PSPC lawsuits jump in another suspicious deal sign for once-hot space

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The SPACs are hit by a growing number of class actions as more and more agreements turn out to be failures.

According to data from Woodruff Sawyer, lawsuits against special purpose acquisition companies post-merger rose to 15 through the first half of 2021, triple from just five cases in 2020. The jump in the segment is Even as the overall securities business has fallen 13% this year, the data shows.

“It’s a lot of litigation for some of the capital markets over a short period of time,” said Priya Huskins, partner at Woodruff Sawyer. “PSPCs have been marketed as a faster and easier way to go public compared to a traditional IPO, but this might tend to attract companies that may not be ready for scrutiny by the public. state-owned enterprises. This is certainly the case the plaintiffs are trying to prove. “

These are so-called equity decline disputes when negative announcements cause the stock price to drop significantly. The plaintiffs would argue that the share price was inflated because the company had made material inaccuracies or omissions in its previous public statements.

PSPCs that have found themselves in legal battles this year include electric vehicle start-ups Lordstown Motors and Canoo as well as Clover Health, backed by Chamath Palihapitiya, all of which are currently under investigation by the Securities and Exchange Commission. . Churchill Capital Corp IV, Purecycle Technologies, XL Fleet and Quantumscape have also been affected by class actions.

While many of these class actions can be dismissed by the courts, some have resulted in punitive settlements. In April 2021, music streaming company Akazoo SA settled two security lawsuits totaling $ 35 million and the stock was delisted from Nasdaq.

Investors are trying to hold PSPC 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 shells, while demanding better information and stricter accounting rules for blank check agreements.

“The day of being a rider is over,” said Huskins. “One of the things we can see as a result of this pressure on due diligence and disclosure is a cooling of the valuation. In a world where due diligence is more and more precise, it is harder to tolerate it. ‘swelling numbers. “

After a record first quarter, the SPAC market came to a screeching halt, with emissions falling nearly 90% in the second quarter due to increasing regulatory pressure. SPACs raise capital through an initial public offering and use the cash to merge with a private company and go public, usually within two years.

Stock prices have come back down to earth as new signs of a bubble emerged. The exclusive CNBC SPAC Post Deal Index, which includes the biggest SPACs that have entered the market and announced a target, wiped out its 2021 rally and fell nearly 25% on the year.

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

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

The SEC recently filed securities fraud charges against Nikola founder Trevor Milton, while the federal grand jury charged him with three counts of criminal fraud for lying about “almost every aspect of the business “. Nikola’s shares fell back to just $ 10.28 each, a few cents above its IPO price.

“Sometimes a target tries to push the price up to an unsustainable level, not realizing that the market is going to correct itself and you don’t want that correction to happen soon after your IPO,” Huskins said.

– With help from Nate Rattner.