SPACs – A Blank Check Company

SPACs Explained: The Trend Continues

Just a month into the new year and we’ve already seen so many newsworthy moments. From the presidential inauguration to the announcement of Bridgerton’s second season, 2021 promises to be an exciting year.  In the financial arena, we have seen the rise of the retail investor and the short squeeze of GameStop and other stocks.  One investment trend that exploded in 2020 and continues to gain momentum in 2021 is the special purpose acquisition company, also referred to as a SPAC. According to SPACInsider, in 2020, 248 SPACs went public.  These 248 SPACs raised more than $83 billion and accounted for more than half of all initial public offerings (IPO) for the year.

SPAC Overview  

What is a SPAC? A SPAC is a “blank check” shell corporation with no commercial operations.  The purpose of a SPAC is to raise capital through an IPO for the purpose of acquiring an existing private company that then becomes publicly traded.  A SPAC may not have a target in mind at the time of formation, or even when it goes public.  Sometimes, the founders have a target in their sights, but keep it under wraps to avoid extensive disclosures during the IPO process.

SPAC IPOs usually trade at $10 a share.  That money goes into an interest-bearing trust account until a target is identified.  A SPAC has two years to complete an acquisition.  If the shareholders vote to approve an acquisition, they can swap their shares in the SPAC for shares in the merged company or redeem their SPAC shares for their original investment plus interest.  If no acquisition is made, the SPAC is dissolved and must return the money raised in the IPO – plus interest – to investors.  This may sound like SPACs come with little risk; however, if the SPAC needs a cash infusion to complete the deal, new funding from additional investors or a private investment in public equity can dilute the value held by existing shareholders.

Examples of successful SPACs include Repay Holdings Corp. (RPAY), Draftkings (DKNG) and Virgin Galactic (SPCE), which have seen substantial stock price increases since going public.  One well-known, but not as well-performing stock is Nikola (NKLA).

Potential Litigation Involving SPACs

While SPACs offer companies quicker roads to the market and broader access to shareholders, they have drawn scrutiny and may be the target of class-action lawsuits in 2021.

SPACs are generally designed to reward founders with a big payday.  If the SPAC acquires a target, founders typically receive 20% of the target company’s stock.  Because a SPAC will liquidate if no deal happens within two years, there is pressure on the founders to finalize a deal, even if it’s a bad one.  Bad deals can result in lawsuits.  Likewise, lawsuits can also be brought if no deal happens.

A SPAC target can rely on projections of future performance before shareholders vote on the merger.  Though a high hurdle to jump, if those projections are way off of the mark and the target does not perform as expected, someone is going to start looking at the disclosures.  Disclosures will come under heightened scrutiny where share prices plummet post-merger, likely resulting in a lawsuit.

Cases can also arise based on the SPAC’s failure to disclose the compensation incentives of its founders and potential conflicts of interest on their management team that could sway judgment.

Be Cautious

As with any investment vehicle, be vigilant.  Do your research.  Investigate the founders.  Have they been involved in previously successful SPACs?  Have they been involved in anything scandalous?  Can they be trusted with your hard-earned money?  Only you can decide whether a SPAC is right for you.

If you have concerns about SPACs or any publicly traded company you are invested in Robbins LLP is here to answer any questions. If you would like to speak with a Robbins LLP Shareholder Rights attorney, please fill out the form below.

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