Question

In: Finance

Discuss the main/general legal challenges for the introduction of SPAC’s “Special Purpose Acquisition Company’s “in the US. Discuss the main/general legal challenges for the introduction of SPAC’s “Special Purpose Acquisition Company’s “in the US.

Discuss the main/general legal challenges for the introduction of SPAC’s “Special Purpose Acquisition Company’s “in the US. Discuss the main/general legal challenges for the introduction of SPAC’s “Special Purpose Acquisition Company’s “in the US.

Solutions

Expert Solution

After years of relatively limited use since its establishment in the 1990s, Special Purpose Acquisition Companies (SPACs) have seen a tremendous upswing in the recent two to three years. SPACs have proven to be reliable in a volatile market, and the covid epidemic has given them a fresh lease on life. Some celebrities, including Shaquille O'Neal and Serena Williams, have invested in SPACs has also helped. While SPAC deals are still in their infancy in India, the number of equity investors contemplating SPAC is steadily increasing. Global Consumer Acquisition Corp, a SPAC sponsored by private equity veterans Rohan Ajila and Gautam Pai, has raised $170 million from its IPO in the United States. In comparison, two other SPACs have raised $120 million.

 

Some takeaways are:-

i) A special purpose acquisition company (SPAC) was founded to generate money to buy another firm through an initial offering (IPO).

ii) SPACs have no established business activities or specified purchase objectives at the moment of their first public offerings.

iii) From very well private equity and superstars to the broader populace, SPAC participants come in all shapes all sizes.

iv) SPACs have two years to complete a purchase before refunding shareholder monies. A specially modified acquisition company (SPAC) is formed solely to complete an acquisition or acquisition. It has no commercial operations and a management team with industry experience. Such a financial backer frequently supports it. Companies raise money through an Initial Public Offering (IPO), which is stored in a family trust and intends to invest in a company within a fixed period, typically approximately two years. The SPAC and the target firm merge into a publicly-traded operating company after the SPAC stockholders approve their purchase of the business entity.

 

General legal Challenges are:-

1) Corporate Veil:
SPACs raise the money from initial public offerings (IPOs) based on an undefined company. According to Regulatory requirements, the SPAC's registration should indicate no specific business being considered a potential purchase. SPACs will not be participating in any daily operations as of now. This all places investors in a delicate situation because they would have had no way of understanding the possibilities of any investment depending on the success, much alone Provide some institution's ambitions or prospects.

 

2) Funds from Investors:-
There is no assurance of success with any firm, which for SPACs implies not being able to close the purchase deal with any target company within the time range. In this instance, the company gets liquidated, and the investors' funds are returned to them. SPACs are required to put a considerable portion of the proceeds from the IPO in an interest-bearing escrow account maintained by an independent escrow agent until the SPACs business purchase gets completed.

 

Conclusion:-

SPACs make it easier and more dependable for a private firm should go private. SEBI intends to release a framework for the launch of SPACs in India to capitalize on this trend.

 

In terms of both organization and registration, Indian corporate administration laws remain opposed to the concept of non-operational firms. As just a result, significant changes have to be made to incorporate SPACs in the larger scheme of things. There will be a slew of regulatory changes as a result of this. Expanding the extent of breaching the corporate veil and establishing constant information are two initiatives. In addition, an influential economic input or circulation method from SPACs should be implemented. Small investors, including consumer owners, are also included.


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