Lessons Learned from the First 200 SPACs

The year 2021 was a record year for SPAC activity. There were 613 SPAC listings, raising a total of $145 billion – an increase of 91% from the amount raised in 2020. To reflect on this record year for SPACs  and discuss what can be expected for the coming year, on January 6, 2022, EisnerAmper hosted a webcast featuring executives in the special purpose acquisition company (“SPAC”) industry titled Lessons Learned from the first 200 SPACs. Panelists included:

• John Pennett, Partner, Head of the Technology and Life Sciences Group and SPAC Services Member, EisnerAmper;
• Machua Millett, SPAC and De-SPAC Practice Leader at Marsh USA, Inc.;
• Michael O’Leary, Partner at Hunton Andrews Kurth LLP;
• Nina Kelleher, National Leader for SPAC Services and Director, EisnerAmper Digital (moderator)

SPACs are not a new entity or a new term. SPACs have been used for the last 25 years but have had serious uptick over the last three years. There are currently over 700 SPACs searching for a target or who have announced a target, and there were 440 IPOs in 2021. Further, since 2019, there have been over 220 completed de-SPACs. During the discussion, the panelists shared some insights about the excitement surrounding SPACs, regulation of the SPAC industry and what is to come for the SPAC market in 2022.

SPACs Today Versus SPACs of 25 Years Ago

Twenty-five years ago, the companies which had gone public through SPACs initially were gaming, mining, or other companies which could not otherwise go public through a regular IPO. This led to SPACs having a very negative connotation in the marketplace. Currently, that reputation has gone away.  SPACs now have very strong management teams with significant pedigree, and they are proving they can find valuable investments in the marketplace. The dry powder in the private equity industry has helped propel these companies forward.    

Regulation Surrounding SPACs

SPACs have faced significant scrutiny over the last two years both from the SEC and Congress due to their proliferation and to safeguard investor money. There has been clarification by the SEC on various accounting issues relating to SPACs such as how to treat potentially redeemable equity and warrants, and how to account for the business combination. These clarifications will reduce the need for financial statement restatements by providing guidance for future SPACs on how to properly present financial statements. Any further legislation will help add transparency to the SPAC market and expectations from the company but is not expected to change or hamper the market. One key takeaway from the last two years is target companies should understand the significant responsibility undertaken when becoming part of a de-SPAC transaction as they will need to provide SEC level reporting. 

Litigation Surrounding SPACs

While there has been an increase in the number of lawsuits relating to SPAC transactions, it appears to be directly correlated to the increased number of SPACs and on a comparative basis has not grown. However, when there have been litigations against these companie,s most of them have not been during the initial stages but rather have been brought post the de-SPAC transaction and have been against the operating company when it goes public. All parties responsible in the transaction including the board of directors, officers, management and accounting firms involved are required to make sure the financial statements are properly presented according to the relevant regulations.   

Directors’ Responsibility for the SPAC

In the same way that management is responsible to perform their utmost due diligence surrounding the SPAC, officers are also required to provide the utmost attention toward the SPAC.  This was highlighted in a January 2022 decision by the Delaware Court of Chancery which noted that officers’ and directors’ decisions related to a SPAC deal are required to be done with the highest level of responsibility by the law called “fairness doctrine.”  The officers on the SPAC board are responsible not onlyfor the SPAC finding a high-quality deal, but also the SPAC hiring a high-quality management team with public management experience. 

Expectations for the Market over the Next 18-24 Months

When looking forward to 2022 and beyond, the panelists agreed there will be a significant number of companies reaching the end of their clock which will give way to significant activity in the market. Some companies will complete their de-SPAC transactions, but some will not find a target company and will have to return capital. The panelists also believe the market will see further clarity from the SEC on the various regulations proposed and possibly some additional legislation from Congress. All in all, the panelists agreed that 2022 will be a very active and exciting time for the SPAC industry.     

The webcast can be viewed here.