lawsuits targeting SPACs as unregistered investment firms | Goodwin

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Over the past two weeks, a group of plaintiff attorneys have filed derivative lawsuits in a US federal court in New York against three Special Purpose Acquisition Companies (“SPAC”) – Pershing Square Tontine Holdings (“PSTH” ),[1] GO Acquisition Corp. (“GO”),[2] and E.Merge Technology Acquisition Corp. (“E.Merge”)[3] – and certain directors and sponsors affiliated with PSPC, on behalf of serial plaintiff George Assad. Counsel for the plaintiff includes former SEC commissioner and current NYU law professor Robert Jackson, as well as Yale University law professor John Morley. The lawsuits allege, among other things, that PSPCs are unregistered investment companies within the meaning of the Investment Company Act of 1940 (the “ICA”). While the size and importance of PSTH, as well as the new complexities of the now abandoned business combination between PSTH and Universal Music Group BV, have made PSTH a tempting target for the plaintiff bar, similar lawsuits against GO and E.Merge suggest a challenge to certain structural components of SPAC.

The lawsuits allege that PSTH, GO and E.Merge (and by implication the 400+ other SPACs currently seeking a business combination as well as any other company raising significant capital relative to its other assets) are investment companies under Article 3 (a) (1) (A) of the ICA because, since their IPOs, “investing in securities is basically the only thing” that companies have “ever done ”with their assets. “[4] The PSTH and E.Merge complaints also allege that certain members of the staff of the PSPC sponsors are acting as investment advisers not registered under the Investment Advisers Act of 1940 (the “IAA”) by advising them on investment associations. potential businesses. The lawsuits challenge the structure of the SPAC, including the arrangement whereby the promoters of the SPACs typically obtain Class B shares equal to approximately 20% of the outstanding equity of a SPAC after the IPO, which is converted. in class A shares at the end of a business combination. The lawsuits argue that the Class B structure, which has been disclosed in the charters and prospectuses of each of the SPACs, is unreasonable and less than transparent. Based on these allegations, the complaints seek a declaratory judgment that SPACs are investment companies within the meaning of the LIC, a declaratory judgment that the staff of the sponsor are investment advisers in the case of PSTH and E.Merge, an order that certain elements of these sponsors and some of their directors’ equity in the SPACs be canceled as violations of the ICA, and reimbursement of allegedly excessive fees paid by the SPACs.

While these lawsuits receive considerable attention (aided by the importance of Bill Ackman and PSTH and the fact that plaintiffs’ counsel includes a former SEC commissioner), they rest on a flawed premise: that conventional SPACs are investment companies under the ICA. To be considered an investment company under Article 3 (a) (1) (A) of the LIC, a company must do more than just invest in securities – investing in securities must be the primary Business. The main activity of SAVS, however, is to identify and complete a business combination with one or more operating companies within a specified time frame. This goal is prominently displayed on the cover page of every SAVS IPO prospectus. For example, GO’s prospectus states that it is “a newly incorporated blank check company for the purpose of effecting a merger, stock exchange, asset acquisition, stock purchase. , a reorganization or a similar business combination with one or more businesses or entities ”. GO further clarifies that it does not “plan to purchase any businesses or assets with a view to reselling them or profit from their resale” or “plans to purchase unrelated businesses or assets or to be a passive investor “. Rather, its “activity will be to identify and complete a business combination and subsequently to operate the long-term post-trade activity or assets”.[5] Although SPACs “place” the proceeds of their IPOs in trust accounts to be invested in short-term cash and qualifying money market funds, each SPAC’s IPO prospectus states (i) that the trust account is designed as a place of holding for funds on hold either the completion of an initial business combination or the failure of the completion of a business combination within a limited time frame (typically 18-24 months), (ii) that public investors can choose not to remain invested in the combined company and to repurchase their shares in exchange for the return of their original investment of $ 10.00 plus interest, and (iii) that the The offer is not intended for investors seeking a return on their investment in government securities or investment securities.

The premise of the lawsuits also runs counter to the SEC’s long-standing interpretation of the CIA’s definition of investment firm. Of the more than 1,000 PSPC IPOs that have been reviewed by the SEC over the past two decades, none have been found to be subject to LIC. While the SEC’s interpretations are not binding on the courts, absent a dramatic break with this regulatory precedent and a rejection of the simple reading of the ICA, the courts are unlikely to find that a SAVS seeking to achieve a traditional business combination with a business will be subject to the LIC.

A number of leading law firms have also publicly announced their disagreement with lawsuits against SPVs as unregistered investment firms. On August 30, a group of more than 55 law firms (including Goodwin) released a joint statement in response to the lawsuits claiming that typical SPACs are not investment firms under the ICA.[6] While these lawsuits aim to challenge some structural foundations of PSPC, the joint statement highlights both the flaws in the complaints and the defenses that may be available.


[1] Assad v. Pershing Square Tontine Holdings, Ltd. and. Al, File n ° 1: 21-cv-06907 (SDNY August 17, 2021). The PSTH complaint is available here.
[2] Assad v. GO Acquisition Corp., et. Al, File n ° 1: 21-cv-07076 (SDNY August 20, 2021). The GO complaint is available here.
[3] Assad v. E.Merge Tech. Acquisition Corp., et. Al, File n ° 1: 21-cv-07072 (SDNY August 20, 2021). The E.Merge complaint is available here.
[4] GO Complaint 3, 70-75; see also E. Merger of complaint 9, 68-73; see also PSTH complaint 3, 100-108.
[5] GO Acquisition Corp. Form S-1 (filed June 30, 2020) on pages 1 and 41.
[6] More than 55 of the country’s leading law firms respond to lawsuits under the Investment Companies Act targeting the after-sales service sector (August 30, 2021), please see Goodwin’s press release.

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