The 2022 US SPAC IPO market was a shadow of its former self. There were 86 SPAC listings on US exchanges, totaling US$13.4 billion in proceeds—a far cry from the 613 listings in 2021, which raised US$162.6 billion in proceeds. The largest SPAC IPO of the year, Screaming Eagle Acquisition Corp, sponsored by Eagle Equity Partners (EEP), raised a relatively modest US$750 million on Nasdaq, compared to the previous SPAC sponsored by EEP, which raised US$1.725 billion in 2021.
While record sums of capital were collected in 2021, leaving plenty of dry powder for deals, de-SPAC transactions also slowed. These transactions nearly halved to 101 in 2022 from 199 a year prior. In terms of total value, US de-SPACs came to US$167.5 billion—a major step down from the US$502.8 billion announced in 2021. The largest of these was the announced US$3.1 billion merger between Horizon Acquisition Corp II and Flexjet, a provider of fractional ownership aircraft, leasing and jet card services.
Taking stock
Perspective is important here: After growing in popularity in the second half of 2020, it is no exaggeration to say the US SPAC market exploded in 2021, as capital markets and M&A markets were each flooded with liquidity. It was to be expected that 2022 would be slower. A proposal in March 2022 by the Securities and Exchange Commission (SEC) to impose stricter rules on the asset class further dampened activity.
Statements made by the SEC in connection with its announcement of the proposed rules about various stakeholders including SPACs, targets, underwriters and other transaction participants being potentially liable for information included in SEC filings during de-SPAC transactions—including projected financial information—were enough to seriously temper the market. The SEC said that it considered it important that there be liability on so-called "gatekeepers" in de-SPAC transactions akin to the liability that underwriters would have in a traditional IPO. A number of law firms, industry associations and other SPAC market participants submitted comments to the SEC, questioning various aspects of the proposed rules. The SEC has yet to respond to the comments or adopt any of the proposed rules.
As a result, the SPAC marketplace finds itself somewhat in limbo. Mergermarket reports that, in Q4 2022, the average time between a SPAC IPO and the announcement of a merger was 15.2 months, up from 8.7 months in Q1. By comparison, it took just 5.9 months for SPACs to find a merger target in Q4 2021.
Similarly, on average, the gap between a SPAC IPO and completion of a merger was 22.5 months in Q4 2022, versus 15 months in Q1 2022 and 11.2 months in Q4 2021.
In addition, the number of SPACs that liquidated more than doubled in each quarter of last year. Per Dealogic data, more than 60 US-listed SPACs announced they would return nearly US$24 billion to investors in 2022. The Inflation Reduction Act—which includes a 1 percent excise tax on corporate stock buybacks that takes effect in 2023—has been cited by some as part of their motivation to liquidate earlier than required. For example, the Gores Group returned cash in the trusts of three of its SPACs in 2022, rather than wait until 2023. However, based on guidance issued by the Departments of the Treasury and the Internal Revenue Service on December 27, 2022, that redemptions in connection with liquidations are not subject to the excise tax, many of those accelerations may have been unnecessary.
Many SPACs waiting to go public, faced with potential SEC scrutiny among other restrictions, simply decided to pull the plug—115 SPACs valued at US$31.5 billion withdrew IPO paperwork in 2022, according to Dealogic. In addition, more than 50 SPAC mergers were terminated in 2022.
Facing litigation
In addition to regulatory and economic pressures, 2022 presented SPACs with a number of civil litigation challenges. These included both breach of fiduciary duty claims and securities litigation.
On January 3, 2022, the Delaware Court of Chancery issued a long-awaited decision in the In re MultiPlan Stockholder Litigation case relating to the de-SPAC transaction between Churchill Capital Corp III, a SPAC founded by Michael Klein, and MultiPlan, Inc.
The complaint in the MultiPlan case generally alleged that the structure of the SPAC created divergent interests between the Class A stockholders (public investors) and Class B stockholders (the sponsor, directors and other founders), and alleged that the defendants (including the directors of the SPAC, the sponsor and the alleged controlling stockholder, Klein) prioritized their personal interests above the Class A stockholder interests in completing the merger and issued a false and misleading proxy statement that deprived Class A holders of the right to make an informed decision as to whether to redeem their shares. In this respect, the complaint asserted breach of fiduciary duty claims against the directors of the SPAC, Klein and the sponsor, among others.
The court "applying well-worn fiduciary principles" concluded that the plaintiff's allegations were sufficient to survive defendants' motion to dismiss, principally because of the potential conflicts of interest between the public stockholders (who would only profit if the stock were to trade above the redemption price of US$10.04 per share) and the defendants (who would profit from their Class B shares even if the stock were to trade substantially below that price). In November 2022, MultiPlan announced that the case had been resolved with plaintiffs for US$33.75 million.
Many SPACs do not have the same level of alleged conflicts as witnessed in the MultiPlan case. In the latter, among other things, the sponsor had the ability to elect all directors prior to the de-SPAC closing, the directors held substantial amounts of Class B shares and there were longstanding relationships between Klein and the other directors. Nonetheless, plaintiffs have looked to the MultiPlan case to craft breach of fiduciary duty allegations in subsequent lawsuits.
In addition, cases have been filed in Delaware and in the US District Court for the Southern District of New York against SPACs that received termination fees stemming from failed mergers and subsequently liquidated. These cases generally focus on whether the Class A holders are entitled to receive additional distributions above and beyond their pro rata share of the trust account in the event the SPAC liquidates. The Delaware courts have yet to issue a dispositive decision on any of these cases and this will be an area to watch in 2023.
Finally, plaintiffs' lawyers continued to aggressively target SPACs with securities litigation in 2022. According to the Stanford Class Action Securities Clearinghouse, there were 25 class action securities litigations filed involving SPACs in 2022. We expect this trend to continue into 2023.
Looking ahead
Despite the slowdown in activity, SPACs remain a viable method of reaching public markets. They give private companies access to growth capital and investors a means of getting in on the ground floor to back high-potential companies. Nevertheless, the volatile markets and regulatory environment have imposed challenges that SPACs will need to address in order to stage a comeback.
For the time being, with the broader IPO and M&A markets remaining challenged and investors leaning away from more speculative assets—which have often been the target of SPACs—SPAC activity is likely to remain subdued. Once the broader markets recover, and the regulatory picture is clarified, SPACs likely will adapt and retake their place among capital markets alternatives, although nobody expects—or even wants—a return to the overheated market of 2021.
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