DealLawyers.com Blog

Now that he’s out of government service and back at Harvard Law School, former SEC Corp Fin Director and General Counsel John Coates isn’t pulling any punches when it comes to his feelings about SPACs.  In a recent paper titled “SPAC Law and Myths”, he absolutely clobbers SPACs and those who promote them.  Here’s an excerpt from the abstract:

SPAC promoters claimed that (1) securities regulations ban projections from being used in conventional IPOs, (2) liability related to projections was lower and more certain in SPACs than it was (and is), (3) the Securities and Exchange Commission (SEC) registration process makes C-IPOs slower than SPACs, (4) the SEC changed SPAC accounting rules in early 2021, (5) this “change” was the primary reason the SPAC wave slowed and peaked, and (6) the Investment Company Act clearly does not apply to SPACs.

These myths were aimed primarily not at unsophisticated retail investors, but business journalists, sophisticated SPAC sponsors and owner-managers of SPAC targets. They illustrate a broader and underappreciated fact that complex financial-legal innovation permits promoters to exploit the “credence good” character of professional advice, perpetuate “deep fraud,” and distort markets and asset prices more and longer than conventional theory assumes. To moderate deep fraud’s market distortions, regulators have a role in speaking frequently and clearly about law and its uncertainties.

As I read this article, I found it disappointing that Prof. Coates refuses to acknowledge that the SEC may bear some responsibility for facilitating the creation or perpetuation of some of these SPAC “myths,” particularly those relating to accounting issues and the Investment Company Act.  Regrettably, he shrugs off any failure to call out these issues during the SEC’s review process for hundreds of SPAC & de-SPAC deals by pointing to the legend that appears on the prospectus cover page:

“The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.”

Yes, that’s true – Staff review doesn’t mean that the SEC has signed off on compliance with all legal and accounting requirements.  But when supposedly significant issues are repeatedly “missed” not only by the parties involved in the transactions but by the SEC Staff reviewing those filings, deflecting responsibility by pointing to required boilerplate disclosure is a feeble response. I think that’s particularly true when that effort at hand washing appears in an article that reads like a 21st century J’Accuse. . . ! targeting everyone else involved in the SPAC boom.

H/T to Ann Lipton for flagging this paper.

– John Jenkins