SPACs have been involved in many large deals this year and are a fairly common way for a private company to go public. From January 1 to May 25, 2022, there have been at least 11 SPAC deals valued at more than $25 million, according to Matterhorn data. In fact, SPACs account for over 8% of high-dollar deals so far this year.
These “bank check” company deals ranged from $185 million to $9.3 billion with a median of $939 million and an average of $1.657 billion. The companies involved were from a variety of industries ranging from industrials to healthcare to technology and business services.
This time last year, approximately 67 out of 133 deals were SPACs (~50%) and at least 117 out of 342 deals for the full year (~34.2%). While SPACs remain popular, their relative decline may due to increased governmental scrutiny in recent months.
According to KPMG, SPACs are a popular choice for companies to go public because it is faster than an initial public offering (IPO), the price is set up-front, additional funding can be raised, and is more cost effective. The University of Pennsylvania notes that SPACs have more protections, such as safe harbor clauses that going the IPO route would not allow. Goldman Sachs states that in 2020, SPACs accounted for more than half of the $67 billion in IPO capital raised that year.
However, SPACs also likely mean greater shareholder dilution, a shorter timeline, less rigorous due diligence, and others potential issues. The Securities and Exchange Commission (SEC) has expressed concern about SPACs’ purported protection from legal liability when making financial protection, claiming this presents “significant investor protection question.”
“With the unprecedented surge has come unprecedented scrutiny, and new issues with both standard and innovative SPAC structures keep surfacing,” John Coates, Acting Director, Division of Corporate Finance, at the SEC said in a statement.
Coates added, “Any simple claim about reduced liability exposure for SPAC participants is overstated at best, and potentially seriously misleading at worst.”
Litigation against SPACs has driven 55 law firms to state that there is no factual or legal basis to call a SPAC an investment company. The SEC has highlighted financial reporting and auditing considerations for SPACs and companies potentially merging with them. In 2021, two bills were also introduced to increase SPAC regulation, namely H.R.5910 and H.R. 5913, which would remove SPACs’ safe harbor protections and place limitations of SPACs, respectively.
