SEC Finalizes Rules Relating to SPACs, Shell Companies, and De-SPAC Transactions

POMERANTZ MONITOR | MARCH APRIL 2024

By Brian O’Connell

On January 24, 2024, the U.S. Securities and Exchange Commission (“SEC”) adopted new rules and guidance that affect Special Purpose Acquisition Companies (“SPACs”) and offerings in which SPACs acquire and merge with private company targets (“de-SPACs”). The rules were initially proposed in March 2022 and were followed by a comment period. Approval was granted via a 3-2 vote, with two commissioners making statements in dissent. The rules a set to become effective July 1, 2024. The rules aim to enhance investor protection, including increasing disclosure requirements in connection with SPAC offerings, as well as to explicitly align SPAC offerings with traditional IPOs.

SPACs, also known as “shell” or “blank check” companies, are development-stage companies that have no operations of their own, apart from seeking private companies, known as “target companies,” with which to engage in a merger or acquisition to take the target public. The SPAC first has gone public via its own IPO. Once the merger between the SPAC and the target company is complete, the target, or operating company, is the sole surviving entity, and it transitions to a public company. This transaction and IPO with the target company is called a de-SPAC, since the SPAC essentially ceases to exist in the process.

SPAC IPOs have surged in popularity in recent years. In 2021, the United States saw a whopping 613 SPAC IPOs, representing 59% of all IPOs that year. SPACs have often relied on celebrity backing to boost their popularity: for example, Shaquille O’Neal advised a SPAC for Beachbody; Peyton Manning, Andre Agassi, and Steffi Graf invested in a SPAC for Evolv Technology; Jay-Z invested in The Parent Co.; Serena Williams served on the board of directors of Jaws Spitfire Acquisition Corp.; Alex Rodriguez is CEO of Slam Corp., and former Speaker of the House Paul Ryan served as Chairman of Executive Network Partnering Corp. Much like their concern with celebrity-backed crypto investments, regulators have been anxious about retail investors’ vulnerability to being misled by a famous name backing a blank check company offering. Although SPACs have subsided somewhat in popularity since their peak in 2021, SPAC IPOs remain in the news, with Trump Media Technology Group going public via de-SPAC on March 26, 2024 under the ticker “DWAC.” SPAC IPOs still accounted for 43% of IPOs in 2023.

Many have raised concerns that the SPAC structure lacks investor disclosure and transparency policies that serve as investor protections under the Investment Company Act. This means that SPAC investors lack protections that are typical in traditional IPOs, which leaves SPAC retail investors vulnerable to being misled. However, critics of the new rules, including dissenting commissioner Mark Uyeda, have pointed out that SPACs now require disclosures in excess of equivalent M&A transactions.

Given the attention and lure to retail investors, regulators will continue to focus on this means of IPO, and these new rules will shape the disclosure requirements for SPACs and de-SPACs. The SEC’s new rules set out to enhance disclosure requirements and provide guidance on the use of forward-looking statements with respect to SPACs, SPAC IPOs, blank check companies, and de-SPAC transactions. Specifically, the new rules provide that the Private Securities Litigation Reform Act (“PSLRA”) safe harbor is not applicable to de-SPAC transactions, which now explicitly aligns de-SPAC offerings with traditional IPOs. In his statement on January 24, SEC Chair Gary Gensler noted that “investors are harmed when parties engaged in a de-SPAC transaction over-promise future results regarding the target company”—something that investors regularly have suffered, as forecasted results have by and large not panned out. Although the PSLRA safe harbor is explicitly not applicable, other safe harbors, such as the “bespeaks caution” doctrine, which is judicial as opposed to statutory, may still apply. However, this new rule may tamp down on the amount and frequency of overly rosy projections in de-SPAC offerings.

The rules also address issuer obligations and liabilities for de-SPAC IPOs, including requiring that SPAC target officers sign the de-SPAC registration statements, which make them liable for misleading statements. The rules also include a new provision, Rule 145a, which makes the issuer a registrant under the Securities Act.

The final rules require disclosures from issuing companies at both the SPAC blank check stage and the de-SPAC stage regarding conflicts of interests, dilution risks, and the target company operations. Regarding dilution, the rules require detailed disclosure concerning material potential sources of additional dilution that non-redeeming SPAC shareholders may experience at different phases of the SPAC lifecycle, including the potentially dilutive impact of the securities-based compensation and securities issued to the SPAC sponsor, its affiliates, and promoters; any material financing transactions after the SPAC’s IPO, or financing that will occur in connection with the de-SPAC transaction closing; and redemptions by other SPAC shareholders.

The rules further require additional disclosure about the SPAC sponsor, its affiliates, and any promoters, including their experience, material roles and responsibilities, and the nature and amount of all compensation of these parties. SPAC sponsors will be required to disclose the circumstances or arrangements under which the SPAC sponsor, its affiliates, and promoters have or could transfer ownership of any of the SPAC’s securities. The rules also require the identification of the controlling persons of the SPAC sponsor and any persons who have direct or indirect material interests in the SPAC sponsor and the material terms of any “lock-up” arrangements for the SPAC sponsor and its affiliates. SPAC IPOs and de-SPAC IPOs will also be required to state in the prospectus cover pages the SPAC’s timeframe to complete a de-SPAC, redemption rights, and the SPAC sponsor’s compensation.

The SEC declined to adopt Rule 140a, which had been included in the proposed rules in March 2022. This would have clarified that anyone who acts as an underwriter in a SPAC IPO and participates in the distribution associated with a de-SPAC is engaged in the distribution of the surviving public entity’s securities. Such a person or entity, therefore, would be construed as an “underwriter” within the meaning of Section 2(a)(11) of the Securities Act. Under Section 11 of the Securities Act, underwriters can be liable for misstatements in registration statements, which incentivizes them to perform careful due diligence. Although this rule was not adopted, the SEC explained in the Final Release that it believes “the statutory definition of underwriter, itself, encompasses any person who sells for the issuer or participates in a distribution associated with a de-SPAC transaction,” and therefore construes anyone involved in the distribution within a de-SPAC to fall within the meaning of Section 2(a)(11) of the Securities Act.

Under these rules, SPAC target companies that are not subject to the reporting requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 will be required to make non-financial disclosures that are included in a traditional IPO, including: (i) Item 101 (description of the business); (ii) Item 102 (description of property); (iii) Item 103 (legal proceedings); (iv) Item 304 (changes in and disagreements with accountants on accounting and financial disclosure); (v) Item 403 (security ownership of certain beneficial owners and management, assuming completion of the de-SPAC transaction and any related financing transaction); and (vi) Item 701 (recent sales of unregistered securities).

Overall, these rules aim to reduce the differences between de-SPAC offerings and traditional IPOs that led to SPAC investors being less robustly protected. Companies should be mindful of these new rules, while investors can now make use of their enhanced protections when choosing to invest in a SPAC, vote on a merger, redeem or not redeem shares in a de-SPAC, or invest in a de-SPAC offering. The new regulations mean that due diligence processes in advance of de-SPAC offerings will likely take longer, and that investors will have more protections, both in terms of the robustness of disclosures and legal options should the prices decline.

What’s in an Acronym? (Or, Can Bill Ackman “SPARC” a Fix to SPACs?)

POMERANTZ MONITOR | NOVEMBER DECEMBER 2023

By Louis C. Ludwig

A recent innovation in the realm of investment vehicles, SPACs, or Special Purpose Acquisition Companies, have experienced a dramatic rise and fall in the past few years. Unlike traditional IPOs, SPACs go public without a business model, later acquiring or merging with an existing company with a defined business. In so doing, SPACs circumvent many of the disclosures required of a traditional IPO. This provides a quicker path to going public, however avoiding the safeguards that the disclosures impose has led to a disturbing string of frauds and scandals. This, in turn, has resulted in SPACs trading for under $10 per share, as well as some companies withdrawing from previously announced SPAC deals, even if they have to pay millions of dollars to the SPAC for backing out. The sense that SPACs are endangered may be what prompted billionaire investor (and former SPAC aficionado) Bill Ackman to step into the arena of SPAC reform. Ackman’s innovation comes in the form of the suspiciously-similar-sounding “SPARC,” or Special Purpose Acquisition Rights Company.  However, the question remains: is this enough to save the SPAC from extinction?  The answer: quite possibly.

SPACs are sometimes referred to as “blank check companies” because they are created for the sole purpose of acquiring another company and taking it public. They recall the 1980s penny stock market where highly speculative stocks sold for less than $5 per share. Most penny stock offerings were similarly made by blank check companies whose stated purposes were to merge with a to-be-identified target. While penny stocks were cheaper than shares sold on reputable exchanges such as the NYSE, the unregulated market on which they were traded was rife with manipulation and outright fraud, subsequently dramatized in classic films like Boiler Room and The Wolf of Wall Street. By 1990, annual investor losses of $2 billion prompted Congress and the SEC to finally regulate the penny stock market through the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (PSRA) and Rule 419, respectively.

Fortunately for fans of Wild West-style investing, two bankers developed the concept of a SPAC in the 1990s as an end-run around the PSRA and Rule 419. Like the penny stocks of yore, SPACs lack their own business model; initial investors simply have no idea what type of company they will ultimately be investing in. When formed, SPACs usually have an industry in mind, such as mining or software, but no specific acquisition target. The gap between the empty holding company and the entity that ultimately emerges through the SPAC process has led some observers to note that a more accurate term is “SCAMs.”

The typical SPAC timeline is as follows: first, the SPAC’s sponsors, who often possess significant financial and reputational clout, e.g., Martha Stewart and Shaquille O’Neal, provide the starting funds for the SPAC; second, the sponsors, assisted by underwriters, take the SPAC public through a standard IPO, which allows the SPAC to raise funds that are held in a trust, pending identification of an acquisition target; and third, assuming the sponsors identify a target company within 18 to 24 months and obtain shareholder approval, the SPAC merges with the target company in a process known as “De-SPAC-ing.” Once the de-SPAC is complete, the resultant company retains the name and operations of the target company, which then trades publicly on a stock exchange. Shareholders can typically redeem their investment if the 18 to 24-month window lapses and shareholders vote to extend the period for the SPAC to find an acquisition target, or if an acquisition target is found but the shareholders don’t like it.

As the number of SPACs skyrocketed from 2019 into 2021, the informational disadvantage to investors inherent in the penny stock market began to reproduce in the SPAC space. SPACs have raised vast sums selling warrants as part of their IPOs, which can be used to buy shares in the de-SPAC-ed company. In the de-SPAC process, sponsors receive compensation in the form of a large ownership stake for a nominal cost, setting up a textbook conflict of interest. As The D&O Diary’s Kevin LaCroix aptly put it, “[t]he conflict arises from the SPAC sponsor’s financial interest in completing a merger even if the merger is not value-creating, which may conflict with the shareholders’ interest in redeeming their shares if they believe that the proposed merger is disadvantageous.” What’s more, these lucrative sponsor compensation arrangements create dilutive effects affecting investors in the SPAC.

Even where they can show they’ve been wronged, SPAC investors are likely to have the courthouse doors slammed in their faces. Freed from the constraints of a traditional IPO, SPAC operators are permitted to speak directly to the market about the SPAC’s financial prospects. SPAC projections are generally protected by the safe harbor for forward-looking statements afforded by the Private Securities Litigation Reform Act (PSLRA), whereas projections made in connection with traditional IPOs are beyond the PSLRA’s safe harbor.

Almost as soon as SPACs became popular, scandals began to erupt. Nikola and Clover Health Investments, two of the biggest SPACs to go public in 2020, found themselves embroiled in fraud investigations conducted by the SEC and DOJ.  In July 2021, Ackman’s own SPAC, Pershing Square Tontine Holdings, abandoned a deal to buy 10% of Vivendi’s flagship Universal Music Group after the SEC flagged several elements of the deal. According to Ackman, a colorful figure best known for his crusades against Herbalife and Harvard President Claudine Gay, the SEC “said that, in their view, the transaction did not meet the New York Stock Exchange SPAC rules and what that meant was what I would call a dagger in the heart of the transaction.” Ackman was forced to return $4 billion to investors.

In response, the price of Directors and Officers insurance for SPACs was reported to have almost doubled by the end of 2020. Democratic legislators in the U.S. House of Representatives introduced the “Holding SPACs Accountable Act of 2021,” which would have excluded all SPACs from the safe harbor, and the “Protecting Investors from Excessive SPACs Fees Act of 2021,” which would have compelled the SEC to adopt a rule requiring SPACs to disclose compensation arrangements in the interest of transparency. While both pieces of legislation passed the Committee on Financial Services, neither became law. For its part, the SEC has increased its scrutiny of SPACs, tightened disclosure regulations, and clarified that the safe harbor applies only to private litigation action and not SEC enforcement.

After the SEC spiked his SPAC’s Universal deal in mid-2021, Ackman debuted a new take on the faltering investment vehicle, the SPARC. SPARCs do not require up-front money from investors like SPACs do. Instead of shares, SPARCs issue rights. Because the SPARC gives rights away, no money is held in trust. Once the acquisition target is identified, SPARC investors are given the chance to either walk away or opt in. Only if these investors approve the acquisition target and the amount that the SPARC is asking them to fork over (which will vary based on the size of the deal), can the deal close. At this point, the acquisition target gets the money and becomes public, and the SPARC rights transform into shares of the new public company. Importantly, SPARCs do not offer IPO warrants, which are used by SPACs as a way to enhance the capital raised in an IPO. This means that SPARC investors will not be diluted by such warrants and will therefore retain more of the company. Finally, SPARCs will have 10 years to complete an acquisition, in contrast to the 18 to 24-month period typically allocated to SPACs. 

Though the future of the SPARC remains uncertain, it appears to address several of the concerns that have imperiled SPACs. Most prominently, SPARC investors, unlike their SPAC counterparts, have the ability to hold back their investment while they evaluate the target. The increased control granted to SPARC investors also avoids the elimination of the safe harbor, and investors will have a greater chance to probe the specifics of the proposed acquisition. Lastly, SPARCs sidestep the share dilution endemic to SPAC compensation agreements, the precise concern underlying the “Protecting Investors from Excessive SPACs Fees Act of 2021.” The SPARC is accurately characterized as shifting risk from the investor to the sponsor, who must corral investors without the leverage that comes from holding a pool of money in trust. In early October 2023, Ackman announced that he had received SEC approval to use a SPARC to raise a minimum of $1.5 billion from investors for the acquisition of a private company.  Ackman seems to have bet that regulators will be more receptive to a model that simultaneously levels the informational playing field and endows investors with more discretion. Given his early victory in bringing the SPARC to fruition, it’s a wager that may have already begun to pay dividends.

Pomerantz Prevails Against Motion to Dismiss Its SPAC Litigation

POMERANTZ MONITOR | JULY AUGUST 2023

By Tamar Weinrib

Pomerantz, as sole lead counsel, recently won an important victory for investors in a securities fraud litigation against PureCycle Technologies, Inc., certain of its executives (collectively, the “PureCycle Defendants”), and Byron Roth. On June 15, 2023, Judge Byron of the Middle District of Florida denied defendants’ two motions to dismiss the Sections 10(b), 14(a), and 20(as) claims set forth in plaintiffs’ Second Amended Complaint, as well as defendants’ motion to strike, only dismissing the claims as to one of the five individual defendants.

PureCycle is a plastic recycling company that went public via a “de-SPAC” reverse merger with Roth CH Acquisition I Co., a special purpose acquisition company (“SPAC”). SPACs are shell companies set up solely to raise money through an IPO to eventually acquire another company. PureCycle had the dubious honor of being merely one in a long line of questionable reverse mergers Byron Roth has brought public, while misleading investors regarding the underlying business, only to slap a “buy” rating on the stock and collect millions in compensation, leaving innocent investors to suffer the consequences.

To date, PureCycle has never earned any revenue and has only one product -- a process it claimed could cost effectively recycle polypropylene, a common plastic that, since its invention in 1951, has stymied all efforts of the top scientists and chemical companies researching a way to effectively or economically recycle it. As the Court how now twice ruled (in the June 15, 2023 order and a previous order granting defendants’ motion to dismiss the First Amended Complaint in part), the PureCycle Defendants and Roth issued false and misleading statements throughout the November 16, 2020 - November 10, 2021 Class Period, claiming to have achieved the impossible. Specifically, defendants represented in proxy statements, a registration statement, and in press releases, that their recycling process is “proven” to convert waste polypropylene (called feedstock) into virgin polypropylene resin more cost effectively than manufacturing virgin polypropylene traditionally and utilizing a broader range of feedstock than traditional recycling. In reality (as multiple industry experts have attested), the technology underlying the process is unproven, presented serious issues at lab scale, could not be achieved cost effectively, and could not utilize a broader range of feedstock than traditional recycling. Defendants further touted the PureCycle management team -- which claimed to have solved the previously unsolvable polypropylene recycling problem -- as having “broad experience across plastics,” and decades of experience scaling early-stage companies in public markets and leading transformational projects, though they in fact had no background in plastics recycling and previously brought six other early-stage companies public that subsequently imploded, causing substantial investor losses. In the order, the Court held, “Defendants have failed to present any new argument that would cause the Court to reverse what it has already determined.”

The Court further held that plaintiffs sufficiently alleged scienter (a culpable state of mind) for purposes of the § 10(b) claim (the sole basis for the Court’s prior partial grant of defendants’ motion to dismiss the First Amended Complaint); Section 14(a), which is based on false and misleading statements in the proxy statements, does not require scienter. With regard to the PureCycle Defendants, the Court found scienter because the Second Amended Complaint avers with “greater specificity…the repeated instances wherein Defendants collectively and individually flaunted their past experience without disclosing their alleged prior business failings.” The Court reached this conclusion for two reasons: 1) the “shift in phrasing” demonstrating that “each Defendant individually ‘acted with the required state of mind’ by touting his own experience while omitting previous failures,” and 2) “Plaintiffs more precisely emphasize the repeated manner in which Defendants touted their experience.”

Though not determinative on its own, the Court also noted the PureCycle Defendants’ repeated “willingness to bolster their own credibility” as compared to their utter silence when their credibility was attacked in the short seller report that revealed the fraud in this case at the end of the Class Period, causing PureCycle’s stock to plummet 40%. As part of its holistic analysis, the Court also based its scienter ruling on defendants’ significant financial gain from the SPAC merger, access to internal company information, lack of experience with polypropylene recycling, and an SEC investigation that commenced in September 2021 “pertaining to, among other things, statements in connection with PureCycle’s technology, financial projections, key supply agreements and management.”

With regard to defendant Roth, the Court correctly rejected his piecemeal attacks and found scienter based on his “checkered history,” financial motive to act fraudulently, the “core operations” doctrine, Roth’s signing of the S-4, Schedule 14A (which contained the SPAC merger agreement), including the initial Proxy Statement and then later the amended Proxy Statement for Special Meeting of Stockholders of Roth Acquisition with the SEC which showed his “ongoing involvement with the SPAC merger over a period of several [pivotal] months,” and his access to information during that time including the “personnel, books, records, properties, financial statements, internal and external audit reports, regulatory reports, Contracts, Permits, commitments and any other reasonably requested documents and other information of [PureCycle Inc.], when Roth issued his misstatements.”

Defendants filed a motion on June 30, 2023 asking the Court to reconsider its order, claiming that “recent developments,” i.e., that PureCycle’s first plant just started producing “post-industrial recycled pellets” undermine plaintiffs claim. However, as plaintiffs argued in an opposition brief filed on July 14, 2023, the misleading statements set forth in the Second Amended Complaint pertained to the status of PureCycle’s technology almost two years ago, not the status of its technology today. Moreover, the misstatements concerned defendants’ claims that PureCycle could recycle polypropylene into virgin-like resin, more cost effectively than traditional recycling methods, and using a broader range of feedstock than traditional recycling. Defendants have not introduced a single fact to suggest that these recently produced pellets are virgin-like, produced more cost effectively than traditional recycling methods, or using a broader range of feedstock. In fact, less than a year ago, the FDA told PureCycle that it could only recycle polypropylene into packaging for food and drink as long as the feedstock comes solely from drink cups, the antithesis of a broad range. Defendants alternatively argued that the Court committed legal error in its scienter ruling, relying on new arguments they did not raise in their motions to dismiss (and thus are foreclosed from arguing now) and basing their arguments on mischaracterizations of the Order.

The discovery process is set to begin, and plaintiffs will file their motion for class certification in the coming months.

The Risks of Investing in SPACs

POMERANTZ MONITOR | MAY JUNE 2021

By Brandon M. Cordovi

Special Purpose Acquisition Companies (“SPACs”) burst onto the Wall Street scene, seemingly from nowhere, as the COVID-19 pandemic swept the world by storm in 2020. Their rise to prominence has been so profound that it has garnered the attention of the SEC and the plaintiffs’ bar. The glamour of SPACs has even drawn superstar athletes, such as Serena Williams and Alex Rodriguez, as well as entertainers, such as Jay-Z and Ciera, to take on prominent roles as investors and advisors.

What is this seemingly newfound investment opportunity that everyday investors and celebrities alike have flocked to? A SPAC is a publicly traded company that is set up by investors with the sole purpose of raising money through an IPO to acquire an existing company. The SPAC itself does nothing at all. Typically, its only asset is the money raised through the IPO to fund a targeted acquisition.

These shell companies are usually formed by a team of institutional investors. At the time the shell company goes public, it is not certain what existing company it is seeking to acquire. After the money is raised through an IPO, it is placed in an interest-bearing account until the acquisition can be made. The SPAC generally has up to two years to identify a target company to acquire. Once a target company has been identified and an agreement is in place, the acquisition must be approved by the SPAC’s shareholders through a vote.

Once the acquisition is completed, shareholders are left with the choice of either converting their shares of the SPAC into shares of the acquired company or redeeming their shares and receiving their investment back plus the accrued interest. If the SPAC fails to identify a target company within the two-year time limit, the SPAC is liquidated, with all shareholders receiving their original investment back along with accrued interest.

Since SPACs have risen to prominence only recently, many investors assume they are new. In fact, SPACs have been around for decades but have scarcely been used. They became more prevalent recently due to the extreme market volatility caused by the COVID-19 pandemic. Existing companies looking to go public were left with a choice: either postpone their IPOs due to the uncertainty, or merge with a SPAC.

The benefits of merging with a SPAC are fairly straightforward. As Peter McNally, global sector lead at Third Bridge, a research firm, explains, “SPACs are giving management and boards of companies more options for quicker and more efficient ways to go public.” Registering an IPO with the SEC can take up to six months, while merging with a SPAC takes only a couple of months to complete, providing the acquired company with quicker and easier access to capital. Additionally, in theory, companies acquired by SPACs are not subject to the same scrutiny under the securities laws and by the SEC, as they were not introduced to the market through IPOs. As a result, SPACs have been more aggressive in making forward-looking statements, prior to targeted acquisitions being finalized, to draw investors in. These perceived benefits are also where the risks lie and are the reason why SPACs have become the focus of the SEC’s crackdown.

The risk of investing in a SPAC for everyday investors is significant. For starters, investors do not know which company the SPAC will seek to merge with. That uncertainty, in and of itself, creates risk. Further, SPACs do not seem to be exercising the same rigorous due diligence that is performed during a traditional IPO. The primary concern of a SPAC is to find a target company to acquire before the two-year time limit runs out. For that reason, SPACs are incentivized to find an acquisition that can close quickly rather than finding the best acquisition target based on performance and price.

Typically, being unable to access the hottest IPOs, an average retail investor’s ability to access a SPAC as soon as it goes public may tempt them to accept the risks.

Investors are not the only ones who bear some risk with their involvement in SPACs. Target companies run the risk of having the merger rejected by the SPAC’s shareholders. Once a company has been chosen for acquisition, the de-SPAC process, which is similar to that of a public company merger, begins. The SPAC, acting as the buyer, requires the approval of its shareholders. Generally, more than 20% of the voting stock approval is mandatory.

Given the recent surge in SPACs, it comes as no surprise that the SEC and the plaintiffs’ bar have taken notice. In a statement issued on April 8, 2021, John Coates, the SEC’s acting director of the Division of Corporation Finance, cautioned that de-SPAC acquisitions are similar to IPOs and should be treated as such under the securities law. Further, Coates warned, the perception that SPACs are subject to reduced liability is “overstated at best” and “seriously misleading at worst.”

Coates warned of the various dangers of forward-looking statements being issued by SPACs, such as their speculative, misleading, and sometimes fraudulent nature. Risk disclosures in SEC filings may serve as a “safe harbor defense” for public companies in securities litigation that arises from their statements to investors, in that predictions, projections and expectations in disclosure documents may not be construed as misleading if they contain sufficient cautionary language disclosing risks. Coates specifically questioned whether SPACs are excluded from the safe harbor under the PSLRA, given their similarity to IPOs, which are excluded. However, there is no definition as to what an IPO consists of in the PSLRA or any SEC rule, and case law interpreting what constitutes an IPO under the PSLRA is sparse. Coates stated that the SEC is considering making rules or providing guidance as to how the PSLRA safe harbors apply at the final stages of a SPAC transaction.

Given the uncertainty regarding whether the safe harbor applies to SPACs, they are expected to be more cautious about the forward-looking statements in their disclosures. This will diminish the appeal of SPACs to investors who have relied on these forward-looking statements to anticipate the type of acquisition targeted by a SPAC in which they invested. It is important to note that regardless of whether the safe harbor applies to SPACs, they are still prohibited from making false or misleading statements in their disclosures. With the SEC turning their attention to SPACs, the forward-looking representations issued are now under the microscope for such infractions.

Further, between September 2020 and March 2021, at least 35 SPACs were sued by shareholders in New York state courts. Generally, these lawsuits allege that SPAC directors breached their duties by providing inadequate disclosures regarding the proposed acquisition. Some of the lawsuits also claim that the SPAC itself, along with the target company and its board of directors, aided and abetted the SPAC directors’ breaches. Notably, all of these lawsuits are limited to state law tort claims and do not assert any state or federal securities claims. The lawsuits were all filed after the de-SPAC transactions were announced but before shareholders had voted on approving the transactions. As such, the lawsuits seek preliminary injunctive relief to prevent the acquisitions from being finalized.

Lawsuits against SPACs remain in their infancy. The only cases in New York state court that have been resolved are those where plaintiffs stipulated to voluntarily dismiss the action. The lawsuits, however, provide a clear indication that the plaintiffs’ bar is monitoring and pursuing SPACs. The Harvard Law School Forum of Corporate Governance anticipates there will be increased litigation in federal courts regarding SPACs, including claims under section 10(b) of the Securities Exchange Act. Given that SEC guidance and intervention appears to be on the horizon, it appears likely that more litigation will follow.

Will SPACs remain prevalent over the long haul, or fade into the background where they have resided for decades? The SECs intervention, or lack thereof, will play a large part in determining that. However, Paul Marshall, co-founder of the investment firm Marshall Wace, did not mince words in his criticism of the future outlook of SPACs, predicting that the phenomenon will “end badly and leave many casualties.” Unsurprisingly, based on his outlook on SPACs, Marshall is shorting them and betting on their eventual demise. Time will tell whether he is correct. However, the returns on SPACs have steadily declined, and it appears the phenomenon which blossomed as uncertainty flooded the market may already be fading as that same uncertainty begins to dissipate, the world begins to reopen, and a new normal is established.