April 25, 2022

Market Spotlight: SPACs seek to regain stellar reputation

As sci-fi movie buffs know, the light that burns twice as bright burns half as long. And 2021 was the year that special purpose acquisition companies (SPACs) went supernova for investors. But now that flame of interest is flickering lower.

SPACs have actually been around since the 1990s, but last year saw the first real explosion of SPAC-related deal activity. Now, just as abruptly, SPAC IPOs have fallen off. According to figures from Dealogic, a sister organization to Mergermarket, just 63 SPACs floated in Q1 of this year, representing a decline of more than 80% from the same period in 2021. The volume and scale of de-SPAC mergers has likewise waned, falling to 32 in Q1.

What’s behind this apparent burn-out? It’s likely that a frothy post-crisis market in 2021, coupled with overly-rosy valuations, led many SPACs to fall short of their own lofty forecasts. Evidently, the shine has come off in the eyes of sponsors, and regulators are already closely involved.

That said, SPACs aren’t going away. In fact, closer scrutiny may be just what they need to recover their twinkle. The US Securities and Exchange Commission (SEC) is more than happy to oblige. Under Gary Gensler, who was appointed chairman in April 2021, the SEC is taking swift steps to rein in valuations and put more power in investors’ hands. In March the regulator voted in favor of proposals to make disclosure requirements stricter for SPAC sponsors.

Gary said, ‘Investors deserve the protections they receive from traditional IPOs, with respect to information asymmetries, frauds and conflicts.’ If the proposals are enacted, the new rules will open up SPACs to potential lawsuits relating to their overly optimistic projections. According to Cornerstone Research, investors in the US brought 33 securities class action lawsuits against SPACs in 2021, and a further eight were filed in Q1 of this year.

With their reputation already dented and litigation risk likely to rise, SPACs can’t afford but to buy in wholeheartedly to the SEC’s agenda. Ultimately, it will be to their benefit. The feeding frenzy of 2021 couldn’t last forever – but then again, what does?

Meanwhile the challenges of a SPAC IPO remain, such as tight timelines, rounds of regulatory approvals, and deeper due diligence, all of which can cause deal team fatigue. Using the right data room and tools can mitigate much of this pressure. If you’re contemplating this route, find out how Datasite can help with SPAC transactions.

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How has M&A fared around the world? Read our latest Deal Drivers reports from the Americas, EMEA, and APAC to gain the latest insight into dealmaking.

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