IPO Restrictions, Market Volatility and the Future of SPACs​

By Beatrice Kang​

What do you need to know this week?

The US Securities and Exchange Commission (SEC) proposed reforms to the Special Purpose Acquisition Companies (SPAC) market in an attempt to improve transparency and bring rules more in line with traditional initial public offerings (IPO).

As a result, Goldman Sachs has paused new SPAC offerings - signaling bumpy roads ahead for the once-booming SPAC market. This is a significant retreat for the lending giant, which last year ranked as the second-largest underwriter for SPACs, raising almost $16 billion for sponsors last year. Other banks are also taken

Why is this important for your interviews?

SPACs are companies created to raise money from investors with the aim of listing on the stock market. SPACs offer firms an alternative route to the market via a merger, bypassing the traditional IPO process and streamlining the associated fees and timelines. This allows investors to raise money with the promise to use the capital to buy a private company down the line. However, since the boom in 2020, SPACs have attracted increased regulatory scrutiny.

Currently, banks generally receive around 5% of a SPAC’s IPO proceeds in fees, with roughly 3.5% payable once the SPAC has completed its merger with a private company. The SEC’s proposal would increase underwriters’ liability by requiring banks who worked on the SPAC IPOs to also work on the subsequent merger. In addition, the SEC is proposing to increase the disclosure responsibilities for SPAC sponsors by naming any potential conflicts of interest and making it mandatory for them to provide performance projections. Banks will also be liable for any inaccurate statements related to the merger. This makes SPACs more risky for banks as underwriters, decreasing the attractiveness of this once ‘golden’ cash-cow.

How is this topic relevant to law firms?

The SPAC boom in 2020-21 reaped windfalls for Big Law firms who have raked up millions in advisors fees. With this sudden cool-off, law firms will be concerned that this continued under-performance could dampen the SPAC market. This has led to a pipeline of work in the corporate and finance departments and many hired lawyers with experience in SPACs and marketed their capabilities. Regulatory restrictions threaten to squeeze this reliable pipeline.

Regulatory restrictions are not the only concern for law firms’ SPAC practice. Market volatility, slowing growth, rising interest rates and war in the Ukraine has halted last year’s historic listings market. In the first quarter of 2022, global IPO activity decreased by 37% in deal numbers and 51% in profit value, compared to the same period in 2021. A decreased volume of SPAC deal volume and value will likely reduce the roster size of legal advisers called to assist in SPAC-related deals.