Investor alert: Special Interest Acquisition Company (SPAC)
The White Law Group is investigating potential securities claims involving broker dealers and financial advisors who may have unsuitably recommended a special purpose acquisition company (SPAC) to investors.
A special purpose acquisition company (SPAC) is basically a shell company set up by investors with the sole purpose of raising money through an IPO to eventually acquire another company. In the past few years SPACs have become popular with retail investors because they allowed them to invest in private companies without meeting certain wealth or income thresholds.
The Financial Industry Regulatory Authority (FINRA) last October launched a thorough examination of the activities of brokerage firms in relation to special purpose acquisition companies (SPACs) because of the risks of the investments and the potential for financial losses for retail investors.
Explanation of the SPAC Process
These shell companies are typically formed by a group of institutional investors and money is raised through an initial public offering (IPO) and moved to an interest-bearing account until the acquisition can be made. When the shell company goes public, it is not certain which company it is seeking to acquire. The SPAC may have up to two years to identify a target company to acquire. After a target company has been decided upon, the acquisition must be approved by the SPAC’s shareholders through a vote.
After the acquisition, the shareholders may decide to either convert their shares of the SPAC into shares of the acquired company or redeem their shares and for the initial investment plus interest.
If the SPAC is unable to locate a target company within the two-year time period, the SPAC is liquidated, with all shareholders receiving their original investment back along with accrued interest.
The Risks of Investing in SPACs
Like all investments, there are risks that come with investing in SPACs. Due diligence of the SPAC process is not as rigorous as a traditional IPO and SPAC sponsors aren’t looking out for retail investors’ best interests.
Since the SPAC sponsors are the ones who choose what entity to acquire, this increases the possibility of self-dealing and may lead the SPAC to pay a premium price for the company at a detriment to investors. Shareholder dilution could also be a problem, due to large fees and a 20% stake by the sponsors, plus a warrant to buy more shares.
If there are too many investors in a SPAC, then a capital short fall may occur.
There is also the possibility that the target companies may have their acquisition rejected by SPAC shareholders.
While there have been some successes with a few high-profile SPACs, the average returns from SPAC mergers fell short of the average post-market return for investors from an IPO, according to reports.
FINRA Targets Broker Dealers in SPAC Examination
FINRA announced in October that while it wouldn’t disclose which brokerage firms were part of its examination sweep, that it would be looking at SPAC-related activates from July 2018 through September 2021, as well policies and procedures involving public offerings, suitability, due diligence, communications with customers, and product recommendations.
Apparently, Securities and Exchange Commission (SEC) chairman Gary Gensler also told Congress last September that there will be new SPAC regulations to make sure that investors are given more information about the costs, fees, and any conflicts involving SPACs.
Filing a Complaint against your Brokerage firm
If you are concerned about an investment in a special purpose acquisition company (SPAC), the securities attorneys at The White Law Group may be able to help you by filing a complaint against your brokerage firm. Please call the offices at 888-637-5510 for a free consultation with a securities attorney.
The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Seattle, Washington.
For more information on the firm, please visit https://www.whitesecuritieslaw.com.