Nearly Half of SPACs Are Likely to Liquidate If SEC Rules Are Adopted

SPAC Insider says $80.6 billion could be returned to investors if blank-check companies are brought under the Investment Company Act.

Zach Gibson/Bloomberg

Zach Gibson/Bloomberg

The Securities and Exchange Commission’s proposed new rules on special purpose acquisition companies could force almost half of the SPACs that are still searching for a merger partner into liquidation, according to a new report from SPAC Insider.

Those SPACs account for $80.6 billion in capital that is now held in trust, but which would be returned to investors.

Under the SEC’s proposal, a SPAC would need to announce a deal within 18 months from the date of its IPO and close within 24 months in order to avoid falling under the Investment Company Act of 1940.

“As investment companies, their activities would be severely restricted and subject to very burdensome compliance requirements,” wrote Kristi Marvin, the founder of SPAC Insider and author of the report. “Those requirements can get quite expensive, and most SPACs do not have the funds available to pay for it.” As a result, she said, “liquidating would be the most palatable and likely solution in that situation.”

There are currently 141 SPACs that have already been searching for a partner for 18 months, according to SPAC Insider. By September, that number soars to 256 — or 44 percent of the 576 SPACS currently on the prowl for a merger partner. These are the SPACS that went public during the heady first quarter of 2021, when SPAC mania peaked. “We’re now seeing many of those Q1-2021 SPACs running out of time,” Marvin said.

She wrote that “most people in SPACland” believe the SEC will finalize its rule in September or early October, though there is a possibility it will wait until after the election. However, Marvin argued that “if the strategy of a new SPAC rule is to ‘protect retail’ as they say, wouldn’t that be more of a positive point... going into an election?”

So far, there have been 10 SPACs that went public in 2020 and 2021 that have been liquidated, the biggest of which was Bill Ackman’s Pershing Square Tontine Holdings, which had raised $4 billion. One of the reasons Ackman cited for the liquidation was the uncertainty around the SEC’s proposal to bring SPACs under the Investment Company Act rules. A lawsuit against Pershing Square Capital had raised the same issue.

“What we did by suing is showing that the Investment Company Act is important, and you need to pay attention to it,” former SEC commissioner Robert Jackson, who was involved in the lawsuit, said.

Ackman’s liquidation will be the largest one, as its SPAC was the largest in history. But there are bigger numbers to come. The potential liquidation of $80.6 billion is “an enormous amount of capital,” wrote Marvin. “Would the SEC risk that kind of ire from sponsors, investors, and banks?”

However, the SEC knew those liquidations would occur when it proposed the rule, and some sources believe the goal was to winnow the field of SPACs in the market.

“It’s hard to say how much of a risk this rule is to SPACs, but it’s still a risk with consequences,” Marvin wrote. “Either way, we’re at the top of the ferris wheel right now and it’s either going to be a pleasant ride down or shut the eyes and hold on tight.”