On May 30, 2023, the Securities and Exchange Commission (SEC) announced the third settlement of an enforcement action alleging violations of the Investment Advisers Act of 1940 (the Advisers Act) with respect to activities concerning special purpose acquisition companies (SPACs).
Taking a step back and looking at the three enforcement actions together, one can see what the SEC has been focusing on in this space and also what it has not been focusing on (yet). The primary key element shared by these enforcement actions is that in all three, the SEC asserts that the investment adviser affiliated with the SPAC failed to provide timely disclosure of conflicts of interest relating to the fact that (i) the SPAC sponsor was owned at least in part by affiliated advisory personnel (alongside either affiliated private funds or third parties) and (ii) the affiliated private funds also invested in the SPAC sponsor and/or engaged in other SPAC-related transactions. Investment advisers should review whether these facts exist with respect to any affiliated SPACs to consider their potential exposure and any disclosures that may be warranted.
During the explosion in the formation of SPACs over the past several years, many SPACs were sponsored by persons or entities affiliated with an investment adviser. The structuring of these investment adviser-affiliated SPACs varied throughout the industry. In many circumstances, private funds and other clients of the affiliated investment adviser were engaged in one or more of the following transactions relating to the SPAC:
- investing in the sponsor of the SPAC (the entity primarily responsible for organizing, directing, or managing the business and affairs of the SPAC)
- investing in the SPAC through the purchase of private placement in public equity (PIPE) securities, warrants, shares, or other interests issued by the SPAC
- purchasing securities of the SPAC on the open market after its public offering or
- engaging in investment, lending, or other transactions with either the SPAC or the target company in order to support their business combination
In addition to the involvement of the private funds and other clients, under certain circumstances, certain personnel or other affiliated persons of the investment adviser were also involved directly or indirectly in these transactions, including, in particular, investing in the SPAC sponsor.
The involvement of private funds and other advisory clients with respect to the SPAC transactions raises a range of potential conflicts of interest that implicate the fiduciary duty of the investment adviser under Section 206 of the Advisers Act.
What’s In the Blueprint?
To date, the SEC has brought enforcement actions alleging violations of the Advisers Act with respect to activities concerning SPACs against (i) Perceptive Advisors, LLC,1 (ii) Corvex Management LP,2 and (iii) RTW Investments, LP,3 each of which follows a very similar blueprint.
The core allegation of these enforcement actions is that these advisers failed to provide timely disclosure of conflicts of interest created by investments by the advisory personnel in the SPAC sponsor. Specifically, the SEC alleges that these investments create conflicts of interest because:
- the contingent nature of the SPAC sponsor compensation creates a financial incentive to recommend the SPAC engage in a business combination even if the transaction is not in the best interests of the adviser’s clients (the Business Combination Conflict) and
- the advisory personnel’s ownership interests in the SPAC sponsor also create an incentive to cause the adviser’s funds and other clients to engage in SPAC-related transactions (including investments in PIPEs and warrants, open market transactions, and bridge financing and other transactions with target companies) to increase the SPAC’s ability to complete a business combination (the SPAC Transaction Conflict)
In each of these three actions, advisory personnel had direct ownership interests in the SPAC sponsor, either with or without investments by the private funds of the affiliated investment adviser in the SPAC sponsor. In Perceptive Advisors and RTW Investments, the sponsors were co-owned by the advisory personnel and the affiliated private fund, while in Corvex the sponsor was owned by the advisory personnel and third parties.
In the Perceptive Advisors action, with respect to the most recent SPAC, the SEC deems co-ownership of the SPAC sponsor by the advisory personnel and the affiliated private fund sufficient to create a Business Combination Conflict even in the absence of another SPAC-related transaction by the affiliated private fund that would create the SPAC Transaction Conflict. This position suggests that the SEC did not believe the co-investment of the advisory personnel alongside the affiliated private fund aligned their interests enough to sufficiently eliminate the conflict of interest.
In the Corvex action, the SEC alleges that both the Business Combination Conflict and the SPAC Transaction Conflict existed where the advisory personnel had ownership interests in the SPAC sponsor (but the affiliated private fund did not) and the affiliated private fund engaged in SPAC-related transactions.
With respect to the timing of the disclosures, each of the affected private funds in each of the enforcement actions appeared to have a board of directors to which the affiliated investment adviser could have provided disclosure and received consent to the conflict of interest; however, the SEC alleges that such disclosure was provided too late. In particular, the SEC appears to suggest that the disclosure should have come prior to the consummation of the initial public offering of the relevant SPAC.
In addition to this core common allegation, the three actions also involve other similar claims:
- Each includes allegations of violations of the policies and procedures rule (Advisers Act Rule 206(4)-7) for the failure to have adequate policies and procedures reasonably designed to provide appropriate disclosure with respect to the conflicts of interest associated with affiliated SPACs.
- Two of these enforcement actions (Perceptive and RTW) also include allegations relating to material misstatements and omissions concerning the SPACs in investor letters and email communications with investors. These allegations covered situations where the investor communications (i) omitted mention of, or misstated the level of, ownership by the advisory personnel of the SPAC sponsor, and (ii) misstated whether the affiliated private funds participated in SPAC-related transactions.
- The Perceptive and RTW enforcement actions also include violations of the Securities Exchange Act of 1934 with respect to beneficial ownership reporting on Schedule 13D and Schedule 13G.
The settlements of the enforcement actions against Perceptive Advisors and RTW Investments (which included the additional alleged violations mentioned above with respect to material misstatements and omissions in investor communications and with respect to Schedule 13D and Schedule 13G filings) include civil monetary penalties of $1.5 million and $1.4 million, respectively. The settlement with respect to Corvex (which lacked these two additional alleged violations) includes a civil monetary penalty of $1 million.
What’s Not In the Blueprint?
These enforcement actions are remarkably similar in the nature of the facts and the alleged violations. However, there are also circumstances and allegations that are notably absent from these actions.
First, the alleged violations did not include a situations where the private funds or other advisory clients of the owned interests in the SPAC sponsor and the advisory personnel had no direct ownership interest in the SPAC sponsor. The Perceptive Advisors enforcement action notably did not cover its first SPAC, where the SPAC sponsor was 100% owned by the private fund of the affiliated investment adviser, even though it presumably had a similar absence of SPAC-related disclosure. Similarly, none of the enforcement actions involve a scenario where the advisory personnel had an ownership interest in the SPAC sponsor but neither the private funds nor other advisory clients of the affiliated investment adviser had an ownership interest in the SPAC sponsor or engaged in transactions relating to the SPAC. This suggests that the SEC has not been focused on allegations of other conflicts of interest in the absence of advisory personnel ownership of the SPAC sponsor, including, for example, potential conflicts associated with allocation of investment opportunities (either between the SPAC and the affiliated private funds or advisory clients or between affiliated private funds or advisory clients into the SPAC or SPAC sponsor) and potential conflicts associated with transactions where the private fund or other advisory client has an interest in the target company of the SPAC (e.g., the target company is a portfolio company of an affiliated private fund).
Second, the alleged violations focus on the absence of any timely disclosure and do not include allegations that the disclosure that was provided was insufficient — i.e., that the disclosure was provided in a timely manner but did not meet the “full and fair disclosure” standard to satisfy the adviser’s fiduciary duty under the Advisers Act. Even the actions involving allegations of material misstatements or omissions focus on clear misstatement and omissions, and not on situations where there was disclosure of the conflict of interest that the SEC deems inadequate.
Finally, none of the enforcement actions include allegations that (i) the SPAC is an unregistered “investment company” under the Investment Company Act of 1940 or (ii) the SPAC should be treated as an advisory client of the affiliated investment adviser (or the SPAC sponsor should be “integrated” with the affiliated investment adviser) for purposes of the Advisers Act.
* * *
Investment advisers who are affiliated with SPACs should evaluate whether they have factual situations that are similar to these enforcement actions, particularly (i) investments by advisory personnel in the SPAC sponsor and (ii) either investments into the SPAC sponsor or other SPAC-related transactions by affiliated private funds or advisory clients.
We will also monitor to see if future SEC enforcement actions against SPAC-affiliated investment advisers continue to follow the blueprint of these enforcement actions.
 In the Matter of Perceptive Advisors, LLC, SEC Release Nos. 34-95673, IA-6106 (Sep. 6, 2022).
 In the Matter of Corvex Management LP, SEC Release No. IA-6284 (Apr. 14, 2023).
 In the Matter of RTW Investments, LP, SEC Release Nos. 34-97622, IA-6318 (May 30, 2023).