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Issues that may require consideration when forming SPACs

On Behalf of | May 21, 2021 | Blog

Individuals considering taking their business public through a Special Purpose Acquisition Company may face scrutiny from regulatory officials. As noted by Insurance Journal, the U.S. Securities and Exchange Commission issued warnings regarding sponsors promoting SPACs with materials containing misleading information.

SPACs may serve as an alternative fund-raising approach. They do not require founders to have a notable record of accomplishment. Instead of listing a company on a stock exchange through a traditional initial public offering, SPACs issue investment units to fund their venture. The SPAC then merges with a private company. After the merger’s completion, the private company begins trading publicly on a stock exchange.

The safe harbor provision may shield companies from litigation

The 1995 Private Securities Litigation Reform Act created a safe harbor provision. It protects publicly listed companies from investor lawsuits over forward-looking statements that fail to materialize. A future outlook must, however, rely upon currently accurate information.

Projections made in good faith may not provide shareholders with strong enough grounds to file legal actions. The safe harbor provision, however, does not protect SPACs from legal actions brought by the SEC. The Commission may conduct investigations and take action against sponsors who publish what they know may reflect misleading statements.

Sponsors may have a limited timeline to produce results

Investors generally rely on the reputation of the SPAC’s sponsors and its management team before committing to purchasing shares, which may initially trade low. SPACs typically lack commercial operations and complete a merger within two years, as reported by MarketWatch.

While a SPAC may appear attractive to investors, its long-term viability requires merging with companies with a potential for substantial profits. The SEC may otherwise raise allegations of misrepresentation, and unprepared founders may require a strong defense to continue their activities.


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