The special purpose acquisition company (“SPAC”) continues to have a profound impact on stock markets. We have written previously about the increasing popularity of SPAC’s and the risks inherent to SPAC’s. The SPAC device attempts to sidestep the SEC review process by bringing companies public through merger with a shell company rather than through a standard IPO. This means that investors will have access to less information regarding the target company. As a result, SPAC’s have generated a substantial amount of litigation, with numerous investor lawsuits being filed against SPAC’s in 2021 and 2022. At the same time, many investors still favor the expedience offered by the SPAC, with over 70% of IPO’s on U.S. exchanges in 2021 involving the use of an SPAC.
The past year has not been kind to the SPAC. CNBC reports that the value of SPAC’s post-merger dropped nearly 50% in 2022. Dozens of SPAC’s have issued going-concern warnings to their investors based on “substantial doubt” that they have the resources to survive another year. Dozens more have reported receiving delisting notices from either the NYSE or Nasdaq. Even more SPAC’s have simply underperformed, failing to meet their lofty pre-merger projections. The disastrous results of so many SPAC mergers has reinvigorated both regulatory and investor criticism of the device.
Despite the inability of SPAC’s to meet their own expectations, few investors have been able to hold SPAC’s accountable for their unrealistic projections. SPAC’s, like other publicly-traded companies, enjoy the protection of safe harbor provisions under the Private Securities Litigation Reform Act (“PSLRA”). See 15 U.S.C. § 78u-5. These provisions protect companies from liability based on “forward-looking statements” made by the company, including statements made about “projections of revenues, income [or] earnings” as well as statements about “future economic performance.” Courts have repeatedly dismissed investors’ claims based on PSLRA safe harbor protection. See, e.g., Moradpour v. Velodyne Lidar, Inc., No. 21-cv-01486-SI, 2022 WL 2391004, at *15 (N.D. Cal. July 1, 2022); Jedrzejczyk v. Skillz Inc., No. 21-cv-03450-RS, 2022 WL 2441563, at *5 (N.D. Cal. July 5, 2022).
However, there is hope for investors hoping to hold SPAC’s responsible for misleading projections. In response to SPAC-related volatility, the SEC proposed new rules for SPACs earlier this year. These rules would create new protections for investors, including eliminating the PSLRA safe harbor for forward-looking statements made by SPAC’s. The SEC explained that “[f]or purposes of the PSLRA, we see no reason to treat forward-looking statements made in connection with de-SPAC transactions differently than forward-looking statements made in traditional initial public offerings, in that both instances involve private issuers entering the public securities markets for the first time and similar information asymmetries that exist between the issuers… and public investors.” If the SEC’s proposed rules are adopted, investors would have even stronger grounds for holding SPAC’s accountable for their statements.
If you have any inquiries regarding SPAC’s or the PSLRA safe harbor, please contact James Pedersen (jpedersen@lowey.com) at 914-733-7219.