The recent surge in SPACs
SPACs have exploded in popularity because forming a new, publicly traded company with a SPAC can be accomplished more quickly than through a traditional IPO. In 2019, $13.9 billion was raised across 59 SPACs. In 2020, the figures grew exponentially to over $83 billion raised across 248 SPACs. As of August 27, 2021, SPAC sponsors have raised over $122 billion across 416 SPACs.
With more SPACs comes more litigation
SPACs were a more popular target for federal class action lawsuits in the first half of 2021 than “other hot-button litigation areas, such as Covid-19 or cryptocurrencies.” (SPACs Are Having Their Day–In Court, Wall Street Journal, August 25, 2021). Prior to the surge in SPACs in 2019, there were only two class action lawsuits concerning SPACs in federal court. Eight months into 2021, 19 SPAC-related class action lawsuits have been filed.
SPACs are also exposed to heightened regulatory scrutiny
Sixty law firms, including Reed Smith, “have united in opposition to recent lawsuits” filed by shareholders that argue SPACs should be regulated as investment companies under the Investment Company Act of 1940. Should these plaintiffs prevail, SPACs would be subject to a new regulatory regime, including certain disclosure requirements that generally do not apply to typical IPOs or mergers (49 Law Firms Push Back Against Litigation Targeting SPACs, Law360, August 27, 2021).
The Securities and Exchange Commission (SEC) has also tightened regulatory and enforcement efforts regarding SPACs. On April 12, 2021, the SEC issued guidance advising that SPAC warrants (instruments that allow investors to buy additional shares at a fixed price) may need to be classified as liabilities rather than equity for many SPAC transactions.
In Lavin v. Virgin Galactic Holdings Inc. ‒ a putative class action complaint filed in federal court in Brooklyn ‒ the plaintiff alleges that the defendants violated the Securities Exchange Act by failing to treat its SPAC warrants as liabilities rather than equity, in accordance with the SEC’s April 12 guidance.
One can expect to see growth in this area as the SEC strengthens its oversight against the heated SPAC market.