The use of SPACs has reached unprecedented levels, but recent pronouncements from the SEC may signal heightened enforcement and litigation risk for SPACs, as well as their sponsors, officers and directors, and auditors.
The exponential and high-profile growth in special purpose acquisition companies ("SPACs") in 2020 and early 2021 is well documented. By one account, SPACs raised $83 billion in 2020, and an additional $26 billion in January 2021 alone. Although the Securities and Exchange Commission ("SEC") had commented on some of the risks associated with SPACs for investors and sponsors, the SEC's tone changed in recent weeks, and SPACs now appear to be an emerging enforcement priority.
In an April 8, 2021 speech, John Coates, the Acting Director of SEC's Division of Corporate Finance ("CorpFin"), questioned those who touted SPACs as a vehicle that presented lower disclosure risks under the federal securities laws than a traditional IPO, stating instead that "in some ways, liability risks for those involved are higher, not lower, than conventional IPOs." In particular, Coates expressly questioned whether the Private Securities Litigation Reform Act's ("PSLRA") "safe harbor" for forward-looking statements should apply to disclosures in a de-SPAC transaction, arguing that a de-SPAC transaction was economically similar to a traditional IPO and therefore the "safe harbor" should not apply.
Then, on April 12, CorpFin and the Office of Chief Accountant issued a statement regarding the accounting for warrants issued by SPACs. The statement asserted that some warrants should be accounted for as liabilities rather than as equity or as assets, and warned registrants and their auditors to review their accounting for warrants to determine whether corrective measures (i.e., a restatement) are required.
As a result of these developments, registrants and sponsors should not presume that the PSLRA's safe harbor will protect forward-looking statements made in a de-SPAC transaction, and should carefully assess the type and quality of forward-looking information, including financial projections, that is disclosed. In addition, registrants, sponsors and auditors should ensure that they follow current SEC guidance in the accounting for warrants and evaluate whether a restatement is required. And finally, registrants and sponsors should understand that under the Biden administration there is now a new SEC Chairman, Gary Gensler, and the SEC may look to "send a message" to SPACs via its Division of Enforcement.