Shareholder Disputes: What Is A SPAC?

On July 13th, 2021, the Securities and Exchange Commission (SEC) announced the settlement of charges involving a SPAC (special purpose acquisition company). It is one of the first times that the federal agency has taken successful enforcement action in a case involving a SPAC. Special purpose acquisition companies have boomed in recent years—and officials warn that SPAC litigation may be on the rise. In this article, our Miami shareholder dispute lawyers provide an overview of SPACs and highlight the recent warnings issued by the SEC.

What is a SPAC? 

A SPAC (special purpose acquisition company) is also sometimes referred to simply as a ‘blank-check company.’ Essentially, a SPAC is a shell company that is listed in a public stock exchange for the purposes of acquiring a privately-held company. In other words, a SPAC is a method that allows a private company to get onto the public market (go public) without going through the traditional initial public offering (IPO) process.

 An Overview of the SEC’s Recent SPAC Enforcement Action 

In July, the SEC announced charges against a SPAC called Stable Road Acquisition Company. The purpose of the SPAC was to facilitate the proposed merger of a company called Momentus Inc., an infrastructure firm in the space industry. According to the SEC, the company repeatedly informed actual and prospective investors that the space infrastructure company had “successfully tested” an advanced form of space-related propulsion technology. In reality, the tests in question were not a success. The SEC brought charges against several individuals involved in the larger transaction, including the sponsor of the SPAC that was acquiring Momentus Inc. 

Many Industry Observers Expect a Rise in SPAC Litigation 

One of the things that makes this case notable is that it is consistent with the SEC’s recent confirmation of its intent to crack down on SPACs that make material misrepresentations to investors (shareholders). Some industry insiders expect a rise in SPAC-related litigation in the coming months and years. In May, the SEC released an updated ‘Investor Bulletin’ in SPACs. Among other things, the federal agency’s Investor Bulletin emphasizes the risk of SPACs.

The use of SPACs has increased dramatically in 2020 and early 2021. According to official SEC data, there were more than $80 billion in SPAC IPOs in 2020—more than the previous two decades combined. With its recent enforcement action, the SEC has made it clear that SPAC sponsors can and will be held accountable for failure to conduct adequate due diligence and/or making material misrepresentations to prospective investors. 

Are You Involved in a Shareholder Dispute?

We are prepared to help. At Pike & Lustig, LLP, our Florida shareholder lawyers are devoted to delivering exceptional representation to clients. Shareholders disputes can be complicated—your rights should be protected every step of the way. If you have any questions about SPAC litigation, professional help is available. Call us now for a confidential initial case evaluation. We provide legal representation in shareholder disputes in West Palm Beach, Miami, and throughout South Florida.

Resources:

sec.gov/news/press-release/2021-124

sec.gov/oiea/investor-alerts-and-bulletins/what-you-need-know-about-spacs-investor-bulletin