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What Is a SPAC?

In 2020, SPACs emerged as a trendy form of investment, attracting attention from technology investors and well-known names. SPAC stands for “special purpose acquisition company,” a kind of a blank-check company. A SPAC is generally formed for the purpose of raising money to acquire an operating company to be decided in the future. The quality of the investment, therefore, depends very much on the decisions of the sponsors who find and vet the operating company.

SPACs gained popularity in part because they offer a way to take a company public without the expense, time, and regulatory scrutiny of a traditional IPO. But for the exact same reason, the U.S. Securities and Exchange Commission warned in late 2020 that they’re risky. SPACs create a way to end-run around disclosure requirements designed to protect investors from fraud and deceit. Their structure also raises concerns about self-dealing among the sponsors of the SPAC. If you’ve lost money in a questionably legal SPAC, or have information to support a whistleblower complaint about one, the Silver Law Group can help.

Taking a Company Public Through a SPAC

A SPAC is, at heart, an investment vehicle more than a business. To use a company in this way, sponsors of a SPAC form a shell corporation that does not offer any product or service. Instead, the SPAC’s business plan, or contractual language, says that it will merge with, be acquired by, or (most often) acquire a company that does offer a product or service by a certain amount of time from when the SPAC goes public.

Investors in the SPAC buy shares at its initial public offering (IPO) at a relatively low cost, and the sponsors of the SPAC then look for a suitable company to combine with. Often, they acquire a private company that wishes to be public, and achieves that by being acquired. At that time, investors in the SPAC can choose to redeem their shares for money or become shareholders in the new combined company. If the companies don’t complete the merger or acquisition, SPAC shareholders are entitled to a pro-rated share of the proceeds of the SPAC’s IPO (which is held in a trust account).

SPACs and Risk

SPACs are popular in part because they offer a way for companies to go public without the time, expense, and regulatory requirements of a traditional IPO. Some believe this way of going public carries less risk because the debt of the acquired company can be paid down more quickly.

However, SPACs also carry risk, as the SEC pointed out in December of 2020. Since investors in a SPAC’s IPO don’t know what company the SPAC’s sponsors might buy—and that transaction is less regulated than an IPO—they are essentially betting on those sponsors to make good decisions and deal with investors fairly. Some sponsors may not be worthy of that trust. For example, shortly after electric car company Nikola was acquired by a SPAC, a third-party researcher alleged that Nikola had faked evidence that its product works. Nikola’s value plunged.

A related problem is that the structure of a SPAC gives its sponsors less incentive to do that due diligence. Sponsors generally get shares in the SPAC on more favorable terms than stockholders and may get up to a fifth of the company for free as compensation for finding a suitable company to invest in. This situation gives them less “skin in the game” than ordinary investors. Sponsors can, therefore, personally profit even if the company they merge with is a bad long-term investment for shareholders. Crooked sponsors could even use their decision-making power to sell a worthless company they own to the SPAC using falsified documents.

Fraud and SPACs

If you have evidence that the people behind a SPAC are violating securities laws, you should call the Silver Law Group. We represent investors who have been defrauded, as well as whistleblowers who have information about lawbreaking to bring to the SEC. We can help you recoup an investment that failed because of securities or investment fraud rather than market conditions, or help you earn money while bringing lawbreakers to justice. For a free consultation, call us today at (800) 975-4345 or send us a message online.

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