A Sober Look at SPACs

88 Pages Posted: 16 Nov 2020 Last revised: 17 Nov 2021

See all articles by Michael Klausner

Michael Klausner

Stanford Law School; European Corporate Governance Institute (ECGI)

Michael Ohlrogge

New York University School of Law

Emily Ruan

affiliation not provided to SSRN

Date Written: October 28, 2020

Abstract

Special Purpose Acquisition Companies (SPACs)—touted as a better alternative to an IPO for taking a company public—have become the next big thing in the securities markets. This Article analyzes the structure of SPACs and the costs embedded in that structure. We find that costs embedded in the SPAC structure are subtle, opaque, higher than has been previously recognized, and higher than the cost of an IPO. Although SPACs raise $10.00 per share from investors in their IPOs, by the time a SPAC takes a company public, it holds far less in net cash per share to contribute to a merger. We find that SPAC costs are not born by the companies they take public, but instead by the SPAC shareholders who hold shares at the time SPACs merge. These investors experience steep post-merger losses, while SPAC sponsors profit handsomely. This Article concludes by suggesting that the SEC promulgate disclosure requirements specific to SPAC mergers that make clear SPACs' costs and sponsors’ incentives, and that equalize regulatory preferences that SPACs enjoy compared to IPOs.

Keywords: SPAC, Securities Law

JEL Classification: G00, G30, G34, K2, K22

Suggested Citation

Klausner, Michael D. and Ohlrogge, Michael and Ruan, Emily, A Sober Look at SPACs (October 28, 2020). Yale Journal on Regulation, Forthcoming, Stanford Law and Economics Olin Working Paper No. 559, NYU Law and Economics Research Paper No. 20-48, European Corporate Governance Institute – Finance Working Paper No. 746/2021, Available at SSRN: https://ssrn.com/abstract=3720919 or http://dx.doi.org/10.2139/ssrn.3720919

Michael D. Klausner

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States
650-723-6433 (Phone)
650-725-0253 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Michael Ohlrogge (Contact Author)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

Emily Ruan

affiliation not provided to SSRN

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