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A Fresh Take

Insights on M&A, litigation, and corporate governance in the US.

| 10 minutes read

Freshfields Partners Not Alarmed By Slump In SPAC Deals

The following article was originally published by Law360 on April 22, 2022. Click here to view.

Although SPAC mergers and IPOs are at their lowest levels since the onset of the pandemic, special purpose acquisition vehicles haven't lost their luster. Rather, market players are adjusting to proposed regulatory rules and looking worldwide for places to both list and find targets, two Freshfields partners told Law360 in a recent interview.

In the first quarter of 2022, there were 34 global de-SPAC deals — the term for when a SPAC combines with a target — valued at a total of about $35.3 billion, according to data provided by Dealogic. That's roughly half the number of de-SPACs that took place in the previous quarter, and the lowest amount of de-SPAC deals in a single quarter since the second quarter of 2020, when there were 18.

Meanwhile, there were 55 U.S. SPAC IPOs valued at a total of $10 billion in the first quarter of this year, a significant drop-off from the fourth quarter of 2021, when there 163 such offerings together worth $33.1 billion, per Dealogic. The figures from this year's first quarter represent the lowest number of U.S. SPAC IPOs since the second quarter of 2020, when there were 24.

On the surface, it might seem like the SPAC craze has concluded. But digging deeper, it becomes clear that the downtick in SPAC deals lines up with the larger M&A market, which has dampened due to uncertainty caused by issues like inflation and Russia's war in Ukraine. Additionally, the SPAC market is in the midst of an evolution, with the U.S. Securities and Exchange Commission attempting to regulate SPACs while other regions of the world set up infrastructure so SPACs can list on their exchanges.

Law360 recently spoke with two partners at Freshfields Bruckhaus Deringer LLP who work on SPAC deals, Michael Levitt and Sebastian Fain, about the state of the SPAC market and trends in the space. Levitt is in the Freshfields financing and capital markets group, and Fain is in the firm's corporate and M&A group.

This interview has been edited for length and clarity.

From your perspective, what is the state of the SPAC market right now?

Levitt: The market is definitely not as strong as it was at the beginning of last year. There were a record 613 SPAC IPOs last year. This year, in the first quarter, there were fewer than 80. In 2021, there were hundreds of de-SPACs announced, and about 200 closed. In the first quarter of 2022, there was only a fraction of that. So the market is definitely much slower.

What are some of the primary reasons the SPAC market has slowed?

Levitt: There are numerous reasons. Redemptions are much higher now than they were, and it's clear now from market history that the stock prices of SPACs have fallen post-de-SPAC. The secret sauce to the recent SPAC boom has been the [private investment in public equity] market, but PIPEs have been significantly harder to raise now, making it more difficult to raise money to finance the de-SPACs. The statistics are blatant: There are fewer SPAC IPOs, there are fewer de-SPACs announced and there are fewer de-SPACs closing. 

The SEC last month proposed a series of rules related to SPACs that would, among other things, require companies to increase disclosure. Is that also contributing to the SPAC slowdown?

Levitt: Many of the law firm memos that came out after those rules were proposed had titles that were more or less "SEC attacks de-SPAC market" or "SEC seeks to destabilize SPAC market." But I don't think the SEC rules are going to decimate the SPAC market, which will still largely be driven by the performance of the assets. If the market price of a SPAC falls from $10 per share to $5 after a de-SPAC, investors are going to view that as a bad investment. 

In the end, a lot of the SEC rules are disclosure-oriented, and they're consistent with the way that disclosure is being made in de-SPAC transactions already. The SEC's rules are really just catching up with the disclosures that are already being made, often due to SEC comments. Under the proposed rules, there is the potential for more liability for underwriters and investment banks, and the SEC has also proposed removing the safe harbor for forward-looking statements, so I think there will be a little bit more nervousness, but I still think SPACs are going to be a viable option.

I don't think the SEC wants to kill the SPAC market. The SEC ultimately wants companies to go public and be subject to public reporting requirements, and the SPAC process does that. 

Fain: To Michael's point regarding the SEC (or at least Congress) wanting more public companies, part of the point of the JOBS Act was to simplify disclosure and make it easier for companies to go public. The effect of these proposed rules could be to have fewer de-SPAC transactions and therefore fewer public companies, but we don't believe that was the ultimate aim for the SEC's rulemaking.

As for the SPAC market more broadly, it is worth noting that SPACs as an asset class have gone through a significant amount of refinement over the years, which has helped make it so that de-SPACs can be a real competitor to IPOs, which wasn't the case a decade ago. There will continue to be some benefits with de-SPAC transactions as compared to the classic IPO, one of which is agreeing on pricing upfront, as opposed to waiting until the end. 

You're not likely to have a repeat of 2020 or 2021 anytime soon, but we don't think SPACs are going to disappear. To paraphrase Mark Twain's often misquoted lines: reports of SPAC's death are greatly exaggerated. 

There have definitely been some significant de-SPAC deals this year, but in general, the markets for both SPAC IPOs and traditional IPOs seem icy. Why is that?

Levitt: This has not been a great year for IPOs across the board. There are a lot of reasons, whether it's interest rates going up, inflation, the war in Ukraine causing uncertainty, political uncertainty in both the U.S. and Europe, etc. There are a lot of different factors. 

There are still de-SPAC deals going on. There are still going to be a number of de-SPAC deals that are going to continue to be announced over the course of the year. Frankly, you had more than 600 SPAC IPOs announced last year, and there are 600 SPACs that need to find a target. The sponsors have a real incentive to find a target, because otherwise they have to give the money back to shareholders and will lose their sponsor investments.

Because of this incentive, SPACs are looking everywhere. They're looking in Europe, they're looking in Asia, including in Singapore, China, and Indonesia, and they're looking at the U.S. East Coast and West Coast. They're looking at tech companies, and they're looking at portfolio companies of private equity firms, and public companies that have divisions they might want to spin off. They're looking at smaller divisions of larger companies. They're looking at distressed companies. They're expanding the companies they are looking at because they want to find targets.

There may even be more de-SPACs than there are SPAC IPOs for the rest of the year. It will be interesting to see.

You mentioned SPACs are looking for targets across the globe, including in Asia. The recently released Freshfields Q1 M&A Monitor highlighted the growth of SPACs in Asia, saying to expect "greater deal flow" going forward, especially in Hong Kong. Is this a positive development?

Levitt: In January, the Hong Kong Stock Exchange adopted new rules to be able to list SPACs in Hong Kong. Before that, you couldn't list a SPAC on the Hong Kong Stock Exchange. Since that new law came into effect, there have been 12 SPAC listing applications filed in Hong Kong. Freshfields has worked on seven of those, including the first one. So we've been very active in the development of the SPAC practice in Hong Kong. 

The way that foreign SPACs are listed, they look a lot like the U.S. SPACs, but just a little different. In some ways better, and in some ways they just changed things a little bit. 

How do geopolitical tensions between the U.S. and China play into all of this?

Levitt: If you're a Chinese company, and you're trying to decide whether you want to go public in Hong Kong or the U.S., you have an option. For the last six or seven months, for Chinese companies, it's been more difficult to list in the U.S. because there's been some friction between the U.S. and China with regards to auditing standards.

But that is changing a little bit. A Chinese company did just go public in the U.S. recently. [Editor's note: Meihua International Medical Technologies listed on the Nasdaq on Feb. 18, according to a statement.] I know we're talking to various Chinese-related companies about different options they might have. I think they have a choice: go public in the U.S., where there may be more SEC review, comment and scrutiny than there used to be. Or go public in Hong Kong. Ultimately, they'll look to investment banks and advisers to give them advice as to where to find the best liquidity, where they'll get the best investors, where they'll get the best terms, etc. Having a choice in where to list is positive, though. 

Speaking of SPACs going global, there was recently a rumor about the potential for the first SPAC IPO in the Middle East. Are SPACs becoming such a worldwide phenomenon that, even if the trend slows down in the U.S., we might see SPAC IPOs popping up elsewhere?

Levitt: That is going to be a trend for sure. The U.K. wants to list more SPACs. Amsterdam has been listing them and wants to list more. Frankfurt and Paris have listed a number of SPACs and want to list more. The Singapore Exchange has developed rules so they can list SPACs, and the Hong Kong exchange wants to be big in SPAC listings.

There are a bunch of Middle Eastern companies that have been looking to the U.S. for their de-SPACs, and they could also decide to list in Abu Dhabi. Abu Dhabi is trying to develop their own SPAC product. And there are definitely many other countries in the world that are trying to jump onto the SPAC bandwagon. No one country has done it like the U.S., though, which has been overwhelmingly the dominant player in this arena.

Going back to the SEC's proposed rules. Those are still in the public comment period, right? Which means they are just proposed rules for now, not set in stone.

Fain: The rules have to go through a public comment period of at least 60 days from their publication in the Federal Register. Then the SEC will take all the comment letters into account when making the final rules. And the timing of that process can vary depending on what else the SEC has going on, how many comments they received on the proposal, and the types of comments.

Under the proposed rules, SPACs would no longer receive protection of the Private Securities Litigation Reform Act safe harbor. Is that very significant? Are there other aspects of the proposed rules that might have an even greater impact?

Fain: While we think that the removal of the PSLRA safe harbor will play into how SPACs are thinking about disclosure of forward-looking information, likely more important and one of the most significant parts of the proposal is that underwriters of SPAC IPOs would have liability as underwriters if they participate in the de-SPAC transaction. The SEC is reasoning that in a regular IPO, the underwriter has potential liability for essentially everything in the prospectus for the IPO. However, they have a due diligence defense, which is why underwriters are very careful in traditional IPOs, spending a lot of time with counsel and in meetings with management, reviewing and getting backup for every little fact in the offering document.

The real reason you don't often see projections in IPOs is because of this underwriting liability. Underwriters don't want to underwrite the liability resulting from the IPOing company putting out projections to sell on. The safe harbor is helpful in non-IPOs, but in any event, you would end up putting out projections in a manner that is always heavily caveated. There's a significant amount of explanation about what the projections are, what is underpinning them and how they could change. So from an issuer's perspective, if you were putting out your projections in this manner, you might worry less about liability, but the fact that there is underwriting liability could cause underwriters to be quite hesitant to market shares in this way.

Levitt: To reiterate, the No. 1 change here is underwriter liability, and how underwriters will react to having liability. The SEC is saying that if you're the underwriter of a SPAC IPO, if you then participate in the de-SPAC, they're going to treat you as an underwriter of the de-SPAC. If you're not the underwriter of the SPAC IPO, they won't treat you as such. That's as proposed. So a lot of banks that are not underwriting the SPAC IPO in theory would not have the liability based on rules as proposed.

SEC Chair Gary Gensler said the proposed rules are meant to bring traditional IPOs and SPAC IPOs to a similar level of investor protection. Do you feel that is the aim, and would that be the effect of the rules as proposed?

Levitt: I do think that's their aim. The one place I think they've gone above and beyond is the requirement that there be a statement of fairness. That would show whether or not the SPAC thinks the transaction is fair to its shareholders, which is not something that's required in a traditional IPO. 

Ultimately, though, I do think the SEC's goal is to harmonize the processes from a disclosure perspective. 


m&a, capital markets and securities, spacs