Investment risk is fundamental.  It is something that cannot be avoided.  Certain investors are high-risk takers while others are either medium or low-risk takers.  SPAC investors are advised to follow the IBC opportunity identified closely.  This helps to reduce the risk which means losing a small portion of the investment money when an investor opts to leave the SPAC and seek a return.  Like any company, the SPAC may have successfully completed the SPAC transaction, IPO proceeds used and trust account liquidated.  The SPAC business appears ongoing with qualified and experienced management personnel yet it may still develop a risk and eventually suffered losses despite corporate governance calls for ethical behavior, risk management, accountability, transparency, and responsibility.  Failure to disclose information promptly or there is concealment also may contribute to losses (see SEC v. Carney, Civil Action No. 2:21-cv-00720-WSS (W.D. Pa. Filed June 1, 2021); SEC v. Couture, Civil Action No. 1:21-cv-10908 (D. Mass. Filed June 1, 2021); SEC v. Pulier, Civil Action No. 2:17-cv-07124 (C.D. Cal. Filed September 27, 2017); SEC v. Rayat, Civil Action No. 1:21-cv-4777 (S.D.N.Y. Filed May 28, 2021); SEC v. Caine, Civil Action No. 1:21-cv-02859 (N.D. lll. Filed May 27, 2021); and SEC v. Gomes, Civil Action No. 1:20-cv-11092 (D. Mass. Filed June 9, 2020).

An investor must consider carefully at which SPAC stage he wishes to invest.  The level of risks is as follows:

Level 4 – High Risk (Post SPAC)

  • No trust account
  • SPAC Shares traded. Share price determined by the market (Secondary Market)
  • SPAC business ongoing, but performance uncertain or losses reported
  • SEC Filing, but no guarantee filings will be prompt

Level 3 – Medium Risk (For SPAC Investors With or Without Warrant)

  • Trust account available
  • Without IPO underwriter
  • SEC effective and listing sought
  • IBC opportunity identified, pursued but may fall-out

Level 2 – Low Risk (For SPAC Investors With or Without Warrant)

  • Trust account available
  • IPO underwriter secured
  • SEC effective and listing sought
  • SPAC Transaction Completed

Level 1 – Very Low Risk (Minimal Risk)

  • Founder Members/SPAC Sponsors

Each risk level has its own characteristics and features that attract the degree of risk.  Therefore, investors following the progress of the SPAC is important.  Unhappy, opt-out and seek a refund (Levels 2 and 3).  Investors could not opt-out at Level 4 instead liquidate the shares through the secondary market which may likely suffer greater losses than losses at Levels 2 and 3.

The critical path in a SPAC timeline appears to be the IPO and the IBC opportunity identified.  The former demonstrates the ability to raise the money for the SPAC and that depends on the IPO size and capability of the underwriter.  The latter is the business prospect of the IBC opportunity identified.  The timeline is two years for the completion of a SPAC transaction.

SPAC Sponsors enjoyed the minimal risk. Usually, they are the management team and are rewarded with remuneration and compensation with shares.  It is an important matter and disclosure required in the prospectus.

Is there a risk when there are so many SPAC IPOs?  Besides the type of risk described above, there is another risk for SPAC.  Looking at the behavior of investors, the majority of them are short-term investors seeking a quick profit.  SPAC management will have the pressure to source, negotiate and complete an IBC within two years.  To circumvent this pressure, SPAC may turn to acquire small companies which are faster.  The majority of small companies suffered ethical corporate governance practice and business performance may not above par.  This is a risk.  Investors need to understand that there is nothing to stop a SPAC to acquire or merge with a small company.

Often share price begins to drop after the IPO due to published financial statements showing financial losses.  The remuneration, reward, and compensation paid to the SPAC management team including underwriting commission for the IPO and professional fees for the lawyers, accountants, transfer agents, and manager for the issue (Issue Expenses) are substantial contributions to the losses with insufficient sales revenue.  Can the SPAC sustain the losses and maintain its business operation, no one could tell.  This is a risk.