An Economic Substance Approach to SPAC Regulation
34 Pages Posted: 18 Jan 2022
Date Written: January 10, 2022
This paper analyzes the economic substance of special purpose acquisition companies (SPACs), shell companies that take private companies public by merging with them as an alternative to an initial public offering (IPO). A SPAC first sells shares to initial investors, whose purchase price is escrowed in a trust. After the SPAC has identified a target, SPAC shareholders are entitled to have their escrowed cash returned to them from the trust. At that point, each shareholder makes an individual choice: walking away with their still risk-free cash or investing it in the target. The paper’s key insight for future regulation is that a SPAC shareholder’s decision to invest their escrowed cash in the target should be treated as the economic equivalent of purchasing target stock for cash. This allows for a better understanding of SPACs’ economic substance and more clearly reveals gaps in investor protection compared to IPOs. Most importantly, the paper shows that this approach offers a sound legal basis for crafting new SEC rules that close these gaps and level the playing field between SPACs and IPOs.
Keywords: SPAC, IPO, Securities Law, Regulatory Arbitrage
JEL Classification: K22
Suggested Citation: Suggested Citation