Regulatory Guidance Emphasizes Disclosure and Warns of Potential RisksĪs highlighted in a recent speech by then-Commissioner and now Acting Chair of the SEC Allison Herren Lee, the SEC has recognized the innovative potential of SPACs to "enliven public markets and expand investor opportunities." Lee, however, also emphasized the need for enhanced scrutiny of disclosures relating to "relevant risks and sponsor compensation," and for exploring whether additional protections are necessary to prevent sponsors from pursuing less-than-ideal acquisitions. In the current market environment, SPAC IPOs and PIPEs have been attracting enormous amounts of capital from investors. In addition, the capital raises effected by private investments in public equity (PIPEs), which often accompany de-SPAC transactions, provide these companies with an additional influx of capital. SPACs have grown in popularity for many reasons, including because there is a perception that they involve an easier process than traditional IPOs in that they provide private companies with a quicker way to go public with more price transparency. A sponsor team, which is often composed of sophisticated business managers and investors, raises these funds for the SPAC and guides it through the IPO and, upon identifying a target, through one or more acquisitions (the so-called de-SPAC transaction). In general, the SPAC is required to use the trust funds within two years to make an acquisition, or it must return the funds to its investors. In the SPAC IPO, the cash proceeds from the offering of common stock and warrants to purchase common stock are placed into a trust account for use to acquire an operating company (the target). A SPAC is a publicly traded, non-operating company that is used solely as a vehicle to acquire an operating target company in the future. SPAC deals have existed in various forms for more than 25 years. This advisory surveys the lay of the land regarding these risks and identifies practical suggestions about ways to anticipate and mitigate them. SPAC market participants-including sponsors, target companies, directors and officers on both sides of the transactions, and investment banks-should be aware of the enforcement and litigation risks involved. We expect this will continue and perhaps increase, particularly if retail investors get involved in SPAC IPOs. ![]() Inevitably, the growth in SPAC deal activity has attracted scrutiny from market regulators, including the US Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA), as well as private plaintiffs. ![]() In the first three months of 2021, there have been approximately 300 initial public offerings (IPOs) of special purpose acquisition companies (SPACs) that have raised $100 billion, which are significant increases over the record number of transactions and amounts raised in all of 2020. Subscribe to our "Biden-Harris Agenda" mailing list to receive our analyses. With deep insights into policies and policymakers, Arnold & Porter has established the Biden-Harris Agenda Resource Team to advise clients on the changing landscape.
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