In just a few days, when the time comes to tot up the 2021 securities class action lawsuit filings and to mark out the key 2021 filing trends, one of the key stories is going to be the surge during the year in the number of SPAC-related securities suit filings. In the latest example of this 2021 filing trend, late last week a plaintiff shareholder filed a securities class action lawsuit against a post-SPAC-merger fintech company. The individuals named as defendants in the lawsuit include two former officers of the SPAC. The new lawsuit has many of the features that have characterized the SPAC-related lawsuits that have been filed this year.
Paysafe Limited is a digital payments company organized under the laws of Bermuda. Its services include digital wallet capabilities, alternative payment methods, and digital currency transactions. Prior to its recent merger with a SPAC, Paysafe was known as Paysafe Group Holdings Limited (Legacy Paysafe).
Foley Trasimene Acquisition Corp II (FTAC) is a special purpose acquisition company (SPAC). FTAC completed its IPO on August 18, 2020. On December 7, 2020, FTAC announced its plan to merge with Legacy Paysafe, with Paysafe to be the surviving company. The two companies completed their merger on March 30, 2021.
On November 11, 2021, Paysafe released its financial results for the third quarter of 2021. In its earnings release, the company revised its revenue guidance downward. According to the press release the company was revising its guidance because of “Gambling regulations and softness in key European markets and performance challenges impacting the Digital Wallet segment” and “The modified scope and timing of new eCommerce customer agreements relative to the Company’s original expectations for these agreements.” The company said that it “expects these headwinds to impact the Company’s growth and profitability in 2021.” According to the subsequently filed securities class action lawsuit complaint, the company share priced declined over 40% on this news.
On December 10, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against Paysafe. A copy of the complaint can be found here. The complaint also named four individuals as defendants. The individual defendants include the former CEO and former CFO of FTAC, as well as the CEO and CFO of Paysafe itself. (The two Paysafe officers named as defendants had held the same positions for Legacy Paysafe prior to the merger with FTAC.) The complaint purports to be filed on behalf of investors who purchased shares of Paysafe, or, prior to the merger, of FTAC, between December 7, 2020 (the date the merger was announced) and November 10, 2021 (the day before Legacy’s third quarter earnings release).
The complaint alleges that the defendants failed to disclose to investors: “(1) that Paysafe was being negatively impacted by gambling regulations in key European markets; (2) that Paysafe was encountering performance challenges in its Digital Wallet segment; (3) that new eCommerce customer agreements were being pushed back; and (4) that, as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis.”
The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the plaintiff class.
By my count, this new lawsuit is the 28th SPAC-related securities class action lawsuit to be filed so far in 2021. By way of comparison, there were only four SPAC-related securities lawsuits in all of 2020, and only ten total during the two-year period 2019-2020.
In some respects, given the massive amount of SPAC-related activity in the financial markets in late 2020 and so far in 2021, the incidence of a certain amount of SPAC-related litigation arguably should come as no surprise. According to SPACInsider (here), year to date in 2021, 591 SPACs have completed IPOs, more than double the 248 SPACs that completed IPOs in 2020 – which was itself a record year. By way of comparison, there were only 226 SPAC IPOs in total completed during the eleven-year period from 2009-2019.
As has been the case with many of the post-SPAC-merger lawsuits this year, this lawsuit involves a post-merger company that stumbled out of the gate. As has been the case in many of the lawsuits, this company announced disappointing news shortly after it began its post-merger life as a public company.
As a general matter, most of the post-SPAC-merger companies that have been sued have been hit with the lawsuits within a short time after the merger was completed (or in a few cases, shortly after the merger was announced). In other words, the SPAC lifecycle events that give rise to the possibility of a securities suit are the SPAC’s announcement and completion of its merger.
I emphasize the significance of these SPAC lifecycle events because there are an enormous number of post-SPAC IPO companies that are currently in the search phase and that will be announcing and completing mergers over the next 24 months.
According to SPACInsider, there are currently 507 SPACs currently seeking to identify merger targets. Since, at least historically, very few SPACs liquidate for lack of finding a target (there were a total of only 27 SPAC liquidations during the period 2009-present), most of the searching SPACs will find and merge with a target company. Indeed, as others have written, the SPAC sponsors have huge financial incentives to complete a deal, any deal.
In short, over the next 12-24 months, a huge number of SPACs will be undertaking the SPAC lifecycle events that have created the SPAC-related litigation risk.
I don’t think I am going out on a limb here by saying that among the over 500 SPAC mergers that will be taking place over the next 24 months, a certain number of the SPACs (and/or their merger targets) are going to be hit with securities suits.
In thinking about the possibility for future lawsuits involving those 500 searching SPACs, consider this: of the 28 SPAC-related securities lawsuits filed so far this year, only one involved a SPAC that completed its IPO in 2021. All of the other 2021 SPAC-related securities suits involved SPACs from the IPO classes of 2020 or prior. In other words, there is a lag between the time of the SPAC IPO and the time when the lawsuits begin to accumulate. This certainly suggests a future surge of suits involving SPACs from the gigantic IPO classes of 2020 and 2021.
Or, to pick up where I began this blog post, if the number of SPAC-related lawsuits so far this year is one of the important securities litigation stories of the year in 2021, the number of SPAC-related securities lawsuit filings is going to be an even bigger story in 2022 and 2023.
One final thought about the over 500 SPACs now out there seeking to identify a merger target. Those SPACs are searching in a landscape in which 150 SPAC mergers already have been completed during 2022 and 2021 YTD. At some point, the best merger prospects will already have been claimed. I suspect that going forward we are going to see more mergers involving, say, target companies doing business outside the U.S.; target companies with even shorter operating histories; and target companies without revenues. That is, companies that could well have a greater likelihood of stumbling out of the gate in their lives as publicly traded companies.
The SEC is Watching: In a December 9, 2021 speech (here), SEC Chair Gary Gensler went out of his way to share his concerns that SPAC investors may not be getting the same protections as IPO investors. He expressed his concern that “the investing public may not be getting like protections between traditional IPOs and SPACs.” He also expressed his intent to try to level the playing field between traditional IPOs and SPACs. Among other things, he said that he has asked the SEC staff for proposals that would close the gap between traditional IPOs and SPACs by focusing on requirements around disclosure, marketing practices and liability for sponsors and other gatekeepers in SPAC deals.
Among other things, Gensler noted that many SPAC backers make use of revenue or profit projections during the SPAC process in ways that traditional IPOs cannot. Gensler said that this use of forecasts goes against fundamental tenets of the U.S. securities laws, particularly since the forecasts are used as a marketing practice to create a buzz around the intended transaction. The slide decks or press releases the SPAC use can move SPAC’s shares “based on incomplete information.” Gensler said that “it is essential that investors receive the information they need, when they need it, without misleading hype.”
Gensler suggested that to address improper priming of the market, the SEC will require more-complete information to be disclosed at the time the merger is announced. Gensler also said that gatekeepers, including sponsors, as well as accountants and company directors and officers should perform the same due diligence and face the same liability as investment banks that underwrite traditional IPOs.
In other words, more SPAC-related regs are coming – and not before time, either.