Why SPACs: An Apologia

Abstract

Special purpose acquisition companies (SPACs) dominated the initial public offering (IPO) market in recent years, but the Securities and Exchange Commission (SEC) has proposed rules that have chilled the SPAC market and, if made final, will likely strangle it completely. It is time to examine what, if anything, SPACs offer the capital markets.

Most commentators and regulators view SPACs as a mere regulatory sleight of hand. This Article focuses on SPACs’ fundamental—but overlooked—innovation. Traditional securities law views average investors as prone to hysteria, and therefore relegates them to investment in public companies, reserving investment in private firms for the wealthy. The traditional securities law regime thus has the effect of preventing the general public from investing in private companies until after more wealthy investors have had their turn. But SPACs allow the public to trade based on information about a still-private company. Allowing free trading of this information is a radical departure from the basic structure and original purposes of U.S. securities law.

SPACs thus challenge securities law at its core. We use an original empirical dataset to argue that their success—or, to be precise, the success of some of them—is evidence that securities law may be overly paternalistic in its attitude toward the general public. Our data provide evidence that, as long as the SEC implements reforms that realign shareholders’ interests with those of SPAC managers, SPACs can offer a valuable new opportunity in the markets.

Keywords: SPACs, Special Purpose Acquisition Companies, SEC, Securities, IPO

JEL Classification: k22