SPECIAL PURPOSE ACQUISITION COMPANIES (SPACs) AND THE SEC

Special Purpose Acquisition Companies (SPACs) are simply enterprises that raise money from the public with the intention of purchasing an existing business and becoming publicly traded in the securities markets. If the SPAC is successful in raising money and the acquisition takes place, the target company takes the SPAC’s place on a stock exchange, in a transaction that resembles a public offering. Also known as “blank-check” or “reverse merger” companies, this process avoids many of the pitfalls of a traditional initial public offering.

Despite receiving a robust retail investor response during 2020 and early 2021, this financial device is not new. Lawrence Trautman—a former New York City investment banker at Donaldson, Lufkin & Jenrette and past president of the New York City and Washington / Baltimore chapters of the National Association of Corporate Directors (NACD)—successfully employed this strategy many years ago to capitalize a start-up oil and gas company during a global recession and historical downturn in petroleum prices. This took place during a time when West Texas Intermediate Crude was trading at about $9 a barrel and traditional bank financing for petroleum assets in Texas was essentially non-existent because most regional banks were in the process of failing and being acquired by institutions outside the region. The Trautman-led group of investors was able to take a moribund shell of a company that had been in the Securities and Exchange Commission (SEC) reporting system for years and employ its publicly traded securities along with traditional bank financing from outside the petroleum belt to acquire oil assets at historically depressed prices. Fast forward and this entity is now successfully listed on the New York Stock Exchange.

During late 2020 and the first six months of 2021, an unprecedented surge in the popularity and issuance of SPACSs took place. John Coates, the SEC’s Acting Director of the Division of Corporation Finance, observed: “Concerns include risks from fees, conflicts, and sponsor compensation, from celebrity sponsorship and the potential for retail participation drawn by baseless hype, and the sheer amount of capital pouring into the SPACS, each of which is designed to hunt for a private target to take public.”

In addition to investment banks and traditional institutional investor-backed venture capital firms, a number of celebrities and those with name recognition have become promoters of SPACs. The rich and famous involved in SPAC sponsorship include entertainers Ciara, Sammy Hagar, and Jay-Z; sports figures Alex Rodriguez, Steph Curry, Colin Kaepernick, Shaquille O’Neal, and Serena Williams; former Oakland A’s manager Billy Beane—and former House Speaker Paul Ryan. Sponsors from the world of business and finance include Peter Thiel; Richard Branson; Bill Ackman; Michael Ovitz; and Sam Zell, just to name a few.

From a regulatory and compliance standpoint, a SPAC’s initial public offering (IPO) works the same as traditional IPOs. The SPAC is required to prepare a Registration Statement that needs to be filed with the Securities and Exchange Commission. Same as in the traditional IPO context, the SPACS’s Registration statement must be prepared in accordance with Regulation S-K and Regulation S-X. Appropriate Risk Factors, Description of the Business, Management Bios, and audited financial statements need to be included in accordance with those Regulations. SPACs differ from the traditional IPO issuance process in that when the SPAC’s IPO is formed, there is no company with serviceable products or services. The SPAC is merely a shell company—an entity formed for the sole purpose of researching, selecting, and acquiring a company that produces actual goods or provides actual services (the Target Company). Accordingly, the disclosures in a SPAC’s IPO will revolve around an explanation of how the SPAC structure works, and the process involved with researching, selecting, and acquiring the Target Company.

SPAC issuance and post-acquisition aftermarket performance has cooled during recent months, following a robust first and second quarter in 2021. Several statistical research study results show that there are significantly greater potential returns for sponsors and promoters; merging with a SPAC is much more expensive than a traditional IPO from the point of view of a private operating company; and, by April 2021, widespread interest has resulted in three new exchange-traded funds (ETFs) entering the SPAC market (it is too early for meaningful return analysis).

Our article proceeds in seven parts. First, we explain SPACs, highlight their benefits, and introduce the issuance process basics. Second, we examine the recent robust market for SPAC issuance during 2020 and 2021. Third, we offer a detailed discussion of the securities issuance process as applicable to SPACs. Fourth, we look at financial reporting and auditing considerations. Fifth is an example of Topps Co. attempt at a public listings of their securities via the SPAC process. Sixth, we a look at a recent SPAC enforcement action by the SEC. And last, we conclude that SPACs have provided a source of needed capital during 2020 and 2021. Our paper adds to the discussion and understanding of this widely employed financing mechanism.

Neal F. Newman is a Professor of Law a Texas A&M School of Law

Lawrence J. Trautman is an Associate Professor of Business Law and Ethics at Prairie View A&M University

This post is adapted from their paper, “Special Purpose Acquisition Companies (SPACs) and the SEC” available on SSRN.

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