In the wake of the SPAC IPO frenzy in 2021, SPAC activity cratered. However, as detailed in the following guest post from Sarah Abrams, there are signs that SPAC IPOs may be making a comeback, a revival that may raise certain concerns. Sarah is Head of Claims, Baleen Specialty, a division of Bowhead Specialty. I would like to thank Sarah for allowing me to publish her article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Sarah’s article.
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2025 may be the year for the SPAC comeback. In the first quarter of 2025, the SPAC initial public offering (“IPO”) market saw the pricing of 19 IPOs, raising a total of $3.1 billion. Eight special-purpose acquisition companies have gone public in April, seeking acquisition targets after raising $1.78 billion combined in IPO proceeds. Are both short-term memory loss and unknown capital market future contributing to the return of the SPACs? No matter: subsequent shareholder lawsuits, failed mergers, and bankruptcies involving SPAC transactions should be top of mind for D&O underwriters excited about prospective “new” SPAC related opportunities.
It is important to understand what SPACs are and the history of leveraging this alternative to a traditional IPO to appreciate the potential liability exposure. SPACs, or blank check companies, are created to raise capital through an IPO. SPACs go public as a shell company with the specific purpose of merging with an operating business, the “target company.” If regulators and shareholders approve the transaction, the target company inherits the original stock listing and related SPAC proceeds through a so-called de-SPAC merger.
Notably, traditional IPOs have largely paused in the wake of sweeping tariff proposals. While equity markets have partly recovered, day-to-day uncertainty makes it challenging to price ordinary IPOs. Therefore, a company that has paused a traditional IPO, but which is still looking for public market liquidity, may be an attractive target company. In addition, the recent SPAC IPOs have been led by management teams that have launched multiple SPAC vehicles. That institutional knowledge of the SPAC landscape may serve to calm concerns of another SPAC boom to bust.
In order to appreciate whether history will repeat itself, understanding what happened during the most recent SPAC craze is important. In the mid-2020s to early 2021, low interest rates, a flood of liquidity, and excitement around fast-growth sectors (especially tech and EVs) fueled SPAC mergers with a variety of untested target companies. SPACs had originally emerged in the 1990s in industries like oil and gas exploration, where traditional IPOs were challenging because of the speculative nature of the business.
In 2021 SPACs raised over $160 billion, a record. Big-name investors, celebrities, and athletes launched their own SPACs, adding hype. SPACs were seen as a faster, easier alternative to traditional IPOs. In mid to late 2021 many SPAC deals started to underperform badly after their mergers, demonstrating that valuations of the target company were often wildly optimistic; reality didn’t match the projections. At the same time regulatory scrutiny increased with the SEC warning about SPAC accounting practices, projections, and disclosures.
Shortly thereafter, in 2022 and 2023, the SPAC bust was underway as retail investors started losing money. Post-merger stocks plunged and target companies were, in many cases, exposed as fraud. Stanford Law School Securities Class Action Clearinghouse has been tracking SPACs as a trend and listed 116 SPAC Securities Class Actions (“SPAC SCA”) filed, including four in 2025. Lawsuits against SPACs also included Delaware Chancery direct actions, alleging breach of fiduciary duty against pre-merger executives of the target companies and SPAC investors by failing to conduct due diligence the go-forward public target companies. A number of SPAC related cases resulted in recorded setting settlements.
One significant SPAC SCA settlement involved blank check merger with oil-and-gas company Alta Mesa, which filed for bankruptcy shortly after de-SPAC. Alta Mesa ended up taking a $3.1B write down, failed to file earnings on time, and was investigated by the SEC for lacking internal controls. The securities fraud case against Alta Mesa settled for $126.3 million. Two other SPAC SCA settlements included the $35 million settlement in the Akazoo securities class action lawsuit and the Clover Health Investments litigation which settled in April 2023 for $22 million.
The Delaware SPAC-related breach of fiduciary duty lawsuits met similar fates. MultiPlan, the first of the Delaware SPAC-related breach of fiduciary duty direct action cases, settled for $33.75 million and the ATI Physical Therapy lawsuits (inclusive of securities class action litigation; derivative litigation; and the Delaware direct action breach of fiduciary duty lawsuits) settled in September 2024 for a combined $31 million.
On top of the number of lawsuits filed, in 2023 to 2024, SPAC deals cratered. Rising interest rates made speculative investments much less attractive, and many SPACs couldn’t find good merger targets, causing them to liquidate. 2023 had 193 SPACs announce they were liquidating, with many of these from the Q1-2021 cohort of SPAC IPOs.
Another significant headwind for SPACs was the impact of increasing redemption rates, often exceeding 90% for many deals. SPAC investor redemptions can occur at the time of the target company merger. Investors in the SPAC, often hedgefunds who bought into the IPO, redeem their shares of the SPAC pre-IPO trust account (usually at $10 per share, plus a little interest) instead of staying invested in the deal by rolling their shares into the new merged company.
Because redemptions drain funds in a SPAC’s trust, there is less operating capital for the target. For example, if a SPAC raised $300 million, but 95% of investors redeemed, the target public company would only get about $15 million and a number of shares outstanding. Hence why a significant number of De-SPAC’d target companies saw share prices plummet immediately after the merger and increased risk of bankruptcy.
Even though the SEC has issued new rules and amendments requiring enhanced disclosures about conflicts of interest, SPAC sponsor compensation and dilution, the SPAC deal itself remains unchanged. Given the traditional IPO market stalling, more companies in need of liquidity may look to a SPAC merger for access to the public market. SPAC veterans raising capital and the new regulatory framework may result in mergers with better vetted target companies. This increased SPAC deal flow may create opportunities for Public Company D&O underwriters who have experienced an incredibly soft market over the last couple of years.
Before wading back into SPAC infested waters, insurance carriers and retail investors alike should take a beat and remember the not-so-distant SPAC past. Especially in light of the four SPAC SCAs filed this year, including one filed April 18th against Net Power and its directors and officers for false and misleading statements made leading up to the SPAC merger to IPO in 2023.
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