SPAC Law and Myths
52 Pages Posted: 3 Feb 2022 Last revised: 14 Feb 2022
Date Written: February 11, 2022
Special purpose acquisition companies (SPAC) were the financial-legal hit of 2021, before they weren’t. Breaking records and displacing to an extent conventional initial public offerings (C-IPOs), even as C-IPOs also boomed, SPACs spiked, in part, because -- in addition to myths about their financial attributes, which others have debunked -- several myths about SPAC law circulated widely and persistently. SPAC promoters claimed that (1) securities regulations ban projections from being used in conventional IPOs, (2) liability related to projections was lower and more certain in SPACs than it was (and is), (3) the Securities and Exchange Commission (SEC) registration process makes C-IPOs slower than SPACs, (4) the SEC changed SPAC accounting rules in early 2021, (5) this “change” was the primary reason the SPAC wave slowed and peaked, and (6) the Investment Company Act clearly does not apply to SPACs. Consistent with these being myths, de-SPACs from 2021 are experiencing significant levels of litigation – even higher than in conventional IPOs. These myths were aimed primarily not at unsophisticated retail investors, but business journalists, sophisticated SPAC sponsors and owner-managers of SPAC targets. They illustrate a broader and underappreciated fact that complex financial-legal innovation permits promoters to exploit the “credence good” character of professional advice, perpetuate “deep fraud,” and distort markets and asset prices more and longer than conventional theory assumes. To moderate deep fraud’s market distortions, regulators have a role in speaking frequently and clearly about law and its uncertainties.
Keywords: SPACs, IPOs, law, securities, finance, asset pricing, regulation
JEL Classification: G12, G14, G18, G34, K22, K40
Suggested Citation: Suggested Citation