By: Ali Muffenbier, Volume 105 Staff Member
As we have all heard more than we would have liked, 2020 was the year of “unprecedented times,” and one unprecedented activity that rocked the finance world was the explosion of the number of Special Purpose Acquisition Companies (“SPAC”), also known as Blank Check companies, to hit the market. But, while many of us might find ourselves wishing for some good, old-fashioned, precedented times, a market full of SPACs seems to be the new normal, and America’s financiers are lining up to get involved. In 2020 the market saw the addition of 248 SPACs: a huge increase from the 59 in 2019, and 46 in 2018. The number is not slowing down in 2021. As of March 22, there were already 281 new SPACs to go public in 2021 which, combined with those already on the market, represent the potential of over $500 billion dollars in mergers and acquisitions transactions over the next two years as these SPACs search for private companies to acquire. This Post will first examine these SPAC-Tacular times: why and how SPACs have gained such unprecedented popularity over the past year. It will then explore the problem that the SEC has recently tried to address: a lack of disclosure in SPAC transactions. Finally, this Post will discuss the future of SPACs, and the way they will likely remain unaffected by the SEC guidelines in the short term.
I. SPAC-TACULAR GROWTH
Over the last year SPACs have seen massive growth as an alternative way for companies to go public, without going through the traditional IPO process. A SPAC starts off as a corporation without any operations and goes through the IPO process itself. Investors buy shares of the SPAC, and the money invested gets placed in a trust, theoretically building a pool to be used when the SPAC acquires a company, the target, to take public. The SPAC gets a specified timeframe within which it must find and acquire a target company, usually around two years, and if it does not acquire a target within that period the shareholders are refunded. In other words, the SPAC is a public company, waiting on the market and collecting funds while its founders are actively searching for a private company that wants to go public and can avoid the IPO process if they can be acquired by the SPAC.
SPACs give companies a sense of flexibility and control that they cannot get with a traditional IPO; the process is generally cheaper, and faster than an IPO, and the sponsor sees a major profit from a successful acquisition. For initial investors, SPACs are appealing because the investment is low risk, with the potential for high reward. In this sense, SPACs seem like a transaction where no one can truly lose. Unfortunately, it is not that simple. The sponsor’s interest differs from the interests of the shareholders at any stage of the transaction, but the sponsor is the only one who is involved in negotiating the deal. Therefore, in order for shareholders to make properly informed decisions, clear disclosures are required to explain to the shareholders which parties are involved in the deal (and any conflicts of interest amongst the parties), why each party is involved, and how the parties are being compensated, both before and after the target is identified.
II. SPAC-TACULAR NEED FOR MORE DISCLOSURE
The lifetime of a SPAC contains two major stages at which disclosures must be made: The Initial Public Offering stage, and the Business Combination Transaction stage. Because of the differences between SPACs and traditional corporations, the disclosures currently required by law might not be adequate to properly warn investors of the risks they take when investing in a SPAC, at least according to the SEC. At the IPO stage, the SEC has identified five potential problem areas, that primarily deal with conflicts of interest that arise among various parties, as well as unequal leverage during negotiations. At the Business Combination Transaction stage, the SEC identified three potential problems: these again relate to conflicts of interest, as well as the potential for undisclosed financing agreements. These problems all stem from a lack of disclosure generally, and ultimately the SEC is worried about conflicting interests between shareholders and the SPAC owners, which creates risk for the shareholders that the SEC would like to reduce.
In response to these problems, the SEC offers a list of questions SPACs should theoretically answer “in the context of their disclosure obligations.” These guidelines are, of course, merely suggestions, but in issuing them the SEC is signaling to SPACs that regulators are looking for answers to these questions in disclosure statements. Further, shareholders may be able to sue companies later if these risks were not properly disclosed by the company. Fortunately for SPAC-enthusiasts (and the companies looking to use a SPAC to go public), the SEC guidelines were issued on December 22, 2020, and today, three months later, the number of SPACs continue to grow. It appears the effect of more disclosure does not necessarily discourage investors, but simply protects SPACs from any future liabilities.
III. SPAC-TACULAR FUTURE FOR SPACS
The ultimate question then is: what do the SEC guidelines mean for the future of SPACs? They will keep growing, and the SPAC will be more powerful and attractive than before, because of the stronger relationship between parties and the lower exposure to risk for all involved. The result of the guidelines is simply that SPAC’s SEC filings will be more robust which results in more information for shareholders. It is ultimately better to require more disclosure, as shareholders can make more informed decisions, and SPAC sponsors face a lower risk of liability by adequately disclosing potential conflicts up front. Further, as 2021 has shown so far, the excitement around SPACs has not slowed, and more SPACs pop up every day, indicating financiers are not fazed by the inclusion of additional regulation. Of course, many companies are attracted to SPACs because the disclosure requirements are less invasive, as compared to a traditional IPO. However, even with the new disclosures, companies still have to disclose less than they would in a traditional IPO, in addition to the numerous other benefits to going public via a SPAC.
The future of SPACs is nevertheless uncertain: the new SEC guidelines indicate that the SEC is worried about SPACs, particularly, companies using SPACs to go public in situations where IPO guidelines would not allow it, for good reason. Some believe the SPAC market might “implode” as a result of companies using SPACs for nefarious reasons. However, many others believe this multi-billion dollar industry is just getting started, and while it may encounter a “speed bump” or two, the future of companies using SPACs to go public remains bright.
 “Unprecedented” was voted the People’s Choice Word of the Year in 2020 by users of Dictionary.com. Olivia Eubanks, ‘Unprecedented’ named People’s Choice 2020 Word of the Year by Dictionary.com, Abc News (Dec. 16, 2020, 4:05 AM), https://abcnews.go.com/Politics/unprecedented-named-peoples-choice-2020-word-year-dictionary/story?id=74735664 [https://perma.cc/746P-YRFL].
 Companies Continue to Turn to SPACs for Greater Flexibility, Goldman Sachs (Jan. 12, 2021), https://www.goldmansachs.com/insights/podcasts/episodes/01-12-2021-olympia-mcnerney.html [https://perma.cc/URA9-F3BS] [hereinafter SPACs for Greater Flexibility].
 Andrew Ross Sorkin, Jason Karain, Michael J. de la Merced, Lauren Hirsch & Ephrat Livni, The Issues With SPACs, N.Y. Times (Feb. 10, 2021) https://www.nytimes.com/2021/02/10/business/dealbook/spacs-blank-check-deals.html [https://perma.cc/X4FK-5R5D] (“The blank-check company boom shows no signs of slowing . . . ‘every friend is launching a SPAC.’”).
 SPAC IPO Transactions: Summary by Year, SPAC Insider, https://spacinsider.com/stats/ [https://perma.cc/8CUD-A7WK] (last visited Mar. 22, 2021) (the second graphic on the page shows this table) [hereinafter SPAC Stats].
 SPAC Stats, supra note 4.
 SPACs for Greater Flexibility, supra note 2.
 Special Purpose Acquisition Companies, Sec. & Exch. Comm’n., (Dec. 22, 2020) https://www.sec.gov/corpfin/disclosure-special-purpose-acquisition-companies [https://perma.cc/K6U9-PAZD] [hereinafter SEC Guidelines].
 SPAC Stats, supra note 4. In 2010, 7 SPACs went public, and in 2011, another 15. By the end of 2019, the total number of SPACs to ever go public hit 226; in 2020 alone, 248 SPACs went public.
 SEC Guidelines, supra note 7.
 Tom Zanki, SEC Urges Blank-Check Companies to Bolster Disclosures, Law360 (Dec. 23, 2020, 7:57 PM) https://www.law360.com/articles/1340671/sec-urges-blank-check-companies-to-bolster-disclosures- [https://perma.cc/C52Z-GH2M].
 SPACs for Greater Flexibility, supra note 2. Because of the SPAC structure (the sponsor has a limited timeframe to find a deal, or else they lose the chance at profit), the companies have a greater negotiating power to get a better deal.
 Nate Nead, Advantages of a SPAC, https://investmentbank.com/special-purpose-acquisition-company/ [https://perma.cc/AE9M-57F8] (last visited Mar. 7, 2020).
 Ortenca Aliaj, Sujeet Indap, & Miles Kruppa, The Spac Sponsor Bonanza, Fin. Times (Nov. 12, 2020) https://www.ft.com/content/9b481c63-f9b4-4226-a639-238f9fae4dfc [https://perma.cc/7BWH-LX7Q]. See also Zanki, supra note 12 (“[F]ounders are often compensated with 20% of the target company’s shares for a nominal fee, usually $25,000. This means that founders stand to make a sizable payday even if shares of the acquired company fare poorly after the merger.”).
 Allison Nathan, Gabriel Lipton Galbraight & Jenny Grimberg, The IPO SPAC-tacle, Top of the Mind 1, 5 (Jan. 28, 2021) https://www.goldmansachs.com/insights/pages/top-of-mind/the-ipo-spac-tacle/report.pdf [https://perma.cc/XKH2-EKSM] (SPAC investors hold shares in the SPAC, which they can either sell at any time, or hold on to and if the SPAC ends up not finding a target, the investment (plus the interest from sitting in the SPAC’s trust) is simply returned, pro rata, to the investors).
 The sponsor often works with a team of officers and directors of the SPAC when negotiating these deals, who share the same general interests as the sponsor (including the ways they differ from the interests of the shareholders), so for the sake of simplicity this Post will refer to that team as simply “the sponsor.”
 Zanki, supra note 12.
 Id. For a more thorough explanation of the problems the SEC identified, see infra notes 20–21 and the accompanying text.
 SEC Guidelines, supra note 7.
 William B. Brentani, Mark A. Brod, and Daniel N. Webb, SEC Issues Guidance on Light of Ongoing Surge in SPAC IPOs, Harv. L. Sch. F. on Corp. Governance (Feb. 7, 2021) https://corpgov.law.harvard.edu/2021/02/07/sec-issues-guidance-in-light-of-ongoing-surge-in-spac-ipos/ [https://perma.cc/7FEL-7TEE].
 Id. at n.2.
 Zanki, supra note 12.
 SPAC Stats, supra note 4.
 Gislar Donnenberg, Michelle Earley & Robert Evans III, SEC Focus on SPACs, JDSupra (Jan. 8, 2021) https://www.jdsupra.com/legalnews/sec-focus-on-spacs-4205436/ [https://perma.cc/4ULP-GYEY].
 SPAC Stats, supra note 4.
 Michelle Celarier, Free of IPO Constraints, SPACs Can Make ‘Absurd’ Financial Projections––and This Hedge Fund Manager Says the Fallout is Coming Institutional Inv. (Feb. 26, 2021) https://www.institutionalinvestor.com/article/b1qqvy1pqh34s6/Free-of-IPO-Constraints-SPACs-Can-Make-Absurd-Financial-Projections-And-This-Hedge-Fund-Manager-Says-The-Fallout-Is-Coming [https://perma.cc/64G5-528U] (“When a U.S. company goes public with a traditional IPO, it is generally prohibited from including forward-looking financial projections in its prospectus and during the quiet period . . . [b]ut because SPAC deals are based on the Securities and Exchange Commission requirements for mergers, there is no such prohibition for target companies.”).
 Nead supra note 14. But see Nathan et al., supra note 16, at 11 (“Going public through a SPAC won’t work for every company,” though Nathan et al., go on to list the appealing aspects of SPACs when the fit is right).
 Celarier supra note 31 (“What you see now is that these flimsy companies that should not be going public have found a backdoor way into the public market.”). But see SPACs for Greater Flexibility, supra note 2 (“At the end of the day the companies that are coming public via SPAC are companies that should be in the public markets.”).
 Celarier supra note 31.
 SPACs for Greater Flexibility, supra note 2 (These “speed bumps” occur when the market becomes oversaturated with SPACs seeking funding after announcing a deal, leading to reduced funding and poor outcomes).
 SPACs for Greater Flexibility, supra note 2. See also Nathan et al., supra note 16, at 11 (“[A]s long as SPACs can find good deals that make sense in the markets, the product is an option for companies to consider.”).