The merger between Social Capital Hedosophia V (NYSE:IPOE) and Social Finance (better known as SoFi) has been paused. That alone doesn’t mean all that much for IPOE stock.

The delay is coming due to updated guidance from the U.S. Securities and Exchange Commission regarding the accounting treatment of SPAC (special purpose acquisition company) warrants. Social Capital Hedosophia V has re-submitted its proxy statement for the merger, and shareholders should  vote on the transaction in the coming weeks.

Given that IPOE stock trades above $17, an approval is all but a formality. A delay in the close of the merger doesn’t impact the value of SoFi any more than a delay in closing on a house makes that house worth less.

That said, the reason for the updated SEC guidance and the agency’s broader focus on SPACs does matter for IPOE stock. In so many ways, Social Capital Hedosophia V  is emblematic of the SPAC trend.

And so it’s no surprise that Social Capital Hedosophia V has risen and fallen in concert with the broader optimism and pessimism toward SPACs. Indeed, at this point investors’ perceptions of the stock almost can’t be disentangled from their view of SPACs as a whole.

The SEC Takes a Look

The warrant accounting issue that led to the refiled proxy statement is immaterial to the valuation of IPOE and all other SPACs. No one really cares about the earnings of Social Capital Hedosophia V or the technicalities of its balance sheet. Owning the stock is about eventually owning SoFi, and the SPAC’s guidance doesn’t impact SoFi’s prospects going forward.

But the accounting change is part of a broader revision of the SEC’s approach to SPACs. There’s a key difference between going public via a SPAC and doing so through an initial public offering. Rules very much limit the ability of IPOs to provide commentary about the future. SPACs do not have such limits.

Chamath Palihapitiya, part of the group sponsoring the Social Capital Hedosophia V (and, so far, five other SPACs), has highlighted the ability of SPACs to provide projections as one of their key benefits.

But the SEC appears less sure about that. In a speech a few weeks ago, a key official emphasized that “a de-SPAC transaction [the merger between a SPAC and a target] gives no one a free pass for material misstatements or omissions.”

The concern is that the guidance of many SPACs looks ridiculously optimistic. Multiple SPACs have promised record-setting revenue growth.

And, particularly after the selloff of many SPACs, it’s quite clear that the market as a whole simply doesn’t trust these projections. If most SPACs hit their projections, their stock prices would jump tremendously. Given the attention paid to these companies, the only logical explanation is that investors are heavily baking those projections into stock prices.

What This Means for IPOE Stock

Forecasts remain an issue for IPOE stock. For instance, SoFi in its merger presentation projected that its technology platform revenue (created by offering services to other financial companies) would grow from $1 million in 2019 to $911 million in 2025. Is SoFi’s technology really that good? Is demand for it really that high given that major financial institutions all build their platforms in-house?

The answer to both questions would seem to be: probably not.

But specific investors’ answers would be driven in part by their trust in Palihapitiya. Some see him as a champion for the retail investor, removing the “IPO pop” from the clutches of institutional and wealthy investors. Others see a charlatan who takes that IPO pop himself in the form of 20% ownership of each of his SPACs.

The debate has been intensified by Clover Health (NASDAQ:CLOV), another one of his SPACs. Clover did not disclose that the company was under investigation by the U.S. Department of Justice. The company said the investigation was not material. Bulls see Clover as persecuted (and set up for a “short squeeze”). Bears see retail investors getting burned and Palihapitiya’s credibility taking a hit.

The Broader Debate

So much of the argument really comes down to one’s view of the market. To Palihapitiya and other SPAC adherents, the trend allows small investors to get into exciting, young, fast-growing companies which they’d normally be shut out of.

And there’s a list of SPAC mergers that support their claims. Would you like to own a U.S. online gambling leader? DraftKings (NASDAQ:DKNG) went public via the SPAC route. An outer space company? Try Virgin Galactic (NYSE:SPCE), the first Social Capital Hedosophia SPAC. Churchill Capital IV (NYSE:CCIV) stock rose far too high, but that was obviously because investors wanted a piece of electric-vehicle startup Lucid Motors.

The contrary argument is that perhaps retail investors shouldn’t be investing in these companies. This is the point that the SEC is gently making as it tries to reel in their  projections.

Investing in these early-stage companies is incredibly difficult. How can an individual investor know whether Lucid Motors or, say, Fisker (NYSE:FSR) has a brighter future? How can she determine whether SoFi is a long-term fintech disruptor or driving growth by taking on too much risk?

One answer is that she’ll look at each company’s projections. Increasingly,  the quality of those projections are being questioned.  For example,  Canoo (NYSE:GOEV) walked its outlook back just eight months after providing guidance that stretched to 2027. As a result, trusting these projections looks awfully dangerous.

The Edge

The institutional investors that historically funded these kinds of businesses in the private markets had key advantages in answering these questions. They were able to perform due diligence that included looking at companies’ books and visiting offices or factories.

SPACs and the shareholders of their merger partners are generally (though not always) investing in hugely high-risk, high-reward businesses, and doing so at an informational disadvantage. Clover’s lack of disclosure highlights this point.

To Palihipitya, that’s fine. He believes that the  rewards are worth the risks. To others (likely including the SEC), the risks are putting individual investors in danger.

To some degree, both are correct. SPACs are dangerous and SPACs can deliver massive returns. Even with their recent pullbacks, Palihipitya’s merger partners, including Virgin Galactic Holdings and Opendoor (NASDAQ:OPEN) overall have done quite well. Social Capital Hedosophia V and SoFi may also deliver excellent returns.

Whether investors should have the right to take those risks is up for debate. But for now, it’s important to remember that the SPAC skeptics do have a case; SPACs are not risk-free. Neither is IPOE stock.

On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.