March Madness extends into April as the Commission markedly increases its focus on SPACs.
TAKEAWAYS
Surprise pronouncements call into question use of the PSLRA safe harbor for projections and accounting treatment for warrants.
Flurry of activity and nature of the SEC’s guidance may signal a desire to cool down the hot market for SPACs.
The Securities and Exchange Commission (SEC or Commission) is raising its voice on Special Purpose Acquisition Companies (SPACs), alerting sponsors, targets, and investors to regulatory risks and raising new concerns about SPAC-related disclosures.
The SEC’s 2020 statements and guidance were relatively relaxed the Commission focused largely on disclosure issues, including a statement from then-Chairman Jay Clayton to ensure that retail investors understand the incentives of SPAC sponsors, along with remarks by SEC officials during the 2020 SEC Speaks conference concerning risks created by potentially divergent incentives between sponsors and i
(Sources: SPACInsider, SPAC Analytics, Dealogic)
As a result, it is estimated that there are more than 400 SPACs in the market looking for M&A targets. Some of these SPACs come with celebrity endorsements. There is even a rap video, thanks to Cassius Cuvée and Mags Lionne. Clearly, this movement cannot be ignored.
At the risk of providing an overly generalized summary of the typical structure (basically enough to get you through a webcast happy hour):
A SPAC is a company that undergoes an IPO at a time when it has no operations.
It is formed for the purpose of raising cash to be held in trust for the purchase of a private company, taking it public in the process.
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For the first time in several years, securities fraud cases declined in 2020, largely due to the pandemic.
1 However, we don’t expect this decrease to continue. Just three months into 2021, there are a number of issues trending in this practice area, including:
Securities litigation against non-U.S.-based issuers;
Securities and derivative litigation arising from SPACs and de-SPAC transactions;
Securities and derivative litigation arising from COVID-19; and
Derivative litigation raising issues relating to diversity.
Increase in Securities Fraud Class Actions Against Non-U.S. Issuers
As reported in Dechert’s Annual Survey, securities class actions filed against non-U.S. issuers actually increased in 2020 going from 64 filed in 2019 to 88 filed in 2020, an increase of 37.5%,
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In light of the dramatic upswing in the use of special purpose acquisition companies (SPACs), the staff of the Securities and Exchange Commission (SEC) has issued several public statements highlighting concerns and issues related to SPACs and private operating companies that are going public through business combinations with SPACs. These business combinations are referred to as de-SPAC transactions.
On April 8, 2021, John Coates, Acting Director of the SEC s Division of Corporation Finance, published a statement titled
SPACs, IPOs and Liability Risk Under the Securities Laws, discussing the legal liability risks of de-SPAC transactions and traditional initial public offerings (IPOs).
When a significant volume of capital is raised from investors through nontraditional capital markets transactions, the U.S. Securities and Exchange Commission (SEC) is sure to follow.