Special purpose acquisition companies, or SPACs, have become the new, go-to structure for taking private companies public. These companies begin as shell corporations listed on public stock exchanges. Often, they report a target area of the market on which they are focused so that prospective shareholders can understand what the SPAC they’re investing in will do. Shares of SPACs are then purchased creating a pool of money that the SPAC can use to acquire a target company. The acquired company then becomes public and the shareholders of the SPAC now become shareholders in the acquired company.
The use of SPACs has greatly increased. 72% of IPOs priced on U.S. exchanges in 2021 use SPACs, up from just 2.5% of the IPOs priced in 2009. The rising popularity of this new method has led to changes in regulation and a corresponding increase in litigation. Securities litigation cases increased by 60% in the first two months of 2021 as compared to the same period a year ago. A report from Bloomberg shows that cases filed against SPACs has increased from 10 in 2018, 14 in 2019, 28 in 2020 and 19 already in the first two months of 2021.
New leadership in the SEC has also pointed towards an increase in regulation and scrutiny of SPAC transactions. On December 10, 2020, the SEC published an Investor Bulletin titled “SPACs – What You Need To Know.” The SEC’s message in this bulletin is to take a close look at SPACs when considering investment, with the bulletin calling out pitfalls and dangers of the new, popular investment strategy. Specifically, the SEC warns investors to give proper consideration to the SPAC’s management and sponsors, as the SPAC has no operating history to evaluate, and to also review the trust account in which SPAC proceeds are held prior to the acquisition or merger, among other issues unique to the SPAC structure. More recently, on March 31, 2021, the SEC’s Division of Corporate Finance released their Staff Statement on Select Issues Pertaining to Special Purpose Acquisition Companies. This statement placed much more focus on the dangers around SPACs, delving into the issues that arise with shell company restrictions, books and records and internal controls requirements, and the initial listing standards of national securities exchanges.
The SEC followed-up these warnings with regulatory action on April 12, 2021. The SEC issued a Staff Statement focused on the accounting and reporting of SPACs. In this statement, the SEC’s Acting Chief Accountant pointed to potential accounting implications of certain transactions into which SPACs enter when issuing SPAC warrants. A SPAC warrant gives a person or entity the right to purchase a share of stock at a certain price before a certain time, similar to a futures contract. The SEC’s specific issue is that the structure of some warrants requires them to be accounted as liabilities where currently they are not. This statement from the SEC further shows the Commission’s focus and the possibility of future regulations that would protect investors in SPACs.
Investors need to stay vigilant as new investing structures arise. The SEC and the securities team at Lowey Dannenberg are both great sources of information to ensure that your investment is protected and in line with regulations. Feel free to reach out to Matthew Roberts of the securities team with any questions or comments you have by emailing mroberts@lowey.com.