SPACs face regulatory scrutiny and insider trading risks, with recent SEC enforcement actions targeting disclosure failures and significant stock sales by company insiders. Nikola Motors serves as a cautionary tale of de-SPAC transactions gone awry, and SPAC insiders must be aware of potential pitfalls and ensure compliance with securities laws to avoid regulatory consequences.
Once upon a time in the financial world, a magical creature called the Special Purpose Acquisition Company (SPAC) was born, promising unicorns and rainbows for all involved. But as we know from fairy tales, not everything goes as planned. While SPACs have provided a unique market access for private companies looking to go public, recent events have shown that the road can be bumpy, and a lack of purpose makes opportunities difficult to find. So, as the saying goes, let’s dive into the murky waters of SPACs, insider trading, and regulatory focus.
Now, let’s take a short trip down memory lane to the frothy SPAC market of 2021. It was a time of great potential and endless possibilities, but alas, reality set in and the market was met with significant headwinds, a short supply of suitable targets, and the onset of the highly anticipated SEC rule. The harsh wind of enforcement blew against investment advisers, targeting alleged disclosure failures involving conflicts of interest. Like a tornado, the SEC left a trail of destruction, slapping companies like Corvex with a whopping $1 million civil penalty for failing to adequately disclose a conflict of interest. If only they had followed the yellow brick road of the Investment Advisers Act of 1940, they could have avoided this financial tornado.
Now, let’s talk about the billions of dollars that SPAC founders and insiders reaped from de-SPAC transactions before share prices of the new public companies collapsed. It’s a tale as old as time – the rich getting richer and the poor getting poorer. But wait, there’s a twist! Recent research has shown that 232 of the 460 de-SPAC entities had company insiders who engaged in significant stock sales, averaging about $22 million each, while SPACs collectively lost over $100 billion of market value. It’s like one big game of musical chairs, and the music has stopped.
Nikola Motors, for example, presents a cautionary tale of insider transactions gone awry. Founder and former CEO Trevor Milton sold the shares he received in connection with the transaction for a total of $374 million following Nikola’s SPAC-fueled business combination in 2021. Nikola stock is currently trading under a dollar a share after a high near $100 during the summer of 2020. Milton now faces significant prison time after being convicted of securities and wire fraud in a parallel criminal case. Oh, how the mighty have fallen.
As the SEC continues to focus on SPACs, using its enforcement reach to charge investment advisers who participated in such transactions, it’s clear that the landscape has changed. The message is clear for SPAC insiders seeking payment: Buyers beware. So, as investment advisers, sponsors, target companies, and other gatekeepers navigate this brave new world of SPACs, it is essential that they understand potential pitfalls and take steps to ensure transparency and compliance with securities laws. After all, no one wants to end up like Corvex or Trevor Milton. And as for the SPAC market, it remains a viable and legitimate means of taking a private company public, but perhaps with a few more bumps and bruises along the way.
In conclusion, the fairy tale of SPACs has taken a darker turn, with villains like insider trading and regulatory focus casting a shadow over the once-promising land. The moral of the story? Always be aware of the risks and regulatory focus when running a game in the world of SPACs, or you may find yourself on the wrong side of the SEC’s enforcement wrath.