The use of Special Purpose Acquisition Companies (SPACs) as an alternative route to gain access to the capital markets has proved extremely popular in recent years.
There has been a huge rise in the appeal of SPACs, which has been especially evident during the pandemic. 2020 saw records broken for SPACs, with a total of $73 billion raised through them in the US. Yet this was soon dwarfed by the first three months of 2021, in which 298 SPACs raised almost $88 billion.
It is a situation that has prompted other financial centres to consider what they can do to attract lucrative SPACs activity.
Elsewhere, we detail the attempts being made by the Financial Conduct Authority (FCA) to modernise the UK market in order to persuade more high-growth companies to list in London.
Rahman Ravelli has an in-depth guide on the subject of SPACs that answers many questions relating to them.
An article by Syed Rahman details the responsibilities and risks facing directors of special purpose acquisition companies (SPACs).
A Special Purpose Acquisition Company (SPAC) is a shell company with no commercial operations that is formed specifically to raise capital through an Initial Public Offering (IPO) and then use that capital to acquire a private company, thereby taking the target company public without a traditional IPO process. SPACs experienced a major wave of activity in the United States between 2020 and 2022, and regulatory and legal issues arising from that period continue to generate significant investigation and litigation.
SPACs raise a range of regulatory and legal risks. These include: alleged material misstatements or omissions in SPAC offering documents and merger proxy materials; alleged failures to disclose conflicts of interest, particularly involving SPAC sponsors; allegations of market manipulation around the announcement of a de-SPAC merger; securities fraud claims brought by shareholders who invested on the basis of misleading forecasts; and investigations by the SEC in the US or the FCA in the UK. SPAC-related litigation has been extensive in US courts and is increasingly common in other jurisdictions.
A de-SPAC transaction is the acquisition by a SPAC of a target private company, resulting in the target becoming a publicly listed entity. The de-SPAC merger is subject to regulatory disclosure requirements and shareholder approval. It is at the de-SPAC stage that many of the regulatory and legal risks crystallise — including whether the disclosures made to investors about the target's business, projections, and prospects were accurate and complete. The de-SPAC process is the subject of heightened SEC scrutiny and has generated substantial securities litigation in the US.
SPAC directors owe fiduciary duties to shareholders, including duties of care and loyalty. Sponsors — the founders of the SPAC who receive a founder share allocation — have duties to act in the interests of public shareholders rather than their own interests. Given the inherent conflicts of interest in SPAC structures (sponsors benefit from completing a deal regardless of whether it is in shareholders' best interests), courts and regulators scrutinise whether these duties have been properly discharged, particularly in relation to the approval of the de-SPAC merger and the accuracy of disclosures made to shareholders.
In 2021, the Financial Conduct Authority amended the UK Listing Rules to make London a more competitive venue for SPAC listings. The amendments allowed SPACs of sufficient size to avoid the automatic trading suspension that previously triggered on announcement of a target acquisition, on condition that certain investor protections — including shareholder approval, redemption rights, and enhanced disclosure — are met. However, the UK SPAC market remained considerably smaller than its US counterpart, and the FCA continues to monitor the space as part of its broader market oversight.
Yes. Investors who suffer losses in connection with a SPAC may have civil claims against the SPAC, its directors, sponsors, and advisors — including claims for misrepresentation, breach of fiduciary duty, and, in the US, securities fraud under Sections 10(b) and 14(a) of the Securities Exchange Act of 1934. Shareholder class actions against SPACs became a significant feature of US litigation from 2021 onwards. In the UK, claims could be brought under the Financial Services and Markets Act 2000 or through common law fraud and misrepresentation routes.
Specialist solicitors advising on SPAC-related matters may be engaged to advise directors and sponsors facing regulatory investigations or litigation, to assist target company management facing claims in connection with de-SPAC transactions, or to act for investors pursuing recovery of losses. Given the cross-border nature of many SPAC transactions — particularly those with a US listing — coordinated advice across UK and US legal systems is often required. Solicitors with deep experience in securities litigation, regulatory proceedings, and corporate governance disputes are best placed to advise on these complex matters.
Investors should scrutinise the experience and track record of the SPAC's sponsors, the size of the sponsor's economic interest relative to the investment made, any conflicts of interest that could incentivise the sponsor to complete a deal at any cost, the quality and specificity of disclosures made about the target company and its projected financials, the degree of dilution implied by warrants and founder shares, and whether adequate redemption rights have been preserved. While SPACs can provide legitimate investment opportunities, the structure creates incentives that warrant careful due diligence.
