Imagine you are the CEO of a fast-growing company that needs public capital to grow. You have a real business today, but much of your value depends on what you haven’t built yet: new products, new capacity, and a multi-year plan that investors can evaluate only when it has been clearly articulated.

The pressing question is not just should you go public but how: a traditional IPO or a SPAC merger?  In an IPO, the sales pitch to investors typically emphasizes what you can show them now, including current products, current performance, and near-term milestones. Detailed long-horizon forecasts are often speculative and can create substantial litigation risk.

In a SPAC merger, the pitch changes. Historically, regulatory differences made it easier for  companies to share forward-looking projections: detailed operating plans, timelines, and targets. In Polestar’s 2021 SPAC transaction, for example, management discussed its current models (Polestar 1 and Polestar 2), as you would expect it to do in an IPO roadshow. But then it went further, laying out a multi-year plan for additional models (Polestar 3-5), with target launch years and other operations goals. In hindsight, the production timeline turned out to be optimistic for two of the three planned models.

That ability to talk more freely about the future is both the attractive and concerning about SPACs. Projections can help sophisticated investors evaluate whether a growth story is plausible, but they can also sound more certain than they really are, especially to less sophisticated investors.

This tradeoff is at the center of the SEC’s January 2024 SPAC reforms, which narrowed this difference between IPOs and SPAC mergers by increasing expected liability around forward-looking statements in SPAC deals. In a recent paper, I study what projections look like in SPAC communications and what changes – across firms and investors – when the SPAC advantage is taken away.

Three takeaways:

• Forward-looking language is pervasive. In investor calls about SPAC mergers, about one in eight sentences (roughly 12 percent) is forward-looking and largely substantive rather than boilerplate.
• Projections can both help and hurt. They can make it easier for sophisticated investors to screen deals, but they can also inflate demand among investors who take optimistic scenarios too literally.
• In my simulation, estimated costs exceed estimated benefits. Implementing the SEC’s 2024 reform prevents roughly $5.75 billion in losses for less-sophisticated investors by blocking a small set of marginal SPAC mergers, but it also reduces the value of late-stage private firms by about $9.80 billion by weakening SPACs as a financing channel. Overall, the policy generates an implied net cost of approximately $4.05 billion for market participants.

SPAC Communications and the 2024 Changes

A traditional IPO and a SPAC merger are two different routes to the same destination: a private firm becoming publicly listed.

Historically, projections in each rout have been treated differently. IPOs are excluded from the Private Securities Litigation Reform Act (PSLRA) safe harbor, so issuers and their advisers have strong reasons to be cautious about sharing detailed forecasts. In SPAC mergers, by contrast, market participants often lean more heavily on the safe harbor when disclosing projections during the de-SPAC process.

To measure how prevalent forward-looking disclosure is in practice, I collect 709 SPAC merger-stage conference-call transcripts and use a finance-trained language model (FinBERT) to classify sentences as forward-looking or not. Forward-looking statements account for about 12 percent of sentences, on average.

Just as important, most of that forward-looking content is specific. Management frequently discusses timelines, milestones, capacity plans, and concrete targets and does not use just generic “we expect” language. This matters because specific projections are precisely the kind of content that sophisticated investors can question and validate, but also the kind of content that can create unwarranted confidence for investors who do not (or cannot) do deep diligence.

In January 2024, the SEC adopted rules that make it harder for SPAC transactions to rely on reduced liability for forward-looking statements. Practically, that raises the expected litigation cost of including projections in SPAC communications and pushes the SPAC environment closer to the IPO environment.

Projections Can Both Help and Harm

Projections can cut two ways, and that tension is the core tradeoff my model is built to capture. On the one hand, detailed forecasts and operating plans can improve screening: When management lays out a roadmap, the economics for each of a company’s units , or milestones for growth, sophisticated investors can test assumptions and make due diligence more informative. On the other hand, the same projections can inflate demand: Investors who rely heavily on management’s narrative may give too much weight to optimistic scenarios and too little weight to the risk in implementing those scenarios and treat forecasts as more precise than they are. As a result, projections can help marginal deals close even when fundamentals are weak. Both forces are most relevant for young firms whose current financials are not very informative about long-run prospects.

This is also why we need to take firms’ optimal choice into consideration. Firms do not randomly choose IPOs or SPAC mergers; they select the approach that best fits their situation and the market’s appetite. When disclosure and liability rules change, the mix of firms choosing between the approaches changes too: some switch their choice, some delay, and some stay private. Thus, simple “before vs. after” comparisons can be misleading.

To address this problem, my paper uses a dynamic learning model of U.S. going-public attempts from 2010 to mid-2023, in which investors learn about long-run growth over time, and firms choose when and how to go public. In the model, projections sharpen sophisticated screening and, when screening is inconclusive, they can generate projection-driven demand among less sophisticated investors.

The SEC’s SPAC Projection Rule

I use the model to simulate a counterfactual economy that mirrors the SEC’s 2024 reform: A SPAC merger faces the same legal liability as an IPO when making forward-looking statements.

The results highlight a sharp tradeoff. The investor-protection gains come from preventing a small set of “weak-but-successful” SPAC mergers, which would have closed largely because projection-driven demand backstops financing even when sophisticated screening is unfavorable. In a cohort of 6,592 late-stage private firms (those raising at least $100 million in their most recent round), the model produces 115 such marginal deals. Losses borne by less sophisticated investors in that subset average about $50 million per deal, totaling about $5.75 billion (a gross figure, not net of gains in stronger deals).

The costs are broader. The reform reduces the value of SPACs as a financing option for many more firms. Without projections helping marginal deals clear, firms wait longer to access public capital, and some lose the option altogether. In the same cohort, the implied reduction in firm value averages about $1.64 million per firm, totaling about $9.80 billion. Overall, the counterfactual implies a conservative net cost of roughly $4.05 billion.

The Policy Outlook

The main message is not that projections are inherently “good” or “bad.” It is that projection policy moves both sides of the market.

Tightening liability can protect investors by cutting off projection-driven demand that allows the weakest deals to clear. But in my simulations, those gains are more than offset by a broader cost: Reducing the value of SPACs as a financing option delays or blocks access to public capital for many late-stage firms, producing an overall net loss.

At the same time, rolling back regulation is not a satisfactory answer either, because losses are real and concentrated in a small set of truly poor deals where optimistic forecasts can do the most harm. A more promising direction is to make projection-based communication more transparent rather than less available. For example, regulators could require clearer disclosure of key assumptions and downside scenarios, standardize how uncertainty is presented, and use more prominent language emphasizing that forecasts are inherently uncertain and should not be taken literally.

Yuchi Yao is an assistant professor at the University of Oregon’s Lundquist College of Business. This post is based on his recent article, “Learning from the Market: The Choice Between IPOs and SPAC Mergers,” available here.