Mark D. Harris and Margaret A. Dale
On July 13, 2021, the Securities and Exchange Commission announced charges against a Special Purpose Acquisition Company (SPAC), the first since Chairman Gary Gensler took the helm at the SEC. The charges follow months of anticipation that the SEC would be ramping up scrutiny of SPACs as investors have flocked to the increasingly popular investment vehicles. This article reviews the basics of how SPACs work and then analyzes the recent enforcement action.
What Is a SPAC?
A SPAC is a shell company formed for the purpose of raising money from investors and using that money to identify and finance a merger with a private target company. Sometimes called a blank-check company, a SPAC has no operations. When a SPAC is formed, it is publicly listed and raises money from investors generally on the basis of the SPAC’s founder or sponsor’s reputation and track record. A SPAC completes an initial public offering (IPO) and then has a limited period (often between one month and two years) to identify and merge with a target company. If the SPAC does not complete a merger within that timeframe (and investors do not agree to extend the SPAC’s lifespan), the SPAC is liquidated and its funds are returned to shareholders.
