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SPAC Litigation - What to Watch in the Second Half of 2022

Special purpose acquisition companies (SPACs) surged in popularity in 2020-2021 as an alternative path to going public over traditional IPOs. However, the boom has been followed by a wave of litigation targeting disclosure issues with SPAC deals. Allegations of misleading projections, inadequate due diligence and conflicts of interest have become commonplace. With SPAC transactions facing increased legal scrutiny, liability risks will likely escalate in the second half of 2022.

This post examines the upswing in SPAC litigation, the core allegations asserted, and key developments to monitor for the rest of the year. SPAC legal vulnerabilities span securities law violations, fiduciary breaches, and accountant liability. Their structure can often lend itself to gaps in diligence, disclosures and objectivity.

The SPAC Boom Draws Scrutiny

SPACs provide a means for companies to go public by merging with listed shell companies rather than a traditional IPO. The SPAC market exploded during the pandemic but has cooled in 2022. Key trends include:

• - $160 Billion Raised in 2020: Over half of total IPO proceeds came from SPACs as they surged in popularity.
• - 600+ De-SPAC Deals: Hundreds of companies went public through mergers with SPACs, far eclipsing traditional IPOs.
• - 70% Fall in 2022 IPOs: As the market cooled, only 90 SPAC IPOs occurred in Q1 2022 versus 300 a year earlier, a 70% decline.
• - SEC Attention: Concerns over disclosure and diligence lapses have drawn SEC scrutiny, with proposed rule changes on the horizon.

The extraordinary rise of SPACs was bound to invite legal attention and enforcement. The litigation wave has clearly crested.

Common Allegations

Shareholder lawsuits related to SPAC deals often allege:

• - Misleading projections: SPAC sponsors are accused of touting inflated earnings forecasts for the merger target. Post-merger results can badly lag projections.
• - Due diligence failures: Plaintiffs contend SPAC sponsors did not rigorously vet target company numbers, technology, or business prospects before completing deals.
• - Undisclosed conflicts: Critics point to sponsors’ financial incentives to close deals rapidly, compromised objectivity on diligence, and preferential treatment of certain investors.
• - Accounting violations: Restated financials, unrealistic valuations and non-GAAP metrics are frequent areas of alleged accounting improprieties.

The compressed SPAC deal timeline limits due diligence windows, creating ample litigation targets as projections allegedly prove unreliable.

Recent Notable Suits

Among recent major SPAC litigation are:

• - MultiPlan Corp: Shareholders sued over 78% stock drop after a critical short-seller report alleged the SPAC deal rested on flawed financial projections.
• - Lucid Group: Investors brought a securities class action alleging the luxury EV maker and SPAC sponsor made unrealistic projections of production capacity.
• - Clover Health: Multiple suits allege the health insurance SPAC and sponsors misled investors about growth prospects, regulatory risks, and DOJ inquiries.

These cases exemplify sponsors touting rosy growth outlooks that quickly prove unfounded after SPAC mergers close. Early post-merger stock drops frequently instigate litigation.

Second Half 2022 Outlook

Key events to monitor for SPAC litigation in the coming months include:

• - New SEC Rules: The SEC proposed adding heightened disclosures and clawback provisions for SPAC deals. Final rules could impose new compliance duties.
• - Court Rulings: With a swell of new SPAC suits, judicial rulings on dismissal motions and liability standards should provide guideposts.
• - New Filings: If the SPAC market stabilizes, new deals could spur a fresh wave of cases if optimistic projections fail to pan out.
• - Settlements: Early settlements related to 2020-2021 SPACs could establish liability parameters and damages.

While SPAC lawsuit risks are already extensive, new regulations, precedents, deals, and outcomes in the coming months could further expand legal duties for sponsors, directors, and advisors. The terrain remains treacherous.

Conclusion

The frenzy around SPAC deals guaranteed intense subsequent scrutiny from plaintiffs’ attorneys and regulators unearthing problematic practices. With their condensed timetables, SPACs are prone to diligence and disclosure vulnerabilities that frequently precipitate buyer’s remorse and lawsuits. Their litigation outlook will remain murky but unquestionably active. SPAC players should retain experienced securities counsel to help mitigate legal risks in the deal process.