SPAC-tacular concerns: Regulatory scrutiny about latest trend increases

Welcome to the April 2021 edition of our newsletter! In this issue, we’ll examine increased regulatory scrutiny of so-called “blank check” companies, and how your clients can prepare themselves to invest in a rapidly evolving landscape.

Speed Kills: the Potential Downside of SPACs

For young companies seeking access to public markets, special purpose acquisition companies, also known as SPACs or “blank check” companies, present an obvious opportunity. Under current rules, the process of taking a company public is much more streamlined than a traditional initial public offering, which typically involves numerous layers of due diligence and compliance work.
As hundreds of such “blank check” companies file paperwork to acquire companies of all types, regulators are taking notice, and are concerned that investors could get burned in the frenzy. The U.S. Securities and Exchange Commission recently issued guidance that warrants – typically issued as part of an acquisition – may need to considered by the SPAC as a liability, not an asset as they typically have been reported. This change would also compel the company to report changes in their value, as it would with loans and other liabilities – which in turn could cause many SPACs to have to restate their prior results.
All of this could add a layer of complexity that SPACs, their investors and the target acquisition would seek to avoid. For investors, a careful reading of various offering documents is essential to determine if the SPAC is seeking to enrich itself at the expense of the shareholders from whom it seeks capital. Additionally, the track record of those behind the SPAC becomes even more critical: have they used this technique, or others, to take companies public before? How were those deals structured, who profited most and what became of the company over the longer term? As they say, past performance is not a guarantee of future results, but it certainly can be a strong indicator.