Analysis

SPACs facing increasing legal issues

, Lexology

The recent SPAC boom is also beginning to create a wave of SPAC-related litigation in state and federal courts. Like any IPO, the initial SPAC IPO requires the filing of a registration statement with the SEC, but because SPACs are shell companies with no operations, their registration statements typically contain fewer disclosures than statements of companies going public through traditional IPOs. Thus, while SPAC managers can still be held liable under the Securities Act for any material misstatements or omissions, the disclosures made in connection with an initial SPAC IPO are less likely to be sources of litigation risk.

Two recently filed class action lawsuits pending in federal courts in New York and California are illustrative. In a putative class action complaint filed in the Eastern District of New York, the plaintiff alleges, on behalf of himself and similarly situated SPAC investors, that the SPAC and its managers disseminated proxy statements containing materially false and misleading statements regarding the due diligence conducted on the target company, a pharmaceutical company. Specifically, the plaintiff claims that the SPAC ignored or failed to disclose safety issues discovered during the company‚Äôs clinical trials of the pharmaceutical product in question. Similarly, in a putative class action complaint filed in the Central District of California, the plaintiff, a SPAC shareholder, alleges that the SPAC and its managers violated Section 10(b) and 20(a) of the Exchange Act by failing to disclose that the target company, an electric vehicle developer, among other things, changed its business model and did not maintain a key partnership with an established car manufacturer that was touted in the registration statement.

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