Economic Substance in SPAC Regulation

Abstract

This Essay lays out an economic substance approach to regulating special purpose acquisition companies (SPACs) as sales of stock for cash. The approach presented here charts an alternative to the SEC’s recent rule proposal that better reflects the economic reality of SPAC transactions and is more firmly grounded in the structure of our existing securities laws. While the SEC’s approach does address certain gaps in the current rules, its primary drawback is that it still treats SPAC mergers as a special type of business combination that requires its own regulatory regime. We already have a regime for sales of stock to the public for cash. The SEC should adopt rules that simply apply this regime to the stock sale for cash that, in economic substance, occurs in SPAC mergers.

Merging with a SPAC has become a popular alternative to an initial public offering (IPO) as a path for going public. Data has consistently shown that public investors often fare poorly in SPAC mergers, compared to the “sponsors” controlling SPACs, who frequently realize outsized gains. One recent study found that SPAC merger investments made by the public underperformed the market by close to 60% at the median after twelve months while SPAC sponsors earned median market-adjusted returns of almost 200% over the same period.