Report: Fizzling SPAC Wave Leads to Rash of Lawsuits

First came the SPACs. Now come the legal actions.

Special purpose acquisition companies (SPACs) were a super-popular method of going public in recent years. But as Bloomberg News reported Thursday (June 1), those listings have now triggered a wave of litigation from investors who say they got a raw deal.

According to the report, these suits allege SPAC executives made millions on deals that let them cash in founder shares, which were marked-down equity stakes that would pay off if they could find a company to purchase.

This system gave them a powerful reason to carry out acquisitions, even if steep valuations and rosy business plans presented long-term risks to other investors.

“The incentives were to close a deal, any deal,” Usha Rodrigues, a professor of corporate law at the University of Georgia School of Law, told Bloomberg.

“There were too many SPACs chasing too few targets and inevitably companies went public that weren’t good candidates for the public market.”

According to the report, more than 100 companies that merged with a SPAC, or about 25% of those to complete deals in the last five years, have seen their shares plunge more than 90% since going public.

Dozens of suits involving SPAC merges have been filed with the Delaware Chancery Court, Bloomberg said, with at least 21 filed there in the last year.

As PYMNTS wrote earlier this year, there was a time when SPACs were the “it” way for companies to list on the stock market, at one time making up 70% of all initial public offerings (IPOs), raising $95 billion as private companies sought a quicker less-scrutinized way to go public.

But now the trend has “become a well-documented bust, where two years ago the number of SPAC listings topped 600 overall; that tally has now become anemic, especially in commerce and FinTech.”

The SPAC wave also led to billions in goodwill write-offs last year, as noted here in April, an illustration of the cost companies paid to close deals during the blank check merger boom.

A report by The Wall Street Journal found that some of 2022’s largest goodwill impairments were from companies that went public via SPACs, with many of them having pretax impairments last year greater than $1 billion.