To SPAC or Not to SPAC: Liberalizing the Regulation of Capital Markets.

• Author: Stoecker, Allison N.

TABLE OF CONTENTS I. INTRODUCTION 580 II. THE TURBULENT EVOLUTION OF SPACS 584 A. Prelude to SPACs: The Notorious Penny Stock Market 584 B. PSRA Squeezes Out Corruption in the Penny Stock Market and David Nussbaum Breathes Life into SPACs 586 C. Comparison of SPACs and Traditional IPOs 588 1. Features of Traditional IPOs and SPACs 588 2. Notable Statutes and Regulations 593 D. Current Problems Brewing in the US SPAC Market 595 1. Increased SEC Scrutiny and Impending Legislation 595 2. Enhanced Private Litigation Filings 597 3. Tightening PIPE Market 598 III. COMPARATIVE ANALYSIS: HOW DIFFERENT CAPITAL MARKETS HANDLE SPACS 599 A. Amsterdam Paves the Way for a Global SPAC Market 600 B. The United Kingdom and Singapore Loosen Regulations in Response to the SPAC Boom 602 C. Hong Kong Enters the SPAC Market with Heightened Listing Requirements 604 D. The United States' SEC Issues Proposed Rules Regarding SPACs, Expected to Chill SPAC Activity 608 IV. A PRAGMATIC SOLUTION: ENHANCING SHAREHOLDER PROTECTIONS WHILE MAINTAINING SPACS AS A VIABLE ROUTE TO ACCESS CAPITAL MARKETS 612 A. Strengthening Preventative Measures 612 B. Minimizing Dilutive Effects 613 C. Punishing Misconduct without Bolstering Current Liabilities for Underwriters 615 D. The Value of Enhanced Access to Capital Markets 617 V. CONCLUSION 618 I. INTRODUCTION

Trevor Milton, former Nikola Chief Executive Officer, learned the hard way that social media can come back to haunt you. On July 29, 2021, the US Securities Exchange Commission (SEC) filed suit against Milton for defrauding and misleading investors to earn capital for Nikola Corporation (Nikola). (1) The SEC alleged that Milton purposefully misled investors into committing funds to Nikola through the use of a special purpose acquisition company (SPAC) by embarking on an aggressive social media campaign and making false claims about Nikola's product capabilities and earning capacities. (2) One of Milton's most infamous moves involved a promotional video featuring the prototype semi-truck Nikola One, which purported to show the Nikola One traveling on its own power down the highway. (3) In actuality, the Nikola One remained motorless at the time of the video: the truck simply rolled down the incline thanks to gravity, not Nikola's innovative engineering capabilities. (4)

The mechanism by which the company went public was believed to be key to Milton's ability to mislead investors: the merging of Nikola with a SPAC, VectoIQ Acquisition Corporation. After VectoIQ issued an initial public offering (IPO) in May 2018, VectoIQ merged with Nikola during the de-SPAC process on June 2, 2020. (5) The resultant entity was Nikola Corporation. (6) The merger raised over $700 million for Nikola's business. (7) To understand how Milton's actions illustrate the problem SPACs present, it is necessary to briefly explain the SPAC process.

SPACs are blank check companies created for the sole purpose of acquiring and taking another company public. (8) A SPAC is referred to as a blank check company because it is an entity that lacks its own business model, so the initial investors have no idea which company they will ultimately be investing in. (9) SPACs are attractive because they offer a faster alternative for high growth, early-stage companies to earn capital by becoming publicly traded companies.

The lifecycle of a SPAC is approximately twenty-four months and proceeds as follows: First, founders, typically experienced business professionals with strong reputations, provide the starting funds for the SPAC. (10) Second, the founders, with the assistance of investment bankers that serve as underwriters, take the SPAC public through a traditional IPO. (11) Through the IPO, the SPAC raises funds that are held in a trust until the SPAC identifies its acquisition target. (12) After completion of the IPO, the SPAC's sponsors have between eighteen and twenty-four months to identify a target company and complete an acquisition. (13) If an acquisition does not occur within the specified time period, then the SPAC is liquidated, and the money is returned to investors. (14) However, if the sponsors do identify a target and the shareholders approve the merger, then the "de-SPAC" process begins. De-SPACing refers to the process of the SPAC merging with the target company. (15) Once the de-SPAC process is completed, the combined company retains the name of the target company and its operations, making the target a now publicly traded company on a stock exchange.

The controversy surrounding SPACs really concerns the de-SPAC process rather than the creation of the SPAC itself. Because the de-SPAC process is a merger, the process is subject to different rules and regulations in the United States than the traditional IPO process-notably the "gun-jumping" provisions of the Securities Act, discussed in Part II. (16)

De-SPAC transactions are essentially IPOs masked as mergers, leading some to dub SPACs as the "Wild West" of the mergers and acquisitions (M&A) world. (17) Tellingly, the goals of M&A for SPACs differ from the goals of traditional M&A, where two established companies with underlying operations combine. There can be a myriad of reasons why two firms decide to merge or one firm decides to acquire another, such as gaining economies of scope, diversifying a business model, and gaining access to new human capital. (18) On the other hand, the sole purpose of a de-SPAC transaction is to take another company public. (19) Therefore, outside of enhanced funding, a SPAC acquisition does not gain the same synergies that are created in traditional M&A transaction. SPACs have gained popularity in tandem with the emergence of the most recent major M&A wave.

The M&A world in the United States has experienced several major waves characterized by booms and busts. The most recent M&A wave was fueled by the introduction of global capital, resulting in cross border transactions. (20) Due to low interest rates, cash replaced stock as the primary source of financing M&A. (21) Likewise, Asian market deregulation and European market integration contributed to the rise of M&A. (22) During this wave, M&A came to a standstill in 2008 with the crash of the housing market, bank bailouts, and the beginning of a financial crisis. (23)

Since the 2008 recession, the rate of M&A has once again rebounded, with an uptick starting in 2016. This new M&A wave has its own unique characteristics: a spreading pandemic worldwide; an enhanced participation in the retail investor market; an increased commitment to environmental, social, and governance factors; and an explosion of private equity funding and SPACs. While the COVID-19 pandemic initially caused mounting uncertainty in financial markets, it also led to businesses striving for technological innovation. Executives reassessed business strategies, resulting in many strategic acquisitions and divestitures to gain a competitive edge. (24) The first half of 2021 resulted in a record number of mega M&A deals, catapulted by the popularity surrounding SPACs and private equity funding. (25)

Although SPACs have existed since the 1990s, they just recently rose to popularity in 2020. After explosive growth in the first half of 2020, the popularity of SPACs in the United States declined due to increased scrutiny from the SEC, signaling enhanced regulatory oversight ahead. Because SPACs are subject to fewer regulations than traditional IPOs, they are easier to exploit and abuse, as evidenced in Trevor Milton's scandal. Milton's exploitation of the SPAC sparked shareholder class actions against the company. At the end of 2021, Nikola reached a settlement with the SEC, agreeing to pay a $125 million penalty and cooperate with the SEC's investigation of Milton. (26) Last fall, Milton stood trial for the fraud charges brought by the SEC. where he faced up to a twenty-five-year federal prison sentence. (27) In October 2022, a jury found Milton guilty of one count of securities fraud and two counts of wire fraud. (28) In the wake of Milton's claims that juror misconduct occurred during his trial, Milton remains free on a $100 million bond until his rescheduled sentencing hearing on June 21, 2023. (29)

The Nikola scandal makes apparent weaknesses and loopholes in the current SPAC structure. Likewise, the SEC has begun taking a closer look at the SPAC market, making more regulatory oversight in the United States inevitable.

This Note aims to assess the current regulatory environment surrounding SPACs in the United States through a comparative approach abroad. Part II discusses the history of US SPACs, the growth of SPACs in the United States, the impacts of COVID-19 on SPACs, and current issues facing US regulators. Part III compares the regulatory regimes surrounding SPACs in the United States, the Netherlands (specifically, Amsterdam), the United Kingdom, Singapore, and Hong Kong. In turn, Part III analyzes the upsides and downsides of the aforementioned countries' regulations on the SPAC market as well as the implications a tightening regulatory regime may have on SPACs' viability worldwide. Part IV seeks to offer a solution that will maintain the attractiveness and flexibility of SPACs while also protecting investors from perverse actions of SPAC sponsors.

2. THE TURBULENT EVOLUTION OF SPACs

   The United States capital markets put the SPAC on the map as an alternative to the traditional IPO. This Part explores the history and evolution of SPACs in the United States, from their inception in the 1990s to the present day.

   1. Prelude to SPACs: The Notorious Penny Stock Market

      SPACs' nefarious predecessors include the 1980s blank check companies that comprised the penny stock market. Penny stocks are highly speculative stocks that sell below five dollars per share. (30) The companies underlying penny stocks were generally small and lacked liquidity, making the investments risky. (31) Despite this risk, the penny stock...