SPAC lawsuits jump in another sign of suspect deal-making

Signage outside the Lordstown Motors Corp. headquarters. in Lordstown, Ohio on Saturday, May 15, 2021.

Dustin Franz | Bloomberg | Getty Images

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SPACs are hit by an increasing number of class action lawsuits as more and more hyped deals turn out to be flops.

According to Woodruff Sawyer, the number of lawsuits filed by shareholders against post-merger acquisition companies rose to 15 by the first half of 2021 and tripled from just five in all of 2020. The jump even came as the total number of securities cases that year, according to the data decreased by 13%.

“That’s a lot of litigation for some of the capital markets in a short amount of time,” said Priya Huskins, partner at Woodruff Sawyer. “SPACs have been marketed as a way to go public faster and easier compared to a traditional IPO, but this could tend to attract companies that may not be ready for a public exam. It is certainly the case that the plaintiffs are trying to prove. “

These cases are so-called stock-drop litigations, when negative announcements lead to a significant price decline. Plaintiffs would argue that the share price was inflated because the company made material misstatements or omissions in its previous public statements.

SPACs found in litigation this year include electric vehicle startups Lordstown Motors and Canoo and Chamath Palihapitiya-backed Clover Health, all of which are under investigation by the Securities and Exchange Commission. Churchill Capital Corp IV, Purecycle Technologies, XL Fleet, and Quantumscape have also been hit by class action lawsuits.

While many of these lawsuits could be dismissed in court, some have resulted in punitive settlements. In April, music streaming company Akazoo SA settled two securities lawsuits for a total of $ 35 million and the stock was removed from Nasdaq.

Investors seek to hold SPAC executives accountable at a time when regulators are stepping up their oversight. The SEC has repeatedly warned investors of the underlying risks of investing in corporate hulls while calling for better disclosures and stricter accounting requirements for blank check transactions.

“The gentleman’s day is over,” said Huskins. “One of the things that we can see as a result of this due diligence and disclosure is a cooling of valuation. In a world where due diligence is becoming increasingly precise, bloated numbers are harder to tolerate.”

After a record quarter in the first quarter, the SPAC market stalled with emissions falling nearly 90% in the second quarter due to mounting regulatory pressures. SPACs raise capital through an IPO and use the cash to merge with a private company and get it public, typically within two years.

Stock prices fell back to the bottom as further signs of a bubble surfaced. The proprietary CNBC SPAC Post Deal Index, which is made up of the largest SPACs to hit the market with announced a target, wiped its 2021 rally, down nearly 25% year over year.

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Last month, the SEC indicted Stable Road Acquisition, space company Momentus, and two executives on misleading claims about their proposed merger.

“I think people will wait and see how many more SPACs they are chasing,” said Kennedy Chinyamutangira, senior financial services analyst at RSM US LLP. “The market will likely remain depressed for the rest of the year.”

The SEC recently filed a civil securities fraud charge against Nikola founder Trevor Milton, while the federal grand jury charged him with triple criminal fraud for lying about “almost all aspects of the business”. Nikola shares are down to just $ 10.28 apiece, a few cents above their IPO price.

“Sometimes a target is trying to drive the price to unsustainable levels without realizing that the market is going to correct and you don’t want that correction to happen soon after going public,” said Huskins.

– With the support of Nate Rattner.

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