Did You Invest in Special Purpose Acquisition Companies (SPACs) and Lose Money?
If you were advised to invest in Special Purpose Acquisition Companies (SPACs) by your financial advisor or brokerage firm, you may be able to recover losses by filing a FINRA arbitration claim. We invite you to contact Sonn Law Group 24/7 for a free consultation. To do so call 844-689-5754 or reach us via email using our confidential online form.
The popularity of special purpose acquisition companies (SPACs) has exploded in recent years, intensified by the market volatility caused by the COVID-19 pandemic. Despite the upward trend in the creation of SPACs, losses suffered by investors are still a major concern.
Many brokers do not explain the risks associated with SPACs, resulting in unexpected and unnecessary risks taken by investors. If your broker recommended investments in a SPAC, talk to an investment losses attorney today to determine if you are entitled to recover damages.
What Is a SPAC and How Does It Work?
A special purpose acquisitions company is a shell company created by investors for the purpose of raising money through an initial public offering (IPO) to eventually acquire another company. SPACs do not have commercial operations, make products, or sell things. Typically, a SPACs only asset is the funds raised in its IPO.
Teams of institutional investors, Wall Street professionals, or high-profile CEOs create or sponsor SPACs to raise funds from investors. At the IPO stage, investors typically do not know what company will eventually be targeted for acquisition. Shares are typically sold at $10 each, and the earnings go into an interest-bearing trust account until the managers or founders of the SPAC find a private company looking to go public through an acquisition.
Sponsors of a SPAC have a two-year deadline after the IPO by which they must have found a suitable acquisition deal; otherwise the SPAC is liquidated and the investors get their money back with interest.
SPACs gained popularity in recent years due to extreme market volatility and the opportunity to expedite the IPO process.
SPAC Merger Process
After completing its IPO, the sponsors of the SPAC decide on a target company to acquire. The acquisition of a private company or combination of the private company and the SPAC is known as the initial business combination. The SPAC’s founders negotiate with the private company, and the acquisition is ultimately approved by the shareholders of the SPAC.
The transaction is typically structured as a reverse merger, meaning the private company merges into the SPAC or becomes a subsidiary of the SPAC. Following the merger, the combined company is publicly traded and carries on the business conducted by the private company.
Following the acquisition, the SPAC provides its investors with an opportunity to redeem their investment, in addition to interest gained, or become a shareholder of the combined company.
Pros and Cons of SPACs
Not surprisingly, there are risks associated with investing in a SPAC. However, investing in a SPAC can provide benefits as well.
Pros of SPACs
SPACs’ rise in popularity is largely attributed to the market volatility exacerbated by the COVID-19 pandemic. During periods of high market volatility, many businesses postpone their IPOs out of fear of not being able to raise enough capital. A SPAC offers private businesses financial flexibility with its IPO funding.
SPAC mergers also take approximately half the time to execute when compared to a traditional IPO in most circumstances. Additionally, share prices in an IPO depend on market conditions at the time of listing, while share prices with a SPAC are negotiated at the time of the merger. Finally, SPAC sponsors often possess extensive financial and industry experience and can offer networking opportunities with their contacts or provide management advice.
Cons of SPACs
As with any investment, investing in an SPAC carries risks for investors. First, SPAC sponsors typically own a 20% stake in the SPAC from the outset. This dilutes the shares of individuals who invested in the SPAC through the IPO as soon as the business combination is made.
Additionally, the SPAC process requires a less rigorous due diligence analysis than a traditional IPO, which could lead to businesses being under- or overvalued.
Companies seeking a SPAC merger run the risk of being rejected by the SPAC shareholders.
Multiple celebrities promote SPACs, causing retail investors to confidently invest in the company without realizing the risks SPACs pose. In fact, the SEC posted an alert cautioning investors against basing their investment decisions on a celebrity’s involvement in a SPAC.
SPAC investors rely on the sponsors of the SPAC to make the decisions about what company will be targeted for acquisition.
Investors Who Suffered SPAC Losses
FINRA requires brokers to recommend investments that are suitable for their clients. Suitability is determined by considering the investor’s financial profile, which includes:
- Risk tolerance,
- Investment objectives,
- Investment experience,
- Liquidity needs, and
- Financial situation.
Brokers who recommend unsuitable investments can cause investors to suffer unnecessary risks and significant financial losses.
SPACs hold risks for investors, especially those who lack experience in the securities industry. If a broker recommended that you invest in an SPAC and you suffered losses as a result, you may be able to recover damages.
Get Help from an Experienced Investment Attorney
Sonn Law Group has committed its practice to representing investors who suffered losses at the hands of their brokers. We will provide a thorough case evaluation, give you an honest assessment of your claim, and recommend the steps you should take next. Contact our office online, or call us today at 866-827-3202 for a free consultation.