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SPACs & the Risks of Investing in Blank Check Companies

Wall Street’s fastest growing trend is investing in Special Purpose Acquisitions Companies (“SPACs”).  SPACs are a way for private companies to go public without having to go through the traditional IPO process.  SPACs have been around for decades but have recently gained popularity in companies seeking to go public in this period of high market volatility.  Historically, SPACs were viewed as extremely risky investments.  The recent rise in SPACs does not change the high risks associated with them.  Some brokers and financial advisors ignore these risks and recommend customers invest in SPACs regardless of the customer’s investment profile and appetite for risk.  RIK’s investment fraud lawyers have extensive experience handling these types of cases and recovering losses for customers.

SPACs, also known as blank check companies, are companies created and publicly traded for the sole purpose of buying or merging with a private company in the future, known as the target company.  SPACs disclose criteria about the what kind of target company or companies it seeks.  Despite these disclosures, which are usually very limited and loosely defined, investors of the SPAC have no idea what the eventual acquisition company will be.  In other words, investors are going in blind.

In using SPACs to go public, private companies forego the process of registering an IPO with the SEC, meaning there is less oversight from the SEC.  The SPAC process also permits private companies to go public in a substantially shorter time period than a conventional IPO.  As one might suspect, the due diligence of the SPAC process is not as rigorous as a traditional IPO and no one is looking out for the best interests of investors.  Even worse, SPAC managers are not incentivized to obtain the best possible deal for investors – their job is to get a merger deal, not get the best deal.  Not surprisingly, this can lead to substantial harm to investors.  For example, the SPAC company may be overpaying for the target company – meaning investors are losing on the deal.

SPACs set forth a time period for which they can buy or merge with a target company, usually within a two-year period.  If the SPAC never merges with a target company within the set time period, then investors will receive the price of the SPAC-IPO price plus interest, minus costs of operating the SPAC.  This means, for example, if the SPAC-IPO price was $10 and a deal is never made to merge with a target company, then investors will receive $10 per share, plus interest, minus costs of operation.  However, most investors are unable to invest in SPACs at their IPO price and have to buy them on the open market for a premium.  As such, if an investor purchases a SPAC at $15, but the SPAC-IPO was $10, and a deal was never made, then the investor will receive only $10 per share.  This creates incredible downside for investors.

Naturally, there are many ways for investors to lose when it comes to SPACs.  Regardless of the risks and the fact that they are not suitable for everyone, brokers and financial advisors recommend SPACs to customers.  Unfortunately for many investors, these risks turn into losses.  If you have losses from investing in SPACs, RIK’s investment lawyers are here to help.  Feel free to contact us for a free consultation at (212) 684-0300.

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