Investment advisers considering the use of a Special Purpose Acquisition Company (SPAC) as part of their merger and acquisition strategy must take into account the myriad of regulatory obligations that come with a SPAC M&A.
SPACs, also called “Blank Checks,” are used to raise capital by taking the company public and offering IPOs, first to institutional investors, then to the public. The purpose of SPACs is to raise capital to acquire an existing and operational private company and take that acquired entity public, however, it is important to note that SPACs have a lifespan of two years. If the merger or acquisition deal is not finalized within the two-year deadline, the SPAC will be liquidated, and funds will be returned to investors.
The 2019 COVID-19 pandemic fueled a rise in the use of SPACs. In 2016, capital from SPAC IPOs reached $3.5 billion. In 2019, SPAC IPOs raised $13.5 billion. In 2021, $162 billion. Although those numbers have dropped, they remain a popular strategy for investors and companies interested in merging or acquiring private companies and taking them public.
SPACs offer some advantages, such as their propensity to raise immense amounts of money and creating a faster route to taking a company public. It may take a company going public via the traditional IPO route anywhere from six months to more than a year, whereas, with a SPAC, a company could go public within a few months (after the 2-year time lock).
As with all high-return opportunities, there are risks associated with SPACs, and it is the duty of an adviser to protect their clients from such risks.
A SPAC is formed without an acquisition target or a reported acquisition target company. This is done to avoid disclosure. The lack of disclosure limits oversight by regulators but also presents a risk to investors who, for lack of information, may not be able to make an informed decision, hence putting them at risk of scams. In addition, there is a high risk of underperforming SPACS, with up to 70% trading under their $10 offer price in 2021.
With these in mind, it is recommended that advisers pay close attention to the details surrounding SPAC deals to determine if their clients truly benefit from such offerings.
Here are some regulatory considerations for advisers managing SPAC portfolios or offering services or products like this:
- SPAC investments are subject to stringent regulatory requirements, such as registration and reporting obligations. Maintaining proactive compliance is vital to reducing the risk of scrutiny or enforcement actions by agencies such as the SEC.
- When evaluating the risk vs. opportunity of SPAC M&As, advisers should perform thorough due diligence into the target company’s operations, financials, and regulatory compliance practices.
- Advisers have a fiduciary duty to their clients to fully vet the suitability of SPAC investments and provide their investors with information on the associated risks, potential conflicts of interest, and any regulatory concerns.
- As advisers balance the needs of all the parties involved in a SPAC M&A deal, their fiduciary duty lies with their clients, and they must, on behalf of their clients, structure such deals in favor of their clients’ best interests, including negotiating favorable terms, mitigating risks, and any post-merger considerations that may affect their clients.
- After the merger has occurred, advisers are responsible for supporting clients through challenges that may occur post-merger and maintaining ongoing monitoring to identify and address potential issues that may impact their clients.
The M&A team at Jacko Law Group has works closely with and assists clients in all aspect of M&A transactions, from counseling them on optimal entity formations to regulatory compliance concerns during and after the merger.
For questions and more information, please call us at 619.298.2880 or email info@jackolg.com.