Syed Rahman of financial crime specialists Rahman Ravelli gives an overview of the scale of the SPAC phenomenon – and some of the risks associated with them.
The huge rise in the use of special purpose acquisition companies (SPACs) has been accompanied by an increase in the number of shareholder lawsuits and heightened activity at the US Securities and Exchange Commission (SEC).
The SEC has opened an inquiry into how underwriters are managing the risks associated with SPACs. The SEC's Division of Corporation Finance (Corp Fin) and its acting chief accountant have both published statements on accounting, financial reporting and governance issues related to SPACs.
These steps by the SEC follow almost two dozen federal securities class action filings and a number of SEC investor alerts related to SPACs.
Such developments reflect the increased use of SPACs, which are companies with no active operations that raise funds from public investors through an initial public offering (IPO). The IPO proceeds are to be used to acquire one or more other companies. A SPAC will usually have two years to complete an acquisition. If that does not happen, it must return the funds to its public shareholders and be dissolved.
Last year saw a record number of SPACs in the US, as they have become increasingly popular as a way of turning a private company into a public one without the market volatility of a traditional IPO. But this is a procedure that has been shown to bring risks – and result in lawsuits.
There are currently more than 400 US SPACs looking for targets. This represents billions of dollars and, as they have two years to consummate a deal, they are not going away any time soon. At present, there is a significant amount of interest in SPACs being expressed in Europe, especially in London. This is only set to grow, given the independent review conducted by Lord Hill which last month recommended reform to the UK listings rules in order to promote growth.
But it should be noted that some of the difficulties that arise out of investing in SPACs are due, in part, to the lack of performance records. In a traditional IPO, projections of the company are scrutinised – but it is not the same for a SPAC merger. This comes with its own obvious risks.
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