SEC Warns of Liabilities Associated with SPAC Mergers

Over the past year, there has been a massive spike in the amount of ‘special-purpose acquisition corporations’ – better known as ‘SPAC’.  The purpose of these corporations is to provide private companies an avenue to go public, aside from a traditional Initial Public Offering (IPO).  With this aforementioned spike in SPACs, the Securities and Exchange Commission (SEC), has just released an informative look at liabilities associated with the process, and to underscore the fact that regardless of the means in which a company goes public, securities laws still apply.

The SEC’s public statement, which was penned by John Coates, Acting Director of the Division of Corporation Finance, can be found in its entirety HERE.

What is an SPAC?

Before taking a look at the issues raised by the SEC, it is good to know exactly what an SPAC is.  As previously stated, the goal of an SPAC is to provide private companies with another avenue to go public.  This process takes place in multiple phases.  A public company with no operations is created with the purpose of eventually being acquired – this is known as an SPAC.  Capital is raised and pooled through the sale of equity to ‘sponsors’.  Once complete, the SPAC must then successfully find a private company/partner within two years, and merge with it – a process known as the de-SPAC.

John Coates states that, “In this way, SPACs offer private companies an alternative pathway to “go public” and obtain a stock exchange listing, a broader shareholder base, status as a public company with Exchange Act registered securities, and a liquid market for its shares.”

SPAC  >  IPO?

Clearly, the idea of going public through a merger with an SPAC is intriguing, as it is stated, “Over the past six months, the U.S. securities markets have seen an unprecedented surge in the use and popularity of Special Purpose Acquisition Companies (or SPACs).”

In this public statement, John Coates associates this spike in popularity to potential misinterpretations or misuse of securities laws, and their relevance to SPACs vs the more traditional IPO.  Much of which surrounds the requirements for information disclosure.  Furthermore, he touches specifically on the interpretation of what is known as the ‘Private Securities Litigation Reform Act (PSLRA)’, and a growing belief that it allows for companies to make ‘forward-looking’ statements when undergoing a merger – also something regulated during during a traditional IPO.

John Coates notes that some believe since an SPAC is already public, when an eventual merger occurs, disclosure requirements are somewhat more lax.  He notes that as the majority of equity typically shifts from sponsors to new investors at this time, the de-SPAC/merger event marks the true moment in which the company has gone public, and it is this event which should be subject to the full suite of rules afforded to the more traditional IPO.  While the SPAC is indeed already public, it has no history of operations – it is rather the acquiring company which will assume control, and as a private entity has no public history.

“If we do not treat the de-SPAC transaction as the “real IPO,” our attention may be focused on the wrong place, and potentially problematic forward-looking information may be disseminated without appropriate safeguards.”

The bottom line is, regardless of whether a company is going public through use of an SPAC or through an IPO, securities laws surrounding the full disclosure of information as well as forward-looking statements still apply.  Without these laws various issues may arise, catching investors off-guard throughout the process.  Issues which may include the following, and more.

• Fees
• Conflicts
• Celebrity sonsorship

So do SPACs warrant their rise in popularity? And are they superior to an IPO?

John Coates believes that, “in some ways, liability risks for those involved are higher, not lower, than in conventional IPOs, due in particular to the potential conflicts of interest in the SPAC structure…a de-SPAC transaction gives no one a free pass for material misstatements or omissions.”

Interested Parties

While SPACs are not explicitly linked to blockchain in any way, there has indeed been a hearty amount of interest in them by various companies within the sector.  The following are a few examples of this.

Bakkt

In January of 2021, Bakkt came to an agreement with and SPAC known as VPC Impact Acquisition Holdings. A valuation of over $2 billion was expected post-merger.

eToro

In March of 2021, eToro Group came to an agreement with an SPAC known as FinTech Acquisition Corp.  A valuation of over $10 billion was expected post-merger.

Figure

While the above examples saw mergers with pre-established SPACs, blockchain startup Figure Technologies filed with the SEC to create its own.  The goal of which is to raise $250 million, and subsequently merge with an appropriate firm in the future.