SPACs, IPOs and Liability Risk Under the Securities Laws

Over the past twelve months, the U.S. Securities markets have seen a tremendous rise in Special Purpose Acquisition Companies (“SPACs”). SPACs raised $100 billion in the first three months of 2021, which represented more than two-thirds of capital raised from all U.S. listings. In some firms, SPACs represented over half of the IPO deal activity in Q1.

On April 8, 2021, John Coates, the acting Director of the Division of Corporate Finance at the U.S. Securities and Exchange Commission (“SEC”), released a public statement titled SPACs, IPOs and Liability Risk under the Securities Laws. Director Coates noted that, contrary to recent statements by prominent SPAC proponents, SPACs are subject to SEC enforcement actions, particularly in regard to potentially misleading forward-looking statements. A safe-harbor in the Private Securities Litigation Reform Act (“PSLRA”), passed in 1995, may protect SPACs from private litigation concerning such statements but, as Director Coates warned, the law does not apply to regulatory enforcement actions.

Further, Director Coates cast doubt on whether or not a court would actually apply the PSLRA safe-harbor exemption to SPACs even in the case of private litigation. He suggested that it may be beneficial for Congress or the SEC to refine the interpretations of the PSLRA and provide guidance specifically on how the legislation does (or does not) apply to SPACs. Director Coates opined that such refinement may be appropriate and timely in light of the increased SPAC activity in the market and the similarities between SPACs and initial public offerings (IPOs).

In aggregate, Director Coates’ comments should put any SPAC sponsors on notice: not only are SPACs subject to regulatory enforcement, the SEC considers it an open question of interpretation whether the PSLRA safe harbor applies to SPACs at all.

SEC – Public Statement – 4.8.21
Bloomberg – Wall Street’s $100 Billion SPAC Boom Upends the League Tables