The SPAC

According to RBC Capital Markets, SPACs represent $700 billion to $1 trillion of buying power. In the first four months of 2021, SPACs accounted for roughly a little over 20% of all M&A transaction volume in the United States. To put that in perspective, prior to 2020, SPAC transactions represented roughly 1%. But SPAC activity has been waning in the later part of this year. A recent PitchBook report notes that SPAC IPOs declined 66% by number and 81.3% by capital raised relative to the record shattering first quarter. Lackluster aftermarket performance could lead to “a related decline of investor sentiment around SPACs, if returning capital due to failure to find a target becomes a regular occurrence.”

Even with the recent slowdown, SPACs still remain an area of regulatory concern. SPACs are part of the SEC’s 2021 regulatory agenda. On Tuesday, September 14 Gary Gensler testified in front of the Senate Committee on Banking, Housing and Urban Affairs. Gensler said that he has asked SEC staff for recommendations on enhancing SPAC disclosures, noting that “There are a lot of fees and potential conflicts inherent within SPAC structures, and investors should be given clear information so that they can better understand the costs and risks.”

 SPACs bring the potential for conflicts of interest where SPAC directors, officers and affiliates could make decisions based on their own best interests at the expense of the investor. Disclosure guidance from the SEC Division of Corporation Finance notes that the economic interests of a SPAC’s sponsors, directors, officers and affiliates can often differ from the economic interests of public shareholders which may lead to conflicts of interests as they evaluate target companies.  Clear disclosure regarding these potential conflicts of interest is particularly important because these parties are generally responsible for negotiating the SPAC’s business combination transaction. Unlike the traditional IPO process where a private operating company sells its securities in a manner in which the company and its offered securities are valued through market-based price discovery, these individuals are solely responsible for deciding how to value the private operating company and how much the SPAC will pay for it.