The Securities and Exchange Commission has been cracking down on SPACS under Chairman Gary Gensler, but so far it has not seemed intent on killing them.
But that doesn't appear to be the view of the SEC’s new head of the division of investment management, William Birdthistle, based on a series of since-deleted tweets from last year, as well as interviews and blogposts, all published while he was a professor at the Chicago-Kent College of Law.
Birdthistle, whose division oversees both hedge funds and mutual funds — but not SPACs — appears to agree with the law professors who’ve launched three lawsuits that, if successful, would destroy the current model of special purpose acquisitions companies. The suits argue that SPACs fall under the Investment Company Act of 1940 because they own government securities while searching for a merger partner.
“My personal view is that the plaintiffs’ argument is quite persuasive,” Birdthistle said in a September 2 interview with David Lat on Substack. “The existing business model of SPACs is incompatible with the Act. There’s no way the SPAC industry, at least as it currently operates, can comply.”
By that time, Birdthistle had already taken to Twitter to opine on the case against Ackman’s SPAC, although the Twitter thread has since been deleted. He was named to his new position on December 21. (The tweets are still available on the Internet Archive’s Wayback Machine.)
“Wow, behold the power of litigation: Two days after being sued by law professors, Bill Ackman’s SPAC, Pershing Square Tontine Holdings, “intend[s] to seek PSTH shareholder approval… to return to shareholders the $4 billion of cash PSTH holds in trust,” the tweets began.
In the thread, Birdthistle went on to explain that “two law professors — John Morley of Yale and former SEC Commissioner Rob Jackson of NYU… sued the world’s largest SPAC.” Their argument is that the SPAC is “an unregistered investment fund under the Investment Company Act of 1940,” he added in the deleted tweet storm.
He then ridiculed Ackman — whose hedge fund Pershing Square Capital he now oversees at the SEC — for what he called “a cringeworthy sign-off from Ackman to his shareholders: ‘We have got your six.’”
Birdthistle also quoted Ackman’s response to the complaint before trying to dismiss his arguments.
“As the law professors who brought the case should very well know (as both are securities law experts) holding cash and government securities while seeking a business combination does not make PSTH an illegal investment company, nor does it make any of the hundreds of other SPACs that do the same, illegal investment companies,” Ackman is quoted as saying.
Birdthistle then tweeted that the hedge fund manager was “confusing several possible defenses to the complaint: First, holding only cash might have evaded the ’40 Act, but PSTH did hold securities. Second, holding only government securities might have helped evade ‘investment company’ status under Section 3(a)(1)(C), which does not count government securities towards the 40 percent threshold for inadvertent investment company status. But under Section 3(a)(1)(A)…engag[ing] primarily in holding any securities would also trigger investment status.”
In other words, there is really only one defense in Birdthistle's view: holding $4 billion in cash (not cash equivalents).
He also noted that Ackman held the securities “for more than a year after its IPO, which sounds like the business it was primarily engaged in.” (All SPACs do the same, as they typically have 24 months to find a merger partner.)
Finally, Birdthistle brought up the Universal Music Group deal that had already fallen through by the time of the lawsuit. Had it not, the law professors might have had a stronger case against Ackman. If that deal had gone through, Birdthistle tweeted, “the SPAC would have satisfied the first definition of ‘investment company’ as ‘proposing to engage primarily’ in the investing in securities.”
“Ackman takes a personal dig at Prof. Jackson, saying he should have done something about SPACs when he was an SEC Commissioner,” Birdthistle concluded. “But redeeming $4 billion w/in 48 hours of a complaint looks like one of the most expensive backhanded compliments the litigation world has ever seen.”
(Ackman has not redeemed the SPAC, but said he might if the SEC endorses his new security, a special purpose acquisition rights company. The SPARC would get rid of the issues presented by the lawsuit because it won’t hold money from investors before finding a deal. Ackman had planned the SPARC long before the lawsuit was filed; the SEC is still reviewing it.)
Birtdthistle took to Twitter again in late August, when 49 law firms wrote a letter pushing back on the SPAC litigation. The letter, he said in another now-deleted Twitter thread, “cites nothing in support of its position. No cases or SEC guidance. It’s just an assertion that a company can act like ’40 Act fund so long as it ultimately uses the money for something else. What are they telling their clients who actually bother to comply with the 40 Act?”
He took note of the law firms not included on the letter, naming Dechert, KL Gates, Debevoise, and Schiff Harden as “four of the biggest ’40 Act firms in the country. Presumably their view of the ’40 act is different. Or they don’t rep SPACs.”
Birdthistle’s social media support of the lawsuit is not his only connection to Morley. His past associations with the plaintiff include contributing to an academic paper Morley published at the Yale Law Journal. The Yale professor also wrote a blurb praising Birdthistle’s book on the mutual fund industry, “Empire of the Fund.”
The SEC declined to comment. Ackman declined to comment.