Demystifying SPACs: A Deep Dive with Michael C. Rakower

Rakower Law PLLC recently won a landmark federal case challenging industry practice related to SPAC warrants, securing a judgment exceeding USD50 million. The case focused on whether SPAC warrants and underlying shares could be fully registered on Form S-4, the document filed with the SEC during the acquisition of a target company.

Rakower explains that special purpose acquisition companies (SPACs) are formed to raise capital for acquiring and taking target companies public, offering advantages like faster processes and favourable terms. The process involves sponsors forming the SPAC entity, investors purchasing IPO units, and the targeting of suitable companies for acquisition.

The SPAC lifecycle begins with formation, followed by an IPO, target company acquisition, and eventual transformation into a publicly traded entity. Rakower highlights the importance of the De-SPAC process, where the acquired company becomes publicly traded.

Rakower elaborates on PIPE (Private Investment in Public Equity) investments, which provide additional capital for SPACs in cases where those who have common stock in the SPAC decide to redeem the stock (eg, if they are dissatisfied with the target acquisition plan). PIPE investors then step in upon redemption to provide sufficient capital for the company to complete the De-SPAC, thereby enabling the target to become a publicly traded company.

SPAC interests, including common stock and warrants, are traded publicly. Rakower explains that litigation in SPACs can arise due to various factors, such as redemption rights for SPAC investors and unique interests of PIPE investors.

Rakower then discusses in more detail the recent federal case won by his clients. The firm, as lead counsel, commenced an action on behalf of two investment funds, alleging that the defendant breached its contract by falsely asserting that warrants could not be exercised until an SEC Form S-1 registration statement became effective. Rakower details the legal arguments presented in the case, including an interpretation of the warrant agreement and the relevant registration statements. In this case, the dispute hinged on whether a Form S-4, which preceded the S-1, was sufficient for registering both warrants and warrant shares. The court found that it was. Damages were calculated based on the difference between the market price of the common stock and the strike price of the warrant.

The video concludes with Rakower highlighting key lessons from the SPAC warrants case. He emphasises the significance of Form S-4 in registering warrants and advises investors to carefully review warrant agreements for unique terms and conditions.