SPACs are under attack in litigation file in New York Federal Court, claiming these entities should be closely regulated as investment companies under the ’40 Act.  SPACs typically invest their funds in market securities during they year or more they seek a company to acquire.

Not surprisingly, about sixty law firms (many of great size, all with SPAC business) have fought back, asserting that these investments are incidental and transitory and that the ’40 Act was not designed for the SPAC model (no doubt true as eighty years ago there were no SPACs).   SPACs seem to be relying on an implicit “grace period” which is nowhere specified in law or regulation.

If a SPAC is an investment company then the “promote” kept by the founders (typically 20% of the deal) would be illegal as to amount and form under the law; indeed, one plaintiff in current litigation so alleges.

It seems unlikely that these suits will prevail, particularly as the SEC has failed to object to SPACs conceptually for many years, and since there are today hundreds of funded SPACs on the hunt for an acquisition.

Parenthetically, the Singapore Stock Exchange just last week adopted rules that will permit SPACs to be traded, subject to mandatory quality standards which echo better US practice.