Special Purpose Acquisition Companies (SPACs), also known as “Blank Check” Companies are created specifically to pool funds in order to finance a merger or acquisition opportunity within a set time frame. The opportunity usually has yet to be identified. If the SPAC does not complete a merger within a specified time frame, the SPAC liquidates and the IPO proceeds are returned to the public shareholders. Once a target company is identified and a merger is announced, the SPAC’s public shareholders may alternatively vote against the transaction and elect to redeem their shares.
According to the NASDAQ, SPACs during 2020 made up most of the growth in the U.S. IPO market compared with the year-ago level. SPACs raised $79.87 billion in gross proceeds from 237 Offerings, surpassing the record $13.6 billion raised in 2019 (raised from 59 IPOs). The average IPO size was $337 million. The 462% year-over-year jump in proceeds raised by SPACs during 2020, outpaced traditional IPOs, which raised $67 billion. The last peak in SPAC IPO Offerings was in 2007 with SPACs making up about 14% of the IPO market as compared to 2020 when SPACs represented roughly 50% of the IPO market share.
According to the U.S. Securities and Exchange Commission (SEC), a blank check or Special Purchase Acquisition Company (SPAC) is a “development stage company that has no specific business plan or purpose or has indicated its business plan is to engage in a merger or acquisition with an unidentified company or companies, other entity, or person. These companies typically involve speculative investments and often fall within the SEC’s definition of penny stocks or are considered microcap stocks.”
According to the SEC, “a blank check company registering for a securities offering may be subject to additional requirements for the protection of investors, including depositing most of the raised funds in an escrow account until an acquisition is agreed to and requiring shareholder approval of any identified acquisition.”
SPACs Represent Speculative Investments
An investment in Special Purpose Acquisition Companies is consider by the SEC to be similar to “penny stocks” and are “speculative” investments. Investors whose risk tolerance and investment time horizon do not meet these criteria should consider this type of investment as an unsuitable investment.
During the recent SPAC rise to prominence nearly half of the SPAC IPO Share Prices traded at or below the IPO Offering Price. These facts point to the speculative nature of investments in IPOs, with a disproportionate number of IPOs that were SPACs compared to traditional Operating Company IPOs with substantial earnings history, and proven management teams.
KlaymanToskes Can Help Recover Investment Losses
KlaymanToskes has been dedicated to the protection of investor rights for decades, from the Tech Bubble in 2000 to the Mortgage Crisis in 2008. Now, we can help you recover investment losses from investments made during the SPAC Boom and Bust Cycle. KlaymanToskes is investigating whether the securities concentration in Special Purpose Acquisition Companies along with other high-risk securities. The following type of investment facts may support a claim for damages:
- percentage concentration in SPACs and speculative securities;
- ability to hedge concentrated position;
- past trading history;
- investment objective and risk tolerance;
- tax ramifications; and
- client sophistication.
It is important to determine what portion of your investment portfolio should be invested in SPACs based on your investment objectives, risk tolerances and investment time horizon. Investors are advised to seek competent financial, tax and legal advice concerning the decisions they make with their investments. KlaymanToskes can provide you with a free consultation concerning any securities industry violations related to the handling of your investments accounts by a full-service brokerage firm or registered investment advisor.
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