THE SPAC EXPLOSION POSES LITIGATION RISK
Special purpose acquisition companies (SPACs) have rapidly gained popularity as a flexible alternative to initial public offerings (IPOs). SPACs raised over $70bn in 2020, a five-fold increase from 2019. That growth has continued into 2021, with SPACs raising $100bn in the first quarter alone. But the very features of SPACs that create additional flexibility raise new questions that could result in litigation.
What is a SPAC?
A SPAC is a mechanism for facilitating public investment in a private company. The process typically involves two steps. First, a SPAC is registered as a shell company with no operations. The SPAC’s registration statement declares that the entity’s sole purpose will be to identify and then merge with a privately held company. The SPAC solicits investment capital for that purpose, and investors hope to profit from the growth of the company the SPAC will acquire. Generally, the SPAC must identify a target acquisition within a specified time, often two years, or the SPAC is liquidated, and money is returned to investors.
After a SPAC identifies an acquisition target, it enters a ‘de-SPAC’ transaction in which publicly traded shares of the SPAC are exchanged for private shares of the target. SPAC shareholders usually must vote to approve the de-SPAC transaction. Following the transaction, the combined entity operates as a publicly traded company. SPACs thus enable private companies to go public without holding an IPO.
The SPAC is generally managed by a team of sponsors comprised of business managers and investors. These sponsors frequently invest in the SPAC themselves and often receive additional incentive compensation upon completion of the de-SPAC transaction. That additional compensation encourages SPAC sponsors to identify a suitable target and consummate an acquisition, but creates a risk that sponsors will receive nothing, or even lose money, in the event of liquidation.
Jul-Sep 2021 issue
MoloLamken LLP