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The SPAC bubble continues, and all the fraud concerns remain

Posted  March 12, 2021

A few months ago, we wrote about why the sudden explosion of SPACs (Special Purpose Acquisition Companies) raised serious investor fraud concerns as they risk being scammed.  Since then, the number of SPACs and their very high-profile acquisition targets has only continued to rise.  On March 10, 2021, for example, Bloomberg reported BuzzFeed was considering a SPAC merger to go public.  And none of the fraud concerns have been addressed.  On the contrary: with every new story about a SPAC comes an increased concern that the SPAC bubble is about to pop, leaving retail investors high and dry.

To recap, a SPAC is an empty shell of a company, formed by a celebrity investor (or sometimes just a celebrity) who promises—in exchange for shares sold at generally $10 each—to find a good acquisition target and then merge with it.  In theory, then, SPAC investors are buying a share of a quality company that actually does something, makes something and/or sells something, even though the SPAC itself is simply a shell and investors aren’t able to choose that target.

The allure is supposedly to avoid the arduous regulations around initial public offerings (IPOs), the traditional way a private company becomes public.  But those regulations are there for a reason—companies are forced to disclose their financials, their compliance programs, their accounting strategies, and all other details about their books so that investors and the market at large can make informed decisions about whether to invest.  SPACs skip that step, asking investors instead to simply trust the acumen of the person heading up the SPAC.  That may work sometimes, but there’s no guarantee as the recent public implosion of Nikola, a SPAC target, showed.  As economic policy analyst Tyler Gellasch succinctly put it, “IPOs vs SPACs: one is giving money to a company in return for an interest in its success and the other is blindly giving someone money based on a promise they will— in the future—get a good deal on a company.  Comparison is akin to apples vs a promise to go to the grocery store.”

And it’s not clear that investors are getting such a good deal, even if the target company isn’t cooking its books or doing anything else untoward.  A Harvard Corporate Governance study released in November 2020 found that, on average, a SPAC is only worth 2/3 of its initial price when it does (if it does) complete a purchase.  In other words, investors are only receiving 67 cents on their dollar invested.  Yet that reality is not stopping new SPACs from popping up every day, and investors from eagerly embracing them.

Fortunately, this is exactly the kind of situation the SEC whistleblower program is designed to protect against.  Even though SPACs in their current form may be a new investment vehicle, they still fall within the SEC’s ambit as any other go-public transaction would.  Anyone with information about investor fraud in a SPAC may thus be eligible to file a SEC whistleblower submission, and receive a portion of any fine imposed by the SEC.

If you have information about fraud in SPACs, please contact us.


Tagged in: Financial and Investment Fraud, Insider Trading, Securities Fraud,