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In a traditional IPO, underwriters typically receive an underwriting discount at closing (a discount of the purchase price paid by the underwriters for the shares) approximating 5%–7% of the gross IPO proceeds. Thereafter, the common stock and warrants may trade separately under independent trading symbols.
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After the IPO, the SPAC unit initially trades on an exchange as a single combined security. The warrant entitles the holder to purchase an additional share (or fraction thereof) of common stock from the company, typically at a price of $11.50 per whole share (i.e., higher than the initial SPAC unit offer price).
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However, given the absence of operations and assets, SPAC IPOs have a number of attributes that distinguish them from traditional IPOs.įor example, whereas a traditional IPO involves the issuance of shares of common stock, a SPAC IPO involves the issuance of a bundled unit of securities (a SPAC unit) consisting of one share of common stock and one warrant typically priced at $10 per unit. Like a traditional IPO, a SPAC IPO involves the filing of a Form S-1 registration statement and prospectus with the Securities and Exchange Commission (SEC or Commission). In addition, the SPAC IPO involves risks for the underwriter(s), and the de-SPAC transaction involves risks for the advisory firm (which is sometimes affiliated with the original underwriter ). These processes involve potential litigation risks for participants, including the sponsor, directors, and officers. Over its life cycle, a typical SPAC engages in a number of due diligence and related disclosure processes. Given the relative simplicity of the process, including the limited disclosures and lower upfront costs, merging into a SPAC through a de-SPAC transaction has become a popular vehicle for achieving public company status. As a result, the offering documents contain more limited disclosures than are commonly associated with a traditional IPO.
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While the sponsors may intend to acquire an operating company in a particular sector, they typically have not identified a specific target at the time of the IPO. SPACs are sponsored by entities (sponsors) that typically have expertise and experience in a given industry. Thus, at inception, a SPAC has only the cash proceeds derived from the IPO and investments associated with those cash proceeds. It is formed to raise capital through an underwritten initial public offering (IPO), the proceeds of which are intended to be used within a defined period of time to identify and acquire an existing operating company through a de-SPAC transaction. Initially, a SPAC is a shell company with no operations or assets. SPAC is an acronym for special purpose acquisition company. Finally, we offer insights regarding how many of the risks associated with SPACs may be mitigated through effective due diligence and related disclosure practices. Building on these foundational elements, we then examine recent regulatory developments and survey a sample of informative pending SPAC lawsuits. We then summarize the relevant regulatory regime within which SPAC litigation typically arises and explain the role of due diligence (including explicit and implicit due diligence defenses) within that regime. First, we explain SPACs and how they work, highlighting some of the structural features that have garnered the most controversy. Because SPACs involve a number of complexities and novel attributes, this article is sequentially structured with each section building on the foundational information conveyed in the sections that precede it. This article explores the role of due diligence in mitigating litigation and enforcement action risks associated with both the SPAC IPO and subsequent business combination (de-SPAC). Given their unique structure and rapid growth, it is not surprising that SPACs have attracted growing regulatory attention and are increasingly the subject of litigation and enforcement actions. That level far exceeded the previous records, which were set in 2020 ($83.4 billion raised in 248 IPOs) and 2019 ($13.6 billion in 59 IPOs). Through the first half of 2021, special purpose acquisition companies (SPACs) raised approximately $113 billion across 366 initial public offerings (IPOs).