SPAC lawsuits increased in another sign of suspect dealmaking for the once red-hot space

SPAC-lawsuits-increased in-another-sign-of-suspect-dealmaking-for-the-once-red-hot-space

August 10, 2021: -SPACs are getting hit by a rising number of class-action lawsuits as more hyped-up deals turn out to be flops.

Shareholder lawsuits against post-merger exceptional purpose acquisition companies increased to 15 through the first half of 2021, tripling from just five cases in 2020, according to data from Woodruff Sawyer. The surge in the segment came even as overall securities cases decreased 13% this year, the data said.

“That’s a lot of litigations for one section of the capital markets in a short period,” said Priya Huskins, partner at Woodruff-Sawyer. “SPACs have been marketed as a way to be public faster and easier compared to a traditional IPO, but tends to attract companies that are not ready for public company scrutiny. It is the case the plaintiffs are trying to prove.”

These cases are stock drop litigations when negative announcements lead to a significant decline in share prices. Plaintiffs argued that the stock price was inflated as they had made material misstatements or omissions in their earlier public statements.

The SPACs found themselves in legal battles this year, including electric vehicle start-ups Lordstown Motors and Canoo, and Chamath Palihapitiya-backed Clover Health, all of which are undergoing inquiries by the Securities and Exchange Commission. Churchill Capital Corp IV, Purecycle Technologies, XL Fleet, and Quantumscape were also hit by class-action suits.

While many of the class actions could be dismissed in court, some have published settlements. In April of 2021, music streaming company Akazoo S.A. settled two security lawsuits for an aggregate amount of $35 million, and the stock was removed from the list from Nasdaq.

Investors try to hold SPAC leaders accountable at a time when regulators are stepping up their oversight. The SEC has repeatedly warned investors of underlying risks in investing incorporate shells while demanding more disclosures and tighter accounting rules from blank-check deals.

“The day of being cavalier is over,” Huskins said. “One of the things we may see as a result of this pressure on diligence and disclosure is cool off of valuation. The diligence is precise, and it’s harder to tolerate puffiness in the numbers,” Huskins added.

After a record first quarter, the SPAC market came to a screeching halt, with issuance dropping closer to 90% in the second quarter as regulatory pressure mounted. SPACs introduced capital in a public offering and use the cash merging with a private company and take it public, probably within two years.

Share prices have come back down to earth as the signs of a bubble emerged.

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