The SPAC Notebook: Making Sense of SPACs
October 21, 2021
I can honestly tell you that when I started watching SPACs and writing about them in 2016, I did not expect to witness the incredible trajectory that the SPAC market has taken over the last five years.
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In 2016, SPACs were a topic unknown to most. I had to constantly spell out what they were (Special Purpose Acquisition Companies) and what they do (raise funds in an IPO to acquire a private company and take it public).
When I began noticing the growth in SPAC IPOs and spending hours researching the market, most of my then-colleagues at Bloomberg Law were skeptical and did not think the effort was worthwhile. I disagreed.
Fast forward to 2021 and a completely new role as a commercial insurance broker at Woodruff Sawyer; not a day goes by without a discussion on either a specific SPAC deal I am working on or on developing news and trends in the SPAC market. Very few weeks go by where I do not end up writing or talking about SPACs generally, insurance for SPACs, litigation around SPACs, SPAC IPOs, SPAC M&A, SPAC news, or SPAC gossip.
SPACs have taken over my life, and I love it. For my corporate securities and M&A attorney turned securities legal analyst and editor, turned IPO and M&A-focused insurance broker brain, SPACs are an intellectual puzzle and a gift that keeps on giving. The SPAC Notebook is just a natural progression of my quest to uncover, understand, and negotiate the twists and turns in the SPAC market.
The goal for the SPAC Notebook, which will include short pieces and longer articles as well as webinar and podcast clips, is to uncover trends and contribute a fresh set of ideas to the diverse SPAC audience. Since I often look at SPAC questions from the insurance and risk mitigation perspective, we’ll hold up that lens to our discussions as well. Other content will include analytical, data-driven pieces and deep dives into friendly (or maybe even heated) discussions with guest SPAC gurus.
A few themes I have noted from this past year will undoubtedly continue to develop into 2022 and beyond.
First, let’s examine the proliferation of various types of litigation leveled against SPACs and SPAC-related deals. Merger objections lawsuits, securities class actions, derivative suits, breach of fiduciary duty suits, suits alleging non-compliance with the Investment Company Act of 1940, and others have significantly grown in volume and frequency in the last few months. This increase in litigation activity and parallel regulatory enforcement actions is not surprising considering the number of SPACs that entered the market since the beginning of the year. We are currently up to 462 SPAC IPOs for the year, with an additional 309 SPACs waiting to IPO and 122 announced deals that are waiting to close.
|Some Common Types of SPAC Litigation|
|Merger objection lawsuits|
|Securities class actions|
|Breach of fiduciary duty suits|
|Shareholder derivative suits|
|Investment Company Act suits|
|Shareholder voting suits|
The volume of activity was so intense at the beginning of the year that I got frequent calls from my SPAC lawyer, banker, and auditor friends complaining of exhaustion and from new SPAC teams asking for introductions to these advisers who at some point had stopped taking on new clients and picking up calls.
After the SEC’s April statements around the treatment of warrants, the market screeched to a stop and, although we are seeing recent increases in activity both on the IPO and the M&A side, subsequent SEC pronouncements, negative media attention, oversaturation in the private investment in public equity (PIPE) market, and the resulting reduced investor interest have turned an overexcited market into a sluggish one. Some of the current dampeners will resolve themselves over the next few months, and we’ll be here to keep an eye on those developments.
New SPAC Structures
We will also watch for new SPAC structures, which some of the current SPAC teams are exploring, and will discuss their effectiveness or lack thereof. The new SPAC structures and litigation theories will undoubtedly continue to create interesting dilemmas from the insurance perspective.
As many of my readers know, there are at least three main directors & officers (D&O) insurance policies that need to be properly structured, negotiated, and priced during a SPAC’s lifecycle. Every time there is a major SPAC case, enforcement, or restructuring, the structure of these policies needs to be reexamined. A number of questions have arisen and will continue to come up around how to best structure the insurance coverage for a SPAC and to otherwise minimize risk for the SPAC team on both the IPO and the de-SPAC side of the equation. I am also seeing increased interest in the market for M&A representations and warranties policies for SPACs, a topic that we will follow closely.
Terms and Pricing of D&O Insurance for SPACs
We will, of course, also track the ever-changing trends in terms and pricing of the D&O insurance policies. The D&O market for SPACs has grown difficult in the last few months with extreme price increases as compared to last year and an unwillingness from underwriters to negotiate terms. Year-end will likely bring positive changes to the current decreased capacity in this market. We will watch these changes closely and analyze them for our readers.
Shifting SPAC Market – Going Abroad
The shift of the SPAC market away from the United States has been another interesting theme this year, with some non-US exchanges changing rules to attract SPAC activity, many non-US SPAC teams looking to access US markets, and many other SPAC teams looking to acquire targets outside the US. I am expecting additional activity in this space and will bring in a few international experts to share their thoughts on this topic.
Serial SPAC Sponsors
Another theme that developed in 2021 is serial SPAC sponsors. We’ve seen several teams, like Social Capital and Churchill Capital, going out to the SPAC market for the fifth or sixth time, raising multiple SPACs and taking multiple private companies public via the SPAC vehicle. These teams have serious know-how under their belts and can differ greatly from first-time teams in their approach to dealmaking and investor interest associated with their deals. As the SPAC market matures, we may witness a split in the market in the types of deals, terms, and risks that are offered by experienced teams versus newcomers.
The evolution of the SPAC market has been fascinating over the last few years, and I am certain that more interesting developments are on the horizon. This SPAC Notebook will aim to capture and make sense of the SPAC market and keep our readers informed and involved.
We welcome thoughtful questions from our readers, and we hope to feature guest articles from market participants as part of the SPAC Notebook. Please reach out to me, Yelena Dunaevsky, to share your thoughts.
Visit our SPACs industries page for more insights and resources related to Special Purpose Acquisition Companies.
Yelena Dunaevsky, Esq.
Vice President, Transactional Insurance
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