Blog
A New Generation of SPACs Leads the Way Into 2025
Yelena Dunaevsky, Esq.
Jan 16, 2025
After a two-and-a-half-year lull in SPAC activity, the second half of 2024 brought glimmers of sunshine to the otherwise gloomy world of SPACs. New SPAC IPO activity picked up pace in the summer of 2024 and continued to grow, finishing the year at a respectable 57 IPOs, with $9.6 billion raised. Seventy-three business combinations valued at almost $38 billion closed in 2024, with 61 additional announced and pending.
A new generation of SPACs—SPAC 4.0—emerged, bringing new approaches to making deals happen. They are showing signs of potential success as they work their way towards business combinations in late 2025 and 2026.
Having been through an undoubtedly tough market and stomached very significant losses, experienced SPAC teams are looking at SPAC risks with a sober eye and making better decisions on corporate governance, disclosures, financials, deal structuring, and risk mitigation.
Let’s review a few interesting trends we’ve noted over the year, including SPAC lawsuits, settlements, and related insurance coverage. They will offer valuable insights into how things might progress for SPACs in 2025.
Learn more about SPAC activity in 2024 and what to expect in 2025 in our fourth annual year-in-review conversation with Doug Ellenoff.
The Look and Feel of the New Generation of SPACs
What does this new wave of SPACs look like? Here are some distinguishing features of the SPACs that were filed with the SEC and/or completed their IPO in the second half of 2024.
- Amount of Raise: Most SPACs raised around $200 million, with a quarter of the SPACs raising less than $100 million.
- Domicile: Most are domiciled in Cayman, a handful are in the British Virgin Islands, and almost none are in Delaware.
- Stock Exchange: Most are listed on NASDAQ.
- Initial Time to Merger: 12, 18, or 24 months, with a third of the SPACs (especially those on the shorter side) building in multiple extensions.
- Time Between Initial Public Filing and IPO: About one month.
SPAC Lawsuits by the Numbers
The chart below illustrates that while SPAC-related securities class action (SCA) filing activity held steady between 2021 and 2023, in 2024, we observed a significant decline in the number of filings.
Seven of the 12 cases filed in 2024 stemmed from business combinations that closed in 2021. The rest were related to deals that closed between 2022 and 2024. The takeaway here is that SPAC-related SCAs sometimes take years to materialize. In 2024, like in 2023, the danger of encountering an SCA three years after the SPAC’s business combination remained very present.
Insurance Implications
Coverage Periods: Considering the lengthy period between a business combination and an SCA and the large number of SCAs that pull in the SPAC and its directors and officers as defendants, having a sufficiently long coverage period for the SPAC and its directors and officers after the closing of the merger is of vital importance. In the height of SPAC frenzy in 2020 and 2021, some SPAC teams, to save on directors’ and officers’ (D&O) insurance costs, opted for shorter tail periods for their SPAC policies. The market standard period is six years and aligns with the statute of limitations for many of these lawsuits, but some teams opted for one-year or three-year periods. Having your D&O insurance coverage expire just as an SCA is being filed against you must be an incredibly uncomfortable and frightening experience for any director or officer.
Derivative Suits: It is worth noting that many of these SCAs were followed by a parallel derivative suit against the SPAC’s and the combined company’s directors and officers. A derivative lawsuit is brought by a shareholder or group of shareholders on behalf of their corporation against a third party. Often, that third party is an insider of the corporation, like a CEO, a CFO, or a director. The claim is typically a breach of fiduciary duty. Although some states allow corporations to indemnify the settlements of derivative suits, the difficulty for the directors and officers arises when, like in Delaware, corporations cannot do so as a matter of corporate law. That’s when it is incredibly important to have access to a well-structured Side A D&O insurance policy. We are currently aware of almost 50 derivative actions that have been filed in parallel with SPAC-related SCAs.
Why SCA Numbers Have Declined, but Fiduciary Duty Suits Are on the Rise
Encouraged by Delaware courts’ negative view of SPACs over the last several years, plaintiffs’ attorneys have shifted their SPAC-related litigation playbook from SCAs to filing fiduciary duty suits in Delaware. This is one of the reasons why over 90% of new 2024 SPACs have chosen to domicile anywhere but in Delaware. We first noted this shift towards breach of fiduciary duty suits in 2023, but the trend has continued in 2024 and will likely persist through 2025 and 2026.
Although a May 2024 dismissal of a SPAC-related fiduciary duty case (Hennessy Capital Acquisition Corp. IV/Canoo Holdings Ltd.) by Delaware’s Chancery Court may have signaled a reversal in Delaware, several recently settled cases in Delaware are continuing to encourage others to be brought there.
SPAC Settlements
Most lawsuits end in settlements. We recorded 15 SCA settlements in 2024 that settled for a combined $305.5 million. That’s a significant increase in both the number and total dollar amount from 2023 and certainly from previous years. The chart below illustrates the increasing frequency of settlements, and we expect a similar number of settlements in 2025 as cases filed against the 2021–2023 SPAC cohort continue to make their way through the court system.
We also noted a few hefty non-SCA-related settlements in 2024. Some examples of these, including a few fiduciary duty breach lawsuit settlements, are listed below.
Here are a few settlements that made the headlines in 2024:
- Tishman Speyer Properties LP affiliates and Latch Inc. have agreed to pay $29.75 million to resolve litigation challenging the smart lock maker’s public listing via a SPAC.
- GeneDx Holdings Corp. settled a direct action breach of fiduciary duty lawsuit in the Delaware Court of Chancery for $21 million.
- XL Fleet Corp. preliminarily settled a four-count fiduciary duty breach suit in Delaware’s Court of Chancery for $4.75 million.
- Lordstown Motors Corp. agreed to settle a shareholder litigation for $15.5 million about a week after it agreed to settle an SEC probe for $25.5 million.
- FinServ Acquisition Corp. and Katapult Holdings, Inc. agreed to pay $9.5 million to settle a stockholder class action brought in the Delaware Court of Chancery.
Insurance Implications
In addition to the settlement amounts, the defendants are responsible for substantial attorney fees. A properly structured D&O policy can help cover both. When deciding on the limit of a D&O policy, factor in potential attorney fees, which will be due whether or not the lawsuit ends up being frivolous or ultimately gets dismissed.
SPAC Litigation Compared to SPAC Activity
SPAC lawsuit data can never be viewed in a vacuum. To understand the dynamics of this kind of litigation and developing trends within it, we must understand the deals that are being done or not done in the market. The graph below shows the number of filed SPAC-related securities class actions as compared to the number of closed de-SPAC transactions in the same year. It has been taking about 12 months on average after the merger occurs for a lawsuit to be brought. If the number of de-SPAC transactions continues to decline, we will likely see fewer SPAC-related securities class action lawsuits as we advance into 2025.
Likelihood of Lawsuits
Our clients often want to know the likelihood of their team or venture getting sued. This information can assist teams in deciding on the amount and type of D&O insurance they will want to purchase. Although the answer is complicated, some recent data may be instructive.
Companies that go public via a traditional IPO are more likely to get sued than mature public companies, and companies merging with a SPAC are more likely to have to face an SCA than those going public via a traditional IPO.
How likely? Based on our data we would expect to see:
- About 3% of mature companies (those that have been public for 10 years or more) getting sued
- About 13% of newly IPOed companies getting sued
- About 17% of de-SPAC’d companies getting sued
The reason the numbers are higher for new public companies, including SPACs, is simple—they are more likely to stumble out of the gate.
Regulatory Enforcement Actions and Lessons Learned
In addition to lawsuits, the other prong of the risk calculation is, of course, regulatory enforcement. The SEC brought a few regulatory and enforcement actions against SPACs in 2024, but they, again, were not nearly as numerous as expected.
It is worth noting that in 2024 the outgoing SEC administration led by Gary Gensler, who is a notorious SPAC critic, leveled a few charges against SPAC advisors. One of the most recent ones, in what feels like a parting shot at the incoming administration, is the December 12 charge against Cantor Fitzgerald. As a reminder, Cantor’s chairman and CEO, Howard Lutnick, is Donald Trump’s nominee to lead the US Commerce Department. Lutnick is also a chairman and CEO of at least 10 SPACs.
The SEC’s order against Cantor, which is a top SPAC investment banking firm, found that at the time of each of Cantor’s SPAC IPOs, Cantor personnel, acting on behalf of the SPACs, had already commenced negotiations with a small group of potential target companies with which the SPACs eventually merged.
Without admitting or denying the SEC’s findings, Cantor agreed to cease and desist from violations of the charged provisions and to pay the $6.75 million in civil penalties. Interestingly, SEC Commissioner Mark Uyeda published a dissenting statement relating to this charge and similar charges against Digital World Acquisition Corp. and Northern Star Investment Corp. II, stating that “the alleged misstatements and omissions are not material” and that he does not view the “facts in the Order as demonstrating investor harm.”
A few additional examples that made headlines in 2024 and a few lessons that future SPACs can draw from them are below.
Northern Star
Northern Star Investment Corp. II: A $1.5 million penalty in January 2024. The SEC’s order found that Northern Star violated an antifraud provision of the Securities Act of 1933 by failing to adequately disclose in its Form S-4 filings that it had engaged in substantive discussions with a potential target company prior to the IPO. This is similar to the charge against Cantor.
Lesson Learned: A SPAC is not permitted to have meaningful discussions with potential targets before closing its IPO. There have been rumors of a few teams not sticking to the letter of the law here and knowingly or negligently breaking this rule in 2020 and 2021, when the market was hot, the going was easy, and deals were closing at the speed of light. However, the lesson here is clear; unless SEC’s new chair reverses course on this issue, the SEC will likely continue to clamp down on these kinds of violations and may not shy away from hefty penalties.
Lordstown
Lordstown Motors Corp.: A disgorgement of $25.5 million in February 2024. The SEC charged Lordstown with misleading investors about the sales prospects of its flagship electric pickup truck, the Endurance. Lordstown, which filed for bankruptcy in 2023, went public via a SPAC in 2020. The order found that Lordstown violated certain antifraud, proxy, and reporting provisions of the federal securities laws.
Lesson Learned: New technology and future demand for same are often trickier to handle and predict than most business teams admit. With the advent of everything AI, it is only too easy to fall into the trap of staking a deal, the future of a business, and the trajectory of its growth on a technology that sounds sexy but may completely fail, become irrelevant or even prove toxic. In 2025, we will likely see more SPAC-related enforcement actions and lawsuits centered around AI.
Clark Schaefer Hackett and Co.
Clark Schaefer Hackett and Co.: A civil penalty of $80,000 in February 2024. The SEC instituted a related, settled administrative proceeding against Lordstown’s former auditor, Clark Schaefer Hackett and Co. (CSH). CSH provided non-audit services, including bookkeeping and financial statement services, to Lordstown during its audit of Lordstown’s financial statements when it was a private entity. CSH then audited the same financial statements in connection with Lordstown’s merger with a SPAC and thus violated the auditor independence standards of the SEC and the Public Company Accounting Oversight Board (PCAOB).
Lesson Learned: As a company looking to merge with a SPAC, you need to make sure that your bookkeeping and financial statement service provider can satisfy independence requirements when it comes time to do your SEC-required audit. If they cannot, you need to get a different, PCAOB independent auditor. A pro tip from our recent webcast is as follows: “If a target company is considering an IPO at some point, they should speak with their auditor about remaining PCAOB independent as they're performing private company or AICPA audits. This way, when the company is ready to pursue the capital markets, there are no independence issues with the auditor they currently have in place.”
National Energy
National Energy Services Reunited Corp.: A $400,000 civil penalty and a potential $1.2 million civil penalty, among other things, in August 2024. The SEC’s order found that National Energy, a former SPAC that closed its business combination in 2018, had financial reporting, accounting, and controls failures that required a multi-year restatement of the company's prior financial statements.
Lesson Learned: This SPAC closed its business combination in 2018. Six years later, by most measures it should no longer be looked upon as a SPAC. Its troubles stemmed from accounting errors in the years it was operating as a public company. The lesson here is that once you become a public company, reporting, compliance, operational, accounting, and financial controls—as well as a slew of other standards—are raised and you cannot behave nonchalantly with your financial reporting and accounting controls. Many targets merging into SPACs in 2019 through 2021 did not have the proper framework to operate as a public company. This latest enforcement action is a reminder that robust financial controls are a must for companies that want to avoid pitfalls and be successful as public companies.
Update on the D&O Insurance Market
Extensive insurer competition and a continuing dearth of IPOs throughout 2024 continue to drive a soft market in D&O insurance. As many readers of the SPAC Notebook know, the SPAC D&O insurance market is a subset of the wider D&O insurance market, and although SPACs could potentially be riskier than a traditional IPO, they are currently also benefiting from lower premium rates and better terms.
Read Our Guide: Guide to D&O Insurance for SPAC IPOs
A few established D&O insurers, who in the past years chose to side-step the SPAC market, reversed course in the later part of 2024 and have been able to offer competitive options both for SPAC IPOs and de-SPACs. Terms continue to be favorable for new teams looking to IPO, but insurance underwriters are certainly looking at SPAC team composition and previous experience. They are also, not surprisingly, looking at past litigation history of SPAC sponsor teams who are coming back to the market with new SPACs.
On the de-SPAC side, we see more scrutiny from underwriters around:
- Sufficiency of funds leading into the transaction and availability of financing options
- Redemption rates
- Valuation of the target company
- Jurisdiction of the target company and post-merger operations
- The extent of the target company’s readiness to operate as a public company
D&O insurance coverage structuring has also evolved since 2020 and 2021. Sophisticated parties are working with their SPAC insurance brokers on different, more efficient, streamlined, and less costly approaches to coverage. Because insurers are in a competitive market and different levers can be pulled within various structures, coverage negotiations have become somewhat more intricate. However, results have proven a lot more favorable for our clients than in years past.
We predict that SPAC teams will continue to enjoy reasonable premium pricing and terms from D&O carriers, at least in the beginning of 2025. However, many carriers have already complained that the current artificially low premium rates are unsustainable. Some have signaled that the rates are becoming too low for them to justify the risk, which means that some will start to exit the market. Assuming the IPO window opens wider in 2025, and we see more IPO activity, it is very likely that SPAC D&O premium rates will start to harden later in the year.
This article was written with assistance from Donna Moser, D&O Liability Research Specialist at Woodruff Sawyer.
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