs included SoFi Technologies Inc., Clover Health Investments Corp. and BARK Inc. Eventually SPACs became trendy, attracting celebrity endorsements and raising concerns that some SPACs were taking advantage of investors.

A recent study found that revenue projections given by SPACs' target firms are much more optimistic than the actual revenue growth of similar public firms, raising red flags that the projections do not give an accurate picture of what the target firms can actually accomplish, said Elizabeth Blankespoor, a University of Washington associate professor of accounting and co-author of the study.

The new rules proposed by the SEC might help investors understand incentives for SPAC sponsors and rein in unreasonable projections, but it is possible investors do not actually read such disclosures, Blankespoor said.

"The SEC's proposal to increase firms' liability for the projections might also be helpful to rein in overly optimistic statements," Blankespoor said. "Of course, this could mean firms will just stop giving any forward-looking information in the filings, which isn't the goal either."

Regulatory pressure

The SEC's proposed rules would require additional disclosures about SPAC sponsors, conflicts of interests and sources of dilution. The new rules aim to address issues related to projections made by SPACs and their target companies, and would bring the SPAC process in closer alignment with traditional IPOs.

The SEC appears to be trying to protect retail investors from buying into companies that are not ready to go public, said Dooley of Morrow Sodali. Companies targeted by SPACs can make revenue projections years into the future in ways that companies going through the traditional IPO process cannot, Dooley said. The SEC's desire to change that could mean fewer companies try to go public through a SPAC and make banks more wary of operating in the space, experts say.

While the SPAC frenzy of 2021 was excessive, the SEC is aiming too wide with its proposals, said Dunaevsky of Woodruff Sawyer. Many SPAC teams have already been disclosing more than is required, and some of the proposed rules appear to go even further than what is required in the traditional IPO process, Dunaevsky said.

"The SEC really needs to take into consideration the views from the market," Dunaevsky said. "I'm sure a lot of these market participants are going to be submitting letters and statements to the SEC during the comment period."