SPAC stands for “special purpose acquisition company,” which is also known as “blank check company.” It typically refers to a shell company listed on a stock exchange with the purpose of acquiring a private company, thus making it public without going through the expensive initial public offering (“IPO”) process. SPACs have posed novel issues for securities litigation as they become more and more popular nowadays. Securities attorneys at Lowey Dannenberg are committed to dealing with complex legal issues in this field to help defrauded investors seek redress.
A SPAC is typically a corporation incorporated in Delaware, formed by sponsors who are usually experienced investors such as private equity firms, bankers, and corporate executives. Sponsors choose the management team for the SPAC, and they raise funds for the SPAC through an IPO. Because the SPAC does not have any asset or operation at all, the IPO process is way faster and cheaper than a traditional one. After the SPAC has gone through the IPO process, it will identify a target company and acquire the target company in a merger transaction, known as the de-SPAC transaction. In this way, the SPAC has become a public traded company running the target company’s business operations.
Because a SPAC operates in a way no different from any normal public company after the de-SPAC transaction, investors can bring securities fraud class action or shareholder derivative action against a SPAC in the same way as against other public companies. However, the public investors of SPACs could be more vulnerable to fraud and misconduct in several important aspects.
First, SPAC sponsors are highly incentivized to complete a de-SPAC transaction, even if it means acquiring an unproven business based on inadequate due diligence. This is because SPACs typically must complete the de-SPAC transaction within a specified time frame (often 24 months) after its IPO. If a SPAC fails to meet this deadline, the sponsors must liquidate and distribute the proceeds to the public shareholders. Second, unlike a traditional IPO, the SPAC process does not involve publishing a registration statement to fully disclose operations and risks, or engaging an underwriter to conduct independent due diligence. Although the SPACs would still provide disclosures about the target company relating to the de-SPAC transaction, they could often be inadequate due to time pressure. Third, SPACs can tout financial projections to prospective investors under a safe harbor provided by PSLRA, whereas forward looking statements associated with an IPO have been specifically excluded from the safe harbor provision. 15 U.S.C. § 78u–5 is a safe harbor provision that allows issuers to make forward-looking statements in public disclosures as long as they are accompanied with cautionary language, but 15 U.S.C. § 78u–5 (b)(2)(D) explicitly excludes statements “made in connection with an initial public offering.” However, forward looking statements made by SPACs are not excluded from this safe harbor. Thus, SPACs have consistently made forward looking statements to attract potential public investors.
In response to these problems and the general lack of regulation on SPACs, SEC proposed new rules to enhance investor protection relating to SPACs on March 30, 2022. The new rules seek to more closely align the regulation on SPACs with that on an issuer in a traditional IPO. The new rules would require additional disclosures about SPAC sponsors, their conflict of interest, and the fairness of the de-SPAC transaction. The new rules would also seek to exclude SPACs from the PSLRA safe harbor regarding forward looking statements. The deadline for submitting comments was June 13, 2022. SEC has not yet made a final decision on whether or how to adopt these new rules.
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Lowey is a leader in the securities litigation, filing some of the first ever class actions on behalf of investors impacted by violations of the securities laws. Lowey Dannenberg is well equipped to investigate and bring shareholder class action litigation on behalf of affected investors. If you wish to speak to a member of Lowey Dannenberg’s securities practice group, please feel free to contact us using the form below reach out directly to Christian Levis (firstname.lastname@example.org), Andrea Farah (email@example.com) or Yuanchen Lu (firstname.lastname@example.org).
 See, e.g., Schmutter v. Arrival SA, 1:21-CV-11016 (S.D.N.Y. 2021); Poirier v. Bakkt Holdings, Inc., 1:22-CV-02283 (E.D.N.Y. 2022); In re Alta Mesa Resources, Inc. Sec. Litig., 4:19-CV-00957 (S.D. Tex. 2020).