If things these days for the rest of you are the way they are for me, then all of you are basically finding out that SPACs are taking over your life. All SPACs, all the time. Wall to wall SPACs. At one level, this development should come as no surprise, as the sheer volume of SPAC activity is nothing short of astonishing. According to SPACInsider (here), since January 1, 2020, there have been a total of 554 SPAC IPOs completed – 308 in the three and a half months of 2021 alone. A further 261 SPAC IPO Registrations are currently pending. A staggering 435 post-IPO SPACs are currently in the process of trying to identify merger partners.  Along with this wave of financial activity has come an accompanying flow of SPAC-related news and information. I have identified below just a few of the many SPAC-related items that crossed my desk in the last week; the selected items underscore the opportunities and risks involved in the SPAC-crazy world that we all now inhabit. And as also noted below, there could be some hints of a slowdown as well.


SEC Official Warns of Legal Risks Involved with SPACs: On April 8, 2021, John Coates, the Acting Director of the SEC Division of Corporate Finance, issued a sharp public statement (here) on the legal liability exposures associated with SPACs. His particular target in his remarks are statements that have appeared in the press to the effect that disclosure responsibilities for SPACs in connection with de-SPAC transactions (and in particular with respect to the financial projections of the merger target) are different from and lower than the comparable responsibilities associated with traditional IPOs.


His comments on this point are blunt: “Any claim about reduced liability exposure for SPAC participants is overstated at best, and potentially seriously misleading at worst. Indeed, in some ways, liability risks for those involved are higher, not lower, than in conventional IPOs, due in particular to the potential conflicts of interest in the SPAC structure.”


Coates opened his remarks by noting that a number of observers have been “sounding alarms” about the surge in SPACs. He noted that the concerns that have been raised include “risk from fees, conflicts, and sponsor compensation, from celebrity sponsorship and the potential for retail participation drawn by baseless hype, and the sheer amount of capital pouring into SPACs.”


Even more ominously, Coates noted that SEC staff “are continuing to look carefully at filings and disclosures” and that they “will continue to be vigilant about SPAC and private target disclosure so that the public can make informed investment and voting decisions about these transactions.”


The one point that was the specific focus of Coates’s remarks are various statements in the media and elsewhere that one of the advantages SPACs have over traditional IPOs is “lesser securities law liability exposures,” and that this perception has made some SPAC process participants “comfortable presenting projections and other valuation material of a kind that is not commonly found in conventional IPO prospectuses.” Coates wants everyone to know that anyone conducting their activities on this presumption could be setting themselves up for serious liability issues.


Coates emphasizes that any material misrepresentation in any registration statement filed as part of a de-SPAC transaction could trigger Section 11 liability. Misrepresentations in proxy statements could be subject to liability under Section 14, under which liability actions are subject only to a “negligence” standard. De-SPAC transaction could “also give rise to liability under state law.”


Accordingly, Coates notes, SPAC sponsors should already be hearing from the legal, accounting, and financial advisors that a de-SPAC transaction gives no one a free pass for material misstatements or omissions.”


Much of Coates’s statement is focused on a specific argument – that is, his view that the safe harbor otherwise available for forward looking statements may not apply to projections made in connection with a de-SPAC transaction. Coates’s argument is based on the fact that under the PSLRA the safe harbor is not available for IPOs, and, he contends, should therefore not be viewed as available in connection with de-SPAC transactions, which in his view is the moral equivalent of an initial public offering.


I will leave it to others to try to sort out what Coates had to say about the lack of availability of the safe harbor for forward looking statements in connection with de-SPAC transactions. What is far more interesting about Coates’s statement is the lengths to which he went to hammer home that no one should be out there acting on the belief that there is some kind of lesser liability standard applicable to SPACs that applicable to traditional IPOs. As he put it in his concluding remarks, “all involved in promoting, advising, processing, and investing in SPACs should understand the limits on any alleged liability difference between SPACs and conventional IPOs. Simply put, any such asserted difference seems uncertain at best.”


The more ominous message in Coates’s statement, and the one that no one can afford to overlook, is that the SEC is watching very closely and in particular it is “vigilant” about SPAC and private company disclosures. Coates’s statement is only one of several different recent statements by the SEC and its personnel about SPACs. It is clear that the SPAC activity has caught the SEC’s attention and it is also clear that the SEC has concerns.  It should be noted in that regard is that Coates chose to speak about and address the legal liabilities that potentially could attach to the de-SPAC transaction, suggesting that part of the process is an area of particular concern.


The SEC’s series of statements addressing various concerns raises the questions of whether and when the SEC might act. Will there come a point when the SEC feels compelled to file an enforcement action as sort of a demonstration project, for its in terrorem effect? Time will tell, but I suspect we will not have to wait long to find out the answer.


State Court SPAC Litigation: It was not a major part of Coates’s statement, but nonetheless I think it is important that Coates did mention the potential liabilities arising from SPAC-related disclosures under state law. So it was with some interest that this week I read an April 8, 2021 memo from the Sidley Austin law firm entitled “SPAC Litigation Accelerates in Delaware Courts” (here).


Although I have been trying to keep track of SPAC-related litigation on this site, my focus primarily has been on federal court litigation – specifically, federal court securities class action litigation. But as the law firm memo notes, there has been state court SPAC-related litigation as well, in Delaware state court. To be sure, one of the specific lawsuits the law firm memo discusses is the Delaware Chancery Court breach of fiduciary duty lawsuit filed against the post-SPAC merger company, MultiPlan. I discussed the MultiPlan lawsuit in Delaware court at length here.


The law firm memo also mentions two other Delaware state court lawsuit that have been filed this year; one, a merger objection lawsuit, filed in January of this year against Acamar Partners Acquisition Corp., a SPAC, in connection with its planned merger with CarLotz; and the second, a governance challenge lawsuit filed against Fintech Acquisition Corp. IV in connection with its planned merger with Parella Weinburg. In both of these cases, the individual defendants named included directors and officers of the involved SPAC.


The memo discussed all three lawsuits, including the MultiPlan lawsuit, and comments in conclusion that “these complaints likely portend an increase in filings in the Chancery Court asserting breach of fiduciary duty against SPAC directors and/or sponsors, particularly in any instance where a stockholder plaintiff can allege a hasty process to speedily complete a de-SPAC deal, where alleged conflicts of interest may be apparent, and/or where the company underperforms market expectations following the de-SPAC.”


Can the Boom Continue?: Among the many questions surrounding the current SPAC extravaganza is –how long can the party last? An April 9, 2021 Financial Times article entitled “SPAC Boom Under Threat as Deal Funding Dries Up” (here) points toward one indicator that could be interpreted to suggest that the momentum could start to slow ahead. The article reports that “a critical source of funding for blank-cheque company deals is drying up, pointing to a slowdown for one of Wall Street’s hottest products after a record-breaking quarter.”


The funding source that the article suggests may be drying up is financing for the PIPE offering (that is, the private investment in public equity offering, which usually accompanies the de-SPAC transaction to provide the additional funding need to fund the deal). The article suggests that SPACs are “struggling to find so-called Pipe financing to complete their planned acquisitions.” The article states further that institutional investors that typically invest in PIPE offerings “are overwhelmed by the sheer volume of transactions and put off by rising valuations.” The “growing backlog” of PIPE offerings could “prove to be a big roadblock” for the many SPACs that are now seeking merger partners.


The article quotes market participants in saying that if there were to be a resulting slowdown in SPAC mergers, there could be a “flight to quality” that would put pressure on the valuations of acquisition targets, which “have skyrocketed in recent months.” The article reports that all of the sources they interviewed said that they were seeing SPAC deals “recut to offer more favorable terms to PIPE investors.” The lower valuations give the PIPE investors “larger stakes for the same amount of money.”


The PIPE slowdown is, the article suggests, “starting to affect the pipeline for SPAC launches,” noting that in the first seven days of April only four SPACs had gone public, compared to 41 during the first week of March and 28 in February. The article quotes an attorney involved in SPAC deals as saying “Where we had been at a crazy, mad, rush pace in January and February, we’re kind of at a standstill right now on the IPO side.” The attorney added that for those that have already completed their IPO, “the hope is that this is just a bump in the road” and that “ultimately the deal gets done.”


SPAC Panel at the Upcoming Virtual PLUS D&O Symposium: The good news in all of this is that the SPAC panel I will be moderating at the upcoming virtual PLUS D&O Symposium will have a lot to talk about. The panel, which is entitled “The D&O Insurance Challenge for SPAC IPOs,” will take place on Wednesday, April 28, 2021 from 1:30-2:30 pm CDT/2:30-3:30 pm EDT. The panel will include Rob Crocitto of ARC; Deidre Martin of Sompo International; and Erin McGinn of AXA XL. From our prep sessions, I can tell this is going to be a great panel; the biggest challenge we are going to face is that there is so much to talk about. For information about the rest of the conference and for registration details, please refer here.