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The Securities and Exchange Commission has focused its attention on the growing number of companies going public through transactions with special purpose acquisition companies, or SPACs, and the regulator’s latest comments — calling into question the purported legal advantages SPACs provide private companies seeking to go public — has some investors worried that new SPAC deals could soon grind to a halt.
SPACs raise cash through an initial public offering that typically prices shares at $10, after which the shell company has two years to use the raised funds to purchase a private company, thereby making that company public.
For years, advocates have argued that it is both cheaper and safer for companies to go public via SPAC because of safe harbor laws that protect companies from lawsuits related to projections about future company performance. But recent academic research has shown that it’s actually more expensive for private companies to go public via SPAC, and that investors’ willingness to bear those costs are the main force propping up the SPAC market.
Then last week, John Coates, acting director of the SEC’s corporate-finance division, argued in a statement that investors are mistaken if they believe that going public via a SPAC merger protects a company from lawsuits related to projections of future company performance.
Read more: SEC’s Coates tells investors to ignore billionaire SPAC investor’s legal advice
Michael Ohlrogge, assistant professor of law at New York University, said in an interview that judicial doctrine actually does protect companies that use projections of future financial performance from lawsuits as long as a company “doesn’t actively know its projections are false when it makes them.”
But prior to Coates’ speech, it was assumed that a 1995 law called the Private Securities Litigation Reform Act enshrined that protection in a legal statute for companies going public via SPAC, he added.
“It’s hard to know for sure what the impact of John Coates’ statement will be,” Ohlrogge said. “But I think it’s reasonable to expect there will be some lawyers doing some hard thinking in response, reevaluating whether they should be telling clients that SPACs enjoy more protections.”
That would be bad news for SPAC sponsors and investors hungry for more deals, according to Matthew Tuttle, CEO and chief investment officer at Tuttle Capital Management. His firm serves as the adviser to the SPAC and New Issue ETF
SPCX,
which offers investors exposure to a diversified portfolio of pre-merger SPACs.
“You’re already in an environment where you have too many SPACs looking for too few deals,” he told MarketWatch. “Now, if I’m a high growth company and I was considering going public through a SPAC because it enables me to rely on projections, I’m wondering whether that’s true and whether there will be a stigma attached to it because the SEC doesn’t like it.”
SPAC deal volume exploded in 2020, with private companies raising $157 billion through mergers with SPACS last year, according to data from Refinitiv, and companies have already eclipsed that fundraising figure in just the first quarter of 2021 alone.
But cracks are starting to form in the market, as evidenced by the frenzied rise and fall in the price of shares of Churchill Captial Corp. VI, which announced a merger with electric car manufacturer Lucid Motors in February, Tuttle said.
“The SPAC market peaked the moment Churchill CCIV
CCIV,
priced at $15 per share, and I don’t think that was a coincidence,” given that the pricing represented a 50% premium on the SPAC’s initial IPO, Tuttle said. The price of shares in the merged company shot to up more than $64 before falling to about $22 on Monday, according to FactSet.
“The SPAC market got ahead of itself, and now it’s corrected and maybe gone too far the other way,” Tuttle added, noting that many pre-merger SPACs are trading below $10 per share today.
Meanwhile, the number of lawsuits filed in New York State against SPACs are on the rise, according to an analysis by law firm Akin Gump. It found that 35 suits have been filed between September of last year through the end of March and that they generally allege that SPAC directors provided inadequate disclosures about the companies they intended to merge with. The analysis claims that the “recent flurry” of lawsuits is just the “beginning wave of SPAC-related litigation.”
Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors told MarketWatch that these suits and increased SEC attention to SPACs is simply the latest evidence that there’s a bubble in these investment vehicles.
“Investors should approach these with extreme caution,” given that the SPAC craze came after a multi-decade boom in the private equity industry, which has driven up the prices for private companies, making it even less likely that the end investor is going to get a good price on a SPAC investment, Suzuki said. “It’s just tough to find cheap, private companies today.”
