SPAC Mergers, IPOs, and the PSLRA's Safe Harbor: Unpacking Claims of Regulatory Arbitrage

Abstract

Communications in connection with an initial public offering (IPO) are excluded from the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 (PSLRA). Not surprisingly, IPO issuers do not share projections publicly—the liability risk is too great. Communications in connection with a merger, by contrast, are not excluded from the safe harbor, and special purpose acquisition companies (SPACs) routinely share their merger targets’ projections publicly. Does the divergent application of the PSLRA’s safe harbor in traditional IPOs and SPAC mergers create an opportunity for “regulatory arbitrage” and, if so, what should be done about it? This Article offers a framework for evaluating these timely questions, and for evaluating claims of regulatory arbitrage more broadly. The analysis brings into sharp focus the contestable policy choices that undergird the IPO exclusion to the PSLRA’s safe harbor.

Keywords: Special Purpose Acquisition Companies, SPACs, initial public offerings, IPOs, forecasts, projections, liability, private securities litigation reform act, PSLRA, safe harbor, reasonable investor, materiality, gameification, retail investors, Robinhood, commercial speech, securities regulation