A “blank check company,” more formally known as a special purpose acquisition company (SPAC), was virtually unheard of ten years ago. However, as fewer companies have been able to launch initial public offerings (IPOs) on their own, SPACs skyrocketed in popularity. By 2020, half of all IPOs were tied to a SPAC, and the largest of these included billion-dollar deals. But the rise of SPACs has led to their abuse—taking advantage of investors—and a resulting crackdown by the Securities and Exchange Commission (SEC).
Whether you’re working in the financial sectors steering investors to SPACs or more directly involved in a SPAC, you should be aware that they are one of the SEC’s top enforcement priorities. And if you know of SPAC-related wrongdoing, you should consider becoming an SEC whistleblower. In the following posts, we’ll explore SPACs and the SEC’s increasing policing of them.
A SPAC is a shell company that exists for the sole purpose of identifying a target company to acquire, with the merged successor company becoming a publicly traded firm.
A SPAC can only exist for a specified period of time, usually 24 months (although there are occasional extensions). When investors buy into the SPAC, their money is put into a trust account, and the SPAC manages the trust’s funds. While SPACs usually put their investors’ funds into safe, interest-bearing instruments, no specific SEC rule limits how a SPAC must invest the money.
If the SPAC does not identify and acquire a target within the specified time, the SPAC ends, the trust must be unwound, and the SPAC must return the money to its investors.
To gain investors, SPACs may identify the type of company (including its industry and market sector) it is looking to acquire. However, investors need to know there’s no requirement that the SPAC obtain a company within its intended field. For example, many SPACs are high-tech. But a SPAC that promoted itself as looking for the next SpaceX could, instead, decide to acquire a hotel chain.
SPAC Investment Structure
SPAC investments have a notably different structure than traditional securities. They are primarily made up of three categories of investment:
- Common shares
- Units (a combination of common shares and fractions of warrants)
- Private Investments in Public Equities (PIPEs)
Most SPACs begin trading at $10 per unit. Crucially, investors need to understand that their holdings are based on the share associated with the trust account’s balance, not the price they may have paid for shares on the open market.
Further, because the valuation is not based on SPAC’s business (since, by definition, there isn’t an operating business), prices of stocks and warrants may be unrelated to SPAC’s financial success. One NASDAQ analysis concluded that early SPAC investment might yield a 20% return, but many investors will receive far less.
When it comes to PIPEs, they usually don’t enter into the picture until late in a SPAC lifecycle, shortly before an acquisition that requires institutional fundraising.
SPAC Exchange Listings
Even though a SPAC has no business operation or assets beyond the trust, SPACs—with holdings equivalent to small or microcaps—can get listed on stock exchanges. NASDAQ holds itself out as being the premier exchange for SPACs.
To be eligible for NASDAQ, a SPAC must satisfy Rules 5406 and 5225(a)(1)(A), requiring:
- The units must satisfy NASDAQ Global Market listing requirements
- The listed securities must have a value of at least $100 million,
- There must be 1.1 million publicly-held shares at market value of $80 million and a bid price of $4
- There must be either a minimum of 2,200 shareholders with a six-month monthly trading volume of 100,000, or 500 stockholders and a monthly-trading volume of 1,000,000 for a year
There are additional requirements if the SPAC includes warrants.
It should already be apparent why the SEC is so concerned about SPACs—the considerable rise in their popularity, and the inherently speculative nature of SPAC valuation, all based on pots of money that don’t have firm rules about how they’re invested.
Even legitimate SPACs may easily cause SEC heartburn. Add that SPACs are often working in the startup tech space, and it may be difficult to discern when a SPAC is legitimate and when it’s a new version of a boiler room fraud.
In our next post, we will examine why the SEC’s new focus on SPACs is crucial for those considering becoming an SEC whistleblower. But in the meantime, if you have specific questions about your whistleblowing tips or the SEC whistleblower submission process, the Silver Law Group and the Law Firm of David Chase have created a strategic alliance to represent SEC whistleblowers like you.
With years of experience representing SEC whistleblowers and a former SEC Enforcement lawyer on our team, we have an in-depth understanding of the SEC Whistleblower Program. We can help you submit a tip that is more likely to result in a successful covered action. We are here to assist whistleblowers in maximizing their opportunity to receive a financial bounty. For a free, confidential consultation, contact us or call us today at (800) 975-4345.