The Cooling Trend – Down But Not Yet Out

SPACs are special purpose acquisition companies formed to acquire a business and take it public. The SPAC is essentially a shell company that is required to identify and acquire a target company within a set period of time, usually 24 months. If the merger is approved, the target company inherits the SPAC's stock listing and begins trading.

With declining post-merger results, misleading financial evaluations, and scrutiny from the U.S. Securities and Exchange Commission, the SPAC market is on a downward trend.

Redemptions are up. A recent study shows that in 2022, 82 percent of shares were redeemed before the mergers closed, compared to the prior-year average of 43 percent, which reduces cash available for acquisition targets. 

PIPE funding is down. SPACs are often infused with additional funding through private investment in public equity (PIPE). However, only 72 percent of 2022s SPAC mergers contained PIPEs, compared to 95 percent in 2021. Further, the average investment declined from $316 billion in 2021 to $128 billion in 2022.

The SEC got involved. The SEC has proposed implementing new rules aimed specifically at SPACs. "The proposed new rules and amendments would require, among other things, additional disclosures about SPAC sponsors, conflicts of interest, and sources of dilution. They also would require additional disclosures regarding business combination transactions between SPACs and private operating companies, including disclosures relating to the fairness of these transactions. Further, the new rules would address issues relating to projections made by SPACs and their target companies, including the Private Securities Litigation Reform Act safe harbor for forward-looking statements and the use of projections in Commission filings and in business combination transactions."

The process is lagging. The increased scrutiny comes with a longer process and more time to vet and close deals. The time between a SPAC IPO and the signing of a merger agreement rose to 9.8 months last year from 7.4 months in 2021. The time between the merger agreement's signing and its closing rose from 5.2 months in 2021 to 7.2 months in 2022.

Even with all these adjustments, there are still 350 SPACs looking for targets and new de-SPAC business combinations are announced each week, although these tend to be smaller deals.

Tread cautiously. We always say be cautious with regard to any investment, and even more so with SPACs. In 2022, there were 24 securities fraud class actions involving SPACs. While this number is 27% less than the year prior, it is much higher than the five filings of 2020. If you have any concerns regarding your investments, in a SPAC or other company, Robbins LLP can provide a free evaluation to assess whether corporate fraud is impacting the value of your investment.