There’s some bad news for investors who don’t like having gotten burned by SPACs, the nickname for special purpose acquisitions companies. Investors put money into a public shell that is supposed to use the proceeds to buy some amazing company to take public rather than using a traditional IPO. The presumption was that people had a chance at the types of returns beyond the dreams of avarice, as the old quote goes.
For at least one SPAC deal, the status quo has been an ongoing investor class action suit. But a decision from Judge Ronnie Abrams in the U.S. District Court in the Southern District of New York may have put the specific suit, and the more general hopes of those who claimed to have been defrauded, into the recycling bin.
Big Bad SPACs
A SPAC is publicly held shell that raises money and then uses it to buy some business, generally with a two-year window to do so before looking for an extension or returning money to investors—with interest. The business subsumes the SPAC, which is now called a de-SPAC and becomes a public company, ultimately able to raise money in the capital markets by selling shares.
SPACs have become a one of those cases were everything was supposed to be amazing for investors until it largely blew up. They were all the rage because it might be easier to get into an exciting early-stage company without being an insider who could find access to an IPO that might become huge.
The expectations were overly rosy.
According to a Calcbench analysis in June 2021, in the first quarter of that year, eight of the SPACs had at least $1 billion in assets, with the biggest—Pershing Square Tontine Holdings—sitting on just
just
over $4 billion. On the other end is Sandston Corp. with $203. Not trillion, billion, million, or even thousand. Just $203.
As CB Insights, which focuses on startups, wrote in April 2022, “Despite the flood of SPACs, their market performance to date has lagged. The price of one exchange-traded fund (ETF) that tracks SPAC performance has sunk 37% in the last year (as of late March), while the S&P 500 has grown by nearly 18% during that time.”
What’s Ordered and What You Get
More disturbing, though, is the biggest need of investors: accurate and timely information. According to a Financial Times report, many of the companies that went public through SPAC madness “are heading into the financial year-end with weaknesses in their accounting practices, raising the prospect that their annual reports may not paint a true picture of their financial health.”
Bedrock AI, which makes AI-assisted tools to do forensic risk assessment, said in September 2022 that “almost 50% of annual and quarterly SEC filings for de-SPACs reported material weaknesses or ineffective controls.” Not what an investor wants to hear. And 40% of de-SPACs “reported substantial doubts about continuing as a going concern.” That compares to 20% of public companies. Even that last fact should be extremely sobering, but SPACs to even worse.
And then, in a Financial Times opinion piece, Craig Coben, a former senior investment banker at Bank of America
BAC
, and Howard Fischer, a partner at law firm Moses & Singer and former senior trial counsel at the SEC, argued that while 2022 may have been a calamitous year for SPACs, this year might be even worse.
“Aggrieved investors claim that SPAC founders had a conflict of interest in pushing through a merger, and as a result skimped on due diligence, inflated forecasts and failed to disclose important business risks,” they wrote.
CarLotz Plotz
A number of investors in a SPAC called Acamar Partners Acquisition Corporation claimed that the ultimate acquisition of CarLotz, “a purported consignment-to-retail used car marketplace that became a publicly traded company in January 2021 following a de-SPAC transaction with Acamar,” had been less than scrupulously honest, according to the decision by Judge Abrams.
“Plaintiffs allege that, in the months leading up to the consummation of the merger, Defendants made materially false and misleading statements regarding key aspects of CarLotz’s business model,” the decision reiterated.
But it looks like the plaintiffs’ case has run out of gas. The CarLotz comments happened before the acquisition took place and so the plaintiffs didn’t have standing to sue in the first place. They hadn’t been injured directly by the company because they hadn’t invested in it. They had invested in Acamar.
Tulane Law Professor Ann Lipton had blogged about the same mechanism in a somewhat different context and then tweeted on April 3 that the CarLotz decision was “the natural implication” and that both cases seemed to be “part of a mini-trend involving the question of when shareholders of a parent publicly traded entity can sue a subsidiary for its statements.”
Judge Abrams issued the decision without prejudice, which means the plaintiffs could try suing again. But, even if so, it shows how uncertain the position of investors is in a badly executed SPAC, which might seem to be more than an unusual situation.
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