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Special Purpose Acquisition Companies (SPACs)

What are Special Purpose Acquisition Companies?

A special purpose acquisition company (SPAC), which is often called a “blank check company,” is a shell company that is set up mainly to find a company to invest in so as to maximize profits for shareholders.

Usually established by institutional investors —typically Wall Street folk or public/famous figures — funds are raised with the intention of paying for a merger or an acquisition. However, investors won’t know ahead of time which company will be acquired.

SPACs have grown in popularity over the past couple of years. A special purpose acquisition company allows a company to go public by merging with an already existing company.

Our knowledgeable investment attorneys represent investors who have suffered losses because their broker-dealer or financial advisor unsuitably recommended a SPAC to them, failed to conduct the proper due diligence into this special purpose acquisition company, made misrepresentations and omissions about the risks involved, or was negligent in other ways.

Call Shepherd Smith Edwards and Kantas (SSEK Law firm at investorlawyers.com) at (800) 259-9010 today.

What are the Benefits Involving a SPAC that Goes Public?

Unlike a traditional IPO that can take up to 18 months, a SPAC merger takes around 3 - 6 months. Investors are also given a chance to buy shares during the IPO at a price that is relatively low.

Another reason why investors are attracted to this form of investment is that they are given a chance to negotiate pricing before the closing of a transaction rather than contending with a price influenced by marketing conditions at listing time.

Lastly, a SPAC can be run by financial professionals and experts, which should be beneficial to both the company and its investors.

What are Some of the Risks Involving SPACs That Investors Need to Be Aware Of?

The way SPACs are generally structured may make it easy for sponsors to defraud investors. Special purpose acquisition company sponsors are the ones that decide what company to acquire, which can increase the chances of self-dealing.

Because SPAC sponsors will own a 20% stake, as well as have a warrant to buy more shares and the opportunity for even more shares through an earnout should the stock hit a certain target, shareholding dilution can occur.

There also may be a capital shortfall in the event that too many initial investors opt to redeem their shares. Because there is no underwriting needed with a SPAC, there is no one to make sure that regulatory requirements that are supposed to protect investors have been fulfilled.

The Financial Industry Regulatory Authority (FINRA), in a Regulatory Notice about SPACs, noted that there may be the risk of:

  • “Unqualified or incompetent” managers.
  • The SPAC going into liquidation.
  • Profits ending up being “very low.”
  • Insider trading.
  • There may be no acquisition at all.

According to IPO expert Renaissance Capital, out of the 313 SPAC IPOs established since 2015, only 93 of them ended in mergers with the companies involved going public. Only 29 of the SPACs had positive returns by late last year.

SPACs also tend to charge a flat fee, a percentage fee, and another fee known as “the promote." The latter can cause a SPAC’s shares to be priced higher, even as investors end up getting less shares with more shares going to the SPAC sponsor/manager.

SEC Warns About SPACs Involving Celebrity Sponsors

In March 2021, the Securities and Exchange Commission (SEC) put out an Investor Alert cautioning against making investment choices, such as investing in a SPAC because a movie star, an athlete, or another type of famous personality is involved.

The Commission warned that just because a SPAC is a good investment for a particular public figure didn’t mean that it would be a suitable fit for investors, and also, that celebrities have been known to become victims of investment scams, too.

The SEC warned that a special purpose acquisition company with a celebrity sponsor may lead to “differing economic interests” in which the famous person, broker, or firm marketing the SPAC could likely benefit much more financially than investors. For example, even if it does poorly and its share price plummets, a SPAC sponsor still may end up making millions of dollars even as investors suffer significant losses.

FINRA Arbitration for Investors Seeking to Recover Damages for Broker Negligence

To request your free case consultation with a seasoned securities attorney experienced in representing SPAC claims, contact us online or by calling (800) 259-9010. You may have grounds for a FINRA arbitration claim against your broker-dealer and financial advisor.

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