Did your broker or investment advisor recommend you invest in a special purpose acquisition company (SPACs)? Erez Law is investigating brokers and investment advisors across the country who recommended their clients invest in SPACs. It is alleged that brokers become more popular throughout 2020 during the COVID-19 global pandemic, proving to be risky investments for many investors.
What are SPACs?
SPACs are shell companies that are established by institutional investors, such as Wall Street professionals or public figures, who raise funds through an initial public offering (IPO) to acquire another company. SPACs are an alternative way for companies to go public, touting themselves as a faster and less expensive path to the public markets.
Shares are typically sold at $10 each and funds are placed in an interest-bearing account. This low-cost investment gives retail investors an opportunity to invest in a pre-IPO company prior to the price increase.
The SPACs’ only asset is the money it raises. SPACs are commonly known as “blank check” companies that act as shell corporations that are listed on a stock exchange with the purpose of acquiring a private company, allowing the SPAC to be made public without going through a traditional IPO process.
According to public records, only 93 of the 313 SPAC IPOs set up since 2015 have resulted in mergers with companies going public; the remaining SPACs have either failed or have yet to merge. Only 29 of the SPACs saw positive returns. In an assessment of these SPACs, the common shares have seen an average loss of nearly 10%, with almost a 30% negative medium return. In comparison, a traditional IPO sees an average aftermarket return of 47%.
According to a SPACInsider report, 174 SPACs were created in 2020 and 59 were created in 2019; there were more SPACs created in 2019 and 2020 than in the prior 18 years combined. Almost 180 SPACs were announced in February 2021, and the number of companies launched in the first quarter of 2021 exceeded the total seen in all of 2020.
What Risks to SPACs Pose to Investors?
However, investors of SPACs typically do not know what company will be targeted for the SPACs’ acquisition. Additionally, SPACs are typically characterized by loose financial accounting that can make these types of investments risky for retail investors.
Once the SPACs are acquired, investors can choose to exchange their original shares in the merged company or they can choose to redeem their original investment in addition to the interest earned. If an acquisition does not occur, the SPACs’ sponsors have two years to establish a merger, or the company would become liquidated and the investors would get their investment back plus interest.
SPACs typically charge a percentage fee and a flat fee, as well as another fee described as a “promote.” The “promote” creates additional shares that are created when a SPAC merges with a private company. The “promote” causes the shares to be priced higher as if there was no “promote.” If investors redeem their shares, their capital will most likely be less than their original investment, sometimes up to 25% of their investment, which comes as a surprise to many investors.
If the SPAC share prices go above the $10 rate and a SPAC fails to complete, investors may suffer losses. This was seen throughout the SPAC boom that was present throughout 2020 and into 2021.
If a SPAC performs poorly and the share prices drop, the sponsor of the SPAC could end up with millions of dollars, even though other investors could see significant investment losses. If a SPAC does well after the merger, the SPAC sponsor will make a large portion of the proceeds.
At Erez Law, many of our clients come to us because of our specialization in recovering investment losses. We use considerable legal resources to help investors who trusted their reckless and unethical brokers who recommended private placements such as conservative easements. We have filed many FINRA arbitration cases against large brokerage firms, holding these firms accountable for dishonest investment advisory practices, unsuitable recommendations, misrepresentation, and over-concentration in investments and strategies.
If you invested in SPACs without understanding the risks associated with your investment, you may be able to recoup your losses. Our team of financial securities attorneys has experience with FINRA arbitration and AAA arbitration and we know how to hold brokerage firms and advisors liable for their indiscretions. Contact our firm by calling (888) 840-1571 to speak with one of our attorneys about filing a SPACs investment losses lawsuit.
SEC Issues New Guidance on SPACs
In April 2021, the U.S. Securities and Exchange Commission (SEC) issued new guidance that would change the way SPACs report information on balance sheets and income statements, including a call for SPACs to classify warrants as liabilities instead of equity instruments; removal of safe harbor provision for private companies introducing themselves to the public markets (including IPOs and de-SPAC transactions); and the need for SPAC internal controls to be up-to-spec. SPACs can no longer provide safe harbor for forward-looking statements or financial projections to “sell the deal.”
Erez Law Investigates Investment Advisors Who Recommended Unsuitable SPACs
Erez Law is also currently investigating the following SPACs:
- Ace Global Business Acquisition Limited
- Akazoo with Modern Media Acquisition Corp.
- Aldel Financial Inc.
- Angel Pond Holdings Corp
- Apollo Strategic Growth Capital
- Aries I Acquisition Corp
- Artisan Acquisition Corp.
- Arya Sciences Acquisition Corp III
- Big Sky Growth Partners, Inc.
- BowX Acquisition Corp
- Catalyst Partners Acquisition Corp.
- CEC Entertainment’s SPAC merger with Leo Holdings
- Churchill Capital Corp IV
- Clover Health Investments Corp.
- CM Life Sciences III Inc.
- Crescent Cove Acquisition Corp.
- Data Knights Acquisition Corp.
- Defiance Next Gen SPAC Derived ETF
- DPCM Capital
- FinTech Acquisition V
- FS Development Corp.
- GigInternational1, Inc.
- Glass Houses Acquisition Corp.
- Global SPAC Partners Co.
- Gores Guggenheim, Inc.
- Gores Holdings VI Inc
- GROUP NINE ACQUISITION CORP.
- GX Acquisition Corp. II
- Health Sciences Acquisitions Corporation 2
- HumanCo Acquisition Corp.
- Ion Acquisition Corp. III
- ION Acquisition Corp 3 Ltd.
- Jaws Acquisition Corp.
- Landcadia Holdings III Inc.
- Leo Holdings III Corp
- Lucid Motors
- Magnum Opus Acquisition Limited
- Maquia Capital Acquisition Corporation
- Model Performance Acquisition Corp
- Mountain Crest Acquisition Corp. III
- Northern Genesis Acquisition merger with Lion Electric
- Opendoor Technologies
- Orion Biotech Opportunities Corp.
- Osiris Acquisition Corp.
- Panacea Acquisition Corp. II
- Pershing Square Tontine Holdings
- Property Solutions Acquisition Corp
- QuantumScape Corp.
- Ribbit LEAP Ltd.
- Skydeck Acquisition Corp.
- Social Capital Hedosophia Holdings Corp. IV
- Social Finance
- TCV Acquisition Corp.
- TGI Fridays’ SPAC merger with Allegro Merger
- Tio Tech A
- TPG Pace Beneficial II Corp.
- TPG Pace Solutions Corp.
- TradeUP Global Corp
- Tuscan Holdings Corp.
- Valor Latitude Acquisition Corp.
- Vesper Healthcare Acquisition Corp.
- Virgin Galactic Holdings Inc.
- VPC Impact Acquisition Holdings
In April 2020, TGI Fridays ended their SPAC merger with Allegro Merger, citing closures during the COVID-19 pandemic, leaving TGI Fridays with $350 million in debt and the need to cash out investors. TGI Fridays received a government stimulus loan for assistance.
In 2019, CEC Entertainment, the owner of Chuck E. Cheese and Peter Piper Pizza, failed to merge with Leo Holdings, losing out on a deal worth $1.4 billion. CEC Entertainment has since filed for Chapter 11 bankruptcy.
Akazoo, an AI music streaming company, was supposed to merge with Modern Media Acquisition Corp in 2019. News broke that Akazoo’s prior management had falsified the books and records. The Akazoo SPAC failed, and Modern Media’s investors lost their backing.
Northern Genesis Acquisition is merging with Canadian commercial electric vehicle supplier Lion Electric. Changes in the fair value of warrant liabilities resulted in an adjusted net loss of $115.1 million, versus $1.5 million reported previously.
If you invested in SPACs at the advice of your broker or investment advisor, you may be able to recover your losses.
Recovering Losses Through FINRA and AAA Arbitrations
Investors in the United States have filed FINRA arbitration claims or AAA arbitration claims against brokers and investment advisors across the country for investments made in SPACs on the advice of their brokers or advisors. Many of these investors were not adequately warned about the high-risk nature of the investments, and have suffered damages as a result. Investors may have a claim against the brokerage firm or advisory firm based on misrepresentation, unsuitability, breach of fiduciary duty, and state and federal securities laws.
A broker or investment advisor must have reasonable grounds for each recommendation made to investors, considering such factors as the customer’s other securities holdings, financial situation, and risk tolerance. In addition, before a financial advisor recommends security, the financial advisor must conduct due diligence, investigating the facts surrounding the security, to confirm that it is suitable for the customer. The suitability of an investment for a particular individual is at the center of the investment process, and one of the key duties owed by a broker to the customer. A firm may be held liable for its broker/advisor’s failure to recommend suitable investments to its customers.
In addition, pursuant to FINRA Rules, member firms are responsible for supervising a broker’s activities during the time the broker is registered with the firm. Therefore, the brokerage firm may be liable for investment or other losses suffered by brokers who worked for the firm.
Erez Law represents investors in the United States for claims against brokers and brokerage firms for wrongdoing. If you have experienced investment losses, please call us at 888-840-1571 or complete our contact form for a free consultation. Erez Law is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies on a contingency fee basis.
Contact Us for a Free Consultation
If you have experienced investment losses as a result of investing in SPACs, we are here to help. We are not afraid of taking on the largest firms, and we can and will combat some of the largest brokerage firms in the United States. Count on our experience to successfully take you through the FINRA arbitration process.
Please call us at (888) 840-1571 for a free consultation or complete our contact form to investigate your recourse for losses in SPACs. Erez Law is a nationally-recognized law firm representing individuals, trusts, corporations, and institutions in claims against brokerage firms, banks, and insurance companies. If you have more questions about investment fraud, you can visit our securities fraud frequently asked questions page, or contact our firm to speak with one of our qualified fraud attorneys.