The SEC has recently turned its attention towards regulating businesses structured as special purpose acquisition companies, or SPAC’s. An SPAC is a publicly-listed shell corporation that is organized for the purpose of collecting investments and then using those funds to acquire a target private company. Through this method, the corporate structure of an SPAC allows the acquired company to bypass the expensive and lengthy process of a traditional IPO.
We have explored the topic of SPAC’s before in the context of general wariness that the SEC has shown towards SPAC’s. Over the year, the SEC has apparently taken a more active approach to address concerning business dealings involving SPAC’s. In July, the SEC has launched a series of investigations into banks that regularly offer SPAC underwriting services. Through its investigations, the SEC seeks to determine whether these banks possess conflicts of interest when they take on multiple roles during the SPAC acquisition process. Each of these banks have served as underwriters of SPAC listings, as well as advisers during the later merger between the SPAC and the target company. The targets of the SEC’s investigations include several of the largest investment banks, such as Citigroup, Credit Suisse Group, Morgan Stanley, and Goldman Sachs.
The SEC’s scrutiny of SPAC’s has also led to concerns regarding the due diligence conducted by the SPAC’s themselves during acquisition. This past year, the SEC has announced investigations and even charges against multiple SPAC’s based on due diligence concerns. SEC Chair Gary Gensler commented that these cases “illustrate[] risks inherent to SPAC transactions, as those who stand to earn significant profits from a SPAC merger may conduct inadequate due diligence and mislead investors.” This language mirrors similar concerns that SEC leadership has expressed towards SPAC’s in the past, that parties involved in SPAC mergers may lack “sufficient incentives to do appropriate due diligence on the target [and make] disclosures to public investors.”
More recently, the SEC signaled continued scrutiny of SPAC’s by announcing plans to implement tougher rules for SPACs in 2022. These rules are intended to improve investor protection by requiring more detailed disclosures by the SPACs, more information regarding target companies, and more due diligence from banks involved in SPAC-related mergers.
The SEC stance towards SPAC-related mergers has been progressively developing as SPAC’s have become a more pronounced influence on the market. If you have any inquiries regarding these events, and would like to speak with one of Lowey’s securities litigation attorneys please contact James Pedersen (jpedersen@lowey.com) at 914-733-7219.