Looking Beyond The 2021 SPAC Market Boom​

By BK​

What do you need to know this week?

In 2021, the special purpose acquisition company (“SPAC”) market boomed and fueled M&A activity. Last year, SPAC companies raised a record-breaking $160 billion and, as a result, many “Big Law” firms have greatly profited. SPACs, also known as “blank-check companies”, are created to list and merge with privately held businesses to bring them into the stock market. A total of 334 SPAC deals were announced in 2021 for companies with a combined value of $597 billion or 10% of the global deal value.

Why is this important for your interviews?

“Big Law” firms have flocked to the market as the value of SPAC initial public offerings (“IPOs”) doubled from 2020. Many firms went on a hiring spree and aggressively marketed their capabilities to gain a share of this burgeoning market.

However, experts are expecting the SPAC market to cool off in 2022. Signs of the slowdown emerged in the second half of 2021 as US competition regulators raised concerns about too much economic activity being concentrated in the hands of a few corporate giants.

Additionally, there has been some negative publicity on the nature of SPACs and investor rights, which has caused investor confidence to tumble.

In April 2021, after a huge accounting error “at levels not seen in a decade”, the US Securities and Exchange Commission (“SEC”) issued a warning statement over how SPACs account for the warrants they issue that allow investors to purchase additional shares at a fixed price. This prompted hundreds of SPACs to frantically issue financial restatements to calm investors’ nerves. Moreover, in August 2021, a consortium of over 60 major law firms quickly jumped to defend SPACs, stating that civil lawsuits filed by a pair of law professors claiming that SPACs violated the Investment Company Act 1940 were “without factual or legal basis”.

This demonstrates that while SPACs may be a lucrative emerging market for law firms to move into, its legal and regulatory uncertainties still render the market relatively volatile.

How is this topic relevant to law firms?

US law firms have especially gained from last year’s recent SPAC market boom.

For instance, Kirkland & Ellis and White & Case aided issuers on $15.5 billion and $10.3 billion worth of deals respectively. Issuers create and sell securities, such as shares and bonds to finance its operations.

On the underwriters’ side, Davis Polk & Wardwell, Skadden, Arps, Slate, Meagher & Flom, and Ropes & Gray each handled deals valued around $20 billion. Underwriters are responsible for evaluating and assuming another party’s risk of payment.

Other firms that have benefited heavily from the SPAC boom include Weil, Gotshal & Manges, Latham & Watkins and Paul Hastings.

Looking forward, law firms will have to prepare for increased regulatory scrutiny within the SPAC market. This means keeping abreast of any regulatory developments and probes, as well as considering, as a matter of strategy, whether they should take a step back as regulatory concerns grow. This could mean halting or minimising their talent investments within their SPAC practice or diversifying their revenue portfolio to brace for a predicted 2022 SPAC market slowdown.