Special Purpose Acquisition Companies (SPACs) continue to be popular. The number of SPAC IPOs jumped from 13 in 2016 to 59 in 2019, 248 in 2020, and 407 so far in 2021.1 There has also been a significant increase in regulatory scrutiny and civil lawsuits concerning SPACs.

In the first half of 2021 alone, the SEC issued several statements on SPACs and signaled a willingness to bring enforcement actions. In that same period, private plaintiffs filed fourteen SPAC-related federal class actions, twice the number filed in 2020.2

SPAC sponsors face the risk that allegations will be made that their registration and proxy statements do not contain sufficient disclosures about the target and their own interests and conflicts.

Plaintiffs have also brought breach of fiduciary duty and other claims against SPAC sponsors and SPAC-related parties in state courts. Their claims often raise questions about the fundamental soundness of SPACs. But SPACs are not inherently improper, as some have tried to make them out to be. Done right, SPACs are the healthy product of a functioning free enterprise system. They can provide value to investors, sponsors, and businesses.

A SPAC is a company that generally has no operations and raises capital in an initial public offering (IPO) of redeemable securities. Their purpose is to identify and acquire a private operating company within a predetermined period, usually two years.

In the meantime, the capital is placed in a trust fund to pay for the acquisition, which is commonly called a "de-SPAC" transaction. The combined company is then publicly traded and continues the target company's business. If the de-SPAC transaction does not occur within the agreed time, the SPAC liquidates and the funds held in trust are returned to investors.

Some raise questions about the prudence of investing in a SPAC that has not yet identified an acquisition target. But the concept is not at all unusual or untoward and has advantages for the capital markets. For example, companies acquired in de-SPAC transactions can become public more quickly and have more control in arriving at the price of the transaction.

Investors in SPACs rely on the expertise and experience of the SPAC team that locates the target for acquisition. Shareholders who do not like the target can redeem their shares in the SPAC for their share of its funds or sell their shares on the secondary market.

While some SPACs have run into trouble, impugning all SPACs because of those outliers would be like throwing the baby out with the bath water. SPACs can avoid the pitfalls described below that have led to regulatory action or litigation and undermined a small minority of SPACs.


SPAC sponsors face the risk that allegations will be made that their registration and proxy statements do not contain sufficient disclosures about the target and their own interests and conflicts to enable retail investors to decide whether to invest in the SPAC and to enable SPAC shareholders to decide whether to redeem their shares or support a de-SPAC transaction.

In December 2020, the SEC issued a statement that it is paying particularly close attention to disclosures concerning potential risks and conflicts of interest. The SEC explained that there must be "[c]lear disclosure" concerning, among other things, any interest the SPAC's sponsor, directors, officers, or affiliates may have in the target company, financial incentives for those parties to complete a merger, and any continuing relationship they may have with the combined company.3

On August 26, 2021, the SEC's Investor Advisory Committee went further. It issued draft recommendations to be discussed at the Committee's September 9, 2021 meeting, that the SEC "regulate SPACs more intensively by exercising enhanced focus and stricter enforcement of existing disclosure rules under the Securities Exchange Act of 1934."4

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1 SPAC Statistics, https://bit.ly/2SSY817.

2 Stanford Law School Securities Class Action Clearinghouse & Cornerstone Research, Securities Class Action Filings, 2021 Midyear Assessment, available at https://bit. ly/3zc0dVh.

3 SEC Division of Corporation Finance, Special Purpose Acquisition Companies, CF Disclosure Guidance: Topic No. 11, Dec. 22, 2020, https://bit.ly/3zfWMgz.

4 Draft Recommendations of the Investor as Purchaser and Investor as Owner Subcommittees of the SEC Investor Advisory Committee regarding Special Purpose Acquisition Companies, Aug. 26, 2021, https://bit.ly/3hBwejX ("Aug. 26, 2021 Draft IAC Recommendations").

Originally published by Reuters Westlaw

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