Has the Growth of SPACs Led to an Increase in Litigation?

SPAC risk

Has the Growth of SPACs Led to an Increase in Litigation?

Dec 17, 2021 INTEL by Kristi Marvin

D&O insurance provider NFP, took a historical look at securities litigation within the SPAC asset class and prepared a report of their findings.  Read on to see the results.

Andrew Pendergast, SPAC & GPL Practice Leader, NFP
Jonathan Abbott, FCAS, MAAA, Senior Vice-President, NFP

With the dramatic increase in SPAC D&O rates over the past 18 months we sought to answer whether SPACs are being targeted with securities litigation more frequently now than they have been historically, or if the percentage of SPACs being sued has remained relatively constant while the number of IPOs has increased. The first edition of our SPAC Securities Litigation Update focuses on the two types of allegations most frequently made against SPACs and De-SPACs via securities class action litigation:

  1. Violations of § 14 (a) of the Securities Exchange Act of 1934 that allege SPAC teams made material misrepresentations and/ or omissions within the proxy statements sent to stockholders in connection with a proposed business combination.
  2. Violations of Rule 10b-5 of the Securities Exchange Act of 1934 that allege securities fraud in connection with a completed business combination. These claims can be far more severe as investor losses are alleged during the class period.

What we have identified is a significant increase in the frequency of these claims, most notably 10b-5 claims related to a completed business combination. Nearly 1 in 5 deals completed in 2020 has seen 10b-5 litigation and, given the focus of short sellers, the plaintiffs bar and the SEC, we expect that ratio to rise for those deals that closed this year. We will be updating this report on a semi-annual basis and will include settlement data as it becomes available and compare class action trends within the SPAC sector to the traditional IPO market.

You can click the link below to access a pdf version of the report.

NFP’s SPAC Securities Litigation Update