Big Law’s SPAC Love Affair Draws Watchful Eye of Regulators

Welcome back to the Big Law Business column on the changing legal marketplace written by me, Roy Strom. Today, we look at the latest challenge to Big Law’s work on SPACs. Sign up to receive this column in your inbox on Thursday mornings. Programming Note: Big Law Business is off next week.

This is an uncertain time for Big Law practices that piled into the SPAC craze in the past two years.

Special purpose acquisition companies, which are alternatives to initial public offerings for presenting share sales, became so popular after years in financial obscurity that regulators are now scrutinizing them.

The Securities and Exchange Commission last week proposed new rules that could put law firms, investment banks and other advisers on the hook for the lofty projections SPACs have used that aren’t allowed for traditional IPOs.

Citibank will pause new SPAC IPOs, Bloomberg News reported this week, citing uncertainty around legal liability the new rules impose on underwriters.

Douglas Ellenoff, a lawyer who helped design the current structure of SPACs, participated in a call this week with more than 60 lawyers—mostly from large firms—to ponder the future of the once red-hot blank check market.

The lawyers discussed how to protect their clients in what is expected to be a heated debate over the proposed rules. The “subtext,” Ellenoff said, was whether law firms would face any liability or reputational harm by staying in the market.

If Big Law firms reduced their profile in the space, Ellenoff said he “wouldn’t be surprised.” He’d also view it as an opportunity. Boutique firms like his once dominated SPACs before prominent Wall Street operations followed the boom and began dominating the practice.

The rise of SPACs has been hard to ignore (apologies to readers who might wish I’d tried to). SPACs raised more than $83 billion in 2020 and $160 billion last year, constituting more than half of all IPOs in both years, Skadden points out.

Even if the boom felt unsustainable, seeing the market recede from whence it came could be a big blow to many law firms’ bottom lines.

But the prospect that SPACs could result in legal liabilities for firms is an even more dire possibility.

The SEC rules proposal broadly seeks to regulate SPAC transactions. A major component is making those involved in the underwriting process liable for projections SPAC targets have been allowed to distribute without traditional due diligence or legal liability.

“The proposed rule should better motivate SPAC underwriters to exercise the care necessary to ensure the accuracy of the disclosure in these transactions,” the rules proposal says.

Ellenoff said the liability could extend to lawyers, accountants, M&A advisers, and placement agents involved in the “distribution” of the projections.

The proposal also contains a “suggestion” that the SEC would retroactively apply the new liability standard to deals already done, he said. While Ellenoff is skeptical that such backward-looking enforcement would occur, he said it’s worth taking seriously.

“The SEC has suggested that in their proposed rules, so I can’t dismiss it out of hand,” he said.

If firms are planning to step away from the market, they didn’t say as much this week. In fact, most wouldn’t say much at all after I reached out to major firms that advise SPACs.

David Goldschmidt, global head of Skadden’s capital markets group, downplayed the proposed changes. Law firms wouldn’t be less comfortable participating in SPACs under the rules, he said.

“Even as proposed by the SEC, SPACs will be another tool in the toolbox for private companies looking to go public,” Goldschmidt said.

Robert Downes, co-head of Sullivan & Cromwell’s capital markets practice, said the new rules could require more legal work on the de-SPAC transactions that do occur, such as writing disclosure letters for IPO underwriters who are involved in the de-SPAC or conducting more thorough due diligence.

Others are less confident the SPAC market will remain as robust.

“If the rules are adopted as proposed, SPAC activity will be significantly reduced,” Davis Polk lawyers wrote in a client note this week.

While SPAC work has been slowing down this year, the proposal gives firms an opening for at least one more flurry of work related to the transactions. Comments on the rules are due to the SEC by the end of May.

Ellenoff said he expects firms will have something to say—particularly about limiting any retroactive liability for advisers.

“That is where the battle will be fought,” he said.

Worth Your Time

On Next Week: The Big Law Business column will be off next week, so I’ll miss my chance to write my annual Masters-themed column. Suffice it to say I’m rooting for Tiger Woods. Perhaps there’s a Big Law lesson about favoritism and mentorship to be drawn from comments made before the tournament by Jon Rahm. The Spanish golfer seemed jealous of Tiger’s relationship with Justin Thomas, whom Rahm said receives dissertation-level tips from the 15-time major champion. Meanwhile, Rahm and others get one-liners. “It’s all about feel,” Rahm said Tiger once replied to his request for advice.

On M&A: Simpson Thacher & Bartlett led the Big Law deal tables in the first quarter, Meghan Tribe reports, as transactions slowed and dealmakers braced for the impact of regulatory changes, inflation and war in Ukraine.

On Starbucks: Starbucks Corp. general counsel Rachel Gonzalez was removed from her role following the return of Howard Schultz as interim CEO. A Starbucks spokesman told Brian Baxter the separation is unrelated to the company’s diversity initiatives, which were in the headlines after Coca-Cola Co. recently walked back a diversity policy spelled out by its former legal chief, Bradley Gayton.

That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.