SPACs—special purpose acquisition companies—rose in popularity in 2019 and especially 2020. These are companies formed primarily as investment vehicles, whose work is finding a profitable company to invest in and thereby maximize shareholder profit. Part of the reason for their popularity is that they’ve been championed by high-profile people and venture capital firms. They’re also popular because they can be used to take a company public by purchasing it, bypassing ordinary federal regulations that apply to initial public offerings (IPOs).
Unfortunately, as with other trends, there’s a danger that SPAC investors, brokers and sponsors may be too entranced by the structure’s popularity to look at the fine print. And it’s vital to look at the fine print because the basic structure of a SPAC provides opportunities for sponsors to defraud SPAC shareholders with false or misleading information or decisions that are not in shareholders’ best interests. The Silver Law Group represents investors who were defrauded by SPAC sponsors or other market participants who owed them fair dealing and failed to disclose material information.Buyer Beware
SPACs are public companies that offer their stock at an IPO just like any other company. But unlike most successful companies, they offer nothing for sale. Their primary purpose is to acquire a company that does do business, often in order to take it public. In theory, the SPAC shareholders find themselves owners of an up-and-coming stock, while the acquired company becomes a public company without jumping through the regulatory hoops at the U.S. Securities and Exchange Commission.
However, those SEC hoops are there to protect investors—and skipping them can have negative consequences for SPAC shareholders when the SPAC’s sponsors don’t perform their due diligence. And unfortunately, SPACs are set up in a way that incentivizes SPAC sponsors not to look very hard at their investments. For example, sponsors typically invest in the SPAC at better terms than ordinary shareholders, which means they benefit most when the SPAC acquires an operating company. They may acquire more shares—with those more beneficial terms—if they need to loan or invest in the SPAC to make an acquisition, diluting shareholders’ interest.
All of that means that SPAC sponsors have less incentive to look hard at whether their acquisition will perform well because they’re likely to profit no matter what. In fact, because sponsors control which companies are considered for acquisition, SPACs provide them with an opportunity for self-dealing or outright fraud.SPAC Investors Have Rights
Of course, SPAC investors should do their own due diligence. But investment fraud breaks the law, and if you’ve been a victim, you have the right to hold the fraudsters accountable. The Silver Law Group exclusively represents investors who were defrauded by someone who owed them a fiduciary duty or other rights. We can help you recoup as much of your investment as possible or even recover other financial damages. For a free, confidential consultation, contact us online, call us at (800) 975-4345 or e-mail us at firstname.lastname@example.org.