February 3, 2021

SPACs: Is the PSLRA Safe Harbor Driving the Boom?

Bloomberg published an interesting opinion piece by Chris Bryant that suggests the SPAC boom may be driven by the fact that, unlike traditional IPOs, sponsors of a de-SPAC merger transaction can discuss projections under the protection of the PSLRA’s safe harbor for forward-looking statements. Here’s the intro:

Former Facebook Inc. executive Chamath Palihapitiya is very open about why he’s such a fan of special purpose acquisition companies (SPACs), compared with taking a company public the usual way.

“In a traditional IPO you can’t show a [financial] forecast and you can’t talk about the future of how you want to do things, you’re just not allowed,” he said in a recent interview. He was referring to laws that exclude initial public offerings from so-called “safe harbor” protections covering forward-looking corporate statements. “Because the SPAC is a merger of companies, you’re all of a sudden allowed to talk about the future,” he told another YouTube questioner. “When you do that you have a better chance of being more fully valued.”

I have a feeling we’ll likely find out fairly soon just how much protection courts are willing to say the safe harbor provides to de-SPAC transactions. SPAC sponsors face an increasing risk of litigation surrounding de-SPAC transactions. Several of the lawsuits that have been filed so far have challenged optimistic statements about the target’s future performance, and recent case law suggests that courts can be pretty resourceful when it comes to finding ways around the safe harbor.

John Jenkins