Boom to Bankrupt

SPACs were booming in 2020. Now they are going bankrupt. Here's why.

Boom to Bankrupt

Hi ZipLawyer! I'm Ludo Lugnani and this is ZipLaw: an independent newsletter covering unique news stories. We explain how each story impacts law firms and their clients so that you can stand out in interviews and applications and develop your Commercial Awareness!

Today's newsletter is a 7 min read:

  • πŸ“‰ Boom to Bankrupt: SPAC companies are leading a new bankruptcy trend, here's why.
  • βž• Plus: China's reduced GDP target, UN agree ocean treaty, Arm plans US IPO and Toblerone needs a new mountain.

πŸ“° News Briefing

  1. 🌟 China's prime minister announced a GDP growth target of around 5% and increased military spending by 7.2%, focusing on economic stability and emerging from strict covid-19 controls.
  2. 🌊 Negotiators at the UN finally agreed on the High Seas Treaty, designating 30% of international waters as protected areas by 2030 to preserve marine life, the first ocean treaty since 1982.
  3. πŸ’° Arm plans to raise at least $8bn when it lists in America, one of the biggest launches in the past decade, rejecting Britain's calls for a dual listing.
  4. 🍫 Toblerone's image of the Matterhorn mountain peak will be removed from packaging as production moves from Switzerland to Slovakia, following Swiss rules prohibiting national symbols for milk-based products not made exclusively in Switzerland.

🀿 Deep Dive

Boom to Bankrupt

In brief:

  • A wave of bankruptcies is coming. for Special Purpose Acquisition Companies (SPACs). This is a great story to discuss in an application or interview to show your understanding of the latest trends in the corporate, restructuring and capital markets legal departments.


Remember SPACs? Those shell companies that became wildly popular in 2020-2021 by going public with the intention of using investor money to buy another company? They were so popular that over 40% of 2020’s IPOs by volume were SPACs, raising $31.6 billion!

The trouble is, many SPACs are now failing. Almost 100 companies that went public in this way don't have enough money to fund their current level of spending over the next year.

Of these, nearly 73 currently trade below $1 a share, risking a potential delisting from major exchanges (the share price of most SPACs before a merger is $10).


SPACs in short: A SPAC is formed to raise money through an initial public offering (IPO) to buy another company. At the IPO, SPACs do not have business operations or stated targets for acquisition. SPACs have two years to complete an acquisition or they must return funding to investors.

What drew investors to SPACs?

Sponsors (i.e. investors who set up and support a SPAC in its pre-IPO stage) can earn big money from SPACs because they get a chunk of stock in the newly public company if they can close a deal.

Meanwhile, early investors can secure a nice return for a while. That's because each $10 share of a SPAC can be redeemed, with interest typically around 1.5%, before the merger. Additionally, there's a "warrant" entitling holders to buy more shares at cheap prices if things go well.

However, this seemingly low-risk deal that hedge funds got isn't what drew retail investors to blank checks. The companies targeted for acquisition often made highly optimistic forecasts for revenue and earnings growth. And in hopes of getting in early on some hot new business, retail traders would buy SPAC stocks ahead of the expected merger or just after, sometimes paying well above $10.

Why are SPACs in trouble?

Many SPACs have been hurt by a surge in redemptions. When their investors don't like an upcoming merger or simply wish to recoup their money, they can redeem their shares before the deal goes through.

Over the past year, the average SPAC saw more than 80% of its shares cashed in. These redemptions mean that companies raise less cash from the deal.

  • For example, Starry Group hoped to raise as much as $450 million when it merged with FirstMark Horizon Acquisition Corp. last March, assuming none of the SPAC investors took their money back. However, FirstMark shareholders chose to cash in more than 90% of their SPAC shares when they approved the combination. The redemptions reduced Starry Group's bundle of new money to a little over $155 million. It traded for about 11 months and now plans to sell itself out of bankruptcy or repay its lenders with new stock (ouch!).

Credit: Bloomberg

How does this Impact Law Firms and their Clients?

Note: In this section, we consider how law firms' clients may be affected by the story we discussed. We then explain how law firms can help, and which particular legal departments could see an increase in work and why.

πŸ’Ό What does this mean for law firm's clients?

  1. SPACs: SPACs are not having a great time at present, and it is quite likely this will keep getting worse. More of these shell companies will run out of cash or struggle to find suitable deals leading them straight to bankruptcy. Those that manage to stay afloat will have to deal with tougher regulation in the US as the Securities and Exchange Commission (SEC) cracks down on these investment vehicles.
  2. SPAC sponsors: SPAC sponsors stand to lose a significant amount of money if the SPAC they sponsor fails. Sponsors typically get a chunk of stock in the newly public company if they can close a deal. However, if the SPAC is unsuccessful, they could lose their initial investment. For instance, if the SPAC is unable to find a suitable target to merge with.
  3. SPAC investors: SPAC investors, particularly retail investors who purchased SPAC shares ahead of the expected merger or just after, could be negatively impacted by SPACs financial struggles. The companies targeted for acquisition often make highly optimistic forecasts for revenue and earnings growth, which could lead to investors paying well above $10 per share. If the SPAC fails, these investors could lose a significant amount of their investment.
  4. Companies seeking to merge with a SPAC: Companies seeking to merge with a SPAC could be negatively impacted if the SPAC fails to raise enough capital to complete the merger. This could result in the company not receiving the expected investment to grow and expand. However, if the SPAC is successful in raising enough capital, the company could benefit from going public without having to go through the traditional IPO process, which can be costly and time-consuming.

βš– Which legal departments would this impact?

Insolvency and Restructuring

Advising a Distressed SPAC: If a SPAC is struggling to find a target company to merge with, or if the merger falls through, the SPAC may find itself in financial distress as it needs to return funds to investors. In this scenario, the Insolvency and Restructuring legal department could advise the SPAC on its options for restructuring or liquidation.

  • Examples of work: Some of the options that may be considered and on which they would advise include: filing for bankruptcy protection and reorganizing the business through a bankruptcy process, liquidating the SPAC and distributing the proceeds to investors, negotiating a debt restructuring with creditors.

Legal Claims against the SPAC: If a SPAC is struggling and its shares are trading below $1, investors may be at risk of losing their entire investment. In this scenario, the Insolvency and Restructuring legal department could represent investors in pursuing legal action to recover their investments.

  • Examples of work: The department would be responsible for: assessing the viability of a legal claim against the SPAC, its sponsors, or other parties involved in the SPAC, representing liquidators and creditors in negotiations with the SPAC, and advising on the impact of a bankruptcy moratorium on halting any claims.

Capital Markets

Advising on disclosure requirements: The Capital Markets legal department could advise SPAC sponsors on the disclosure requirements related to SPAC offerings, including the risks associated with investing in SPACs and the potential impact of redemptions on the SPAC's financial position. For example, the department could advise on the disclosure requirements related to the financial position of the SPAC after redemptions, and the impact of redemptions on the amount of cash available to the SPAC to complete a merger.

Advising SPACs on compliance with SEC rules: The SEC is considering imposing stricter rules on SPACs, including disclosure requirements, qualifications of directors and officers, and redemption rights of investors. The Capital Markets legal department could advise SPACs on how to comply with these proposed rules and other SEC regulations, including disclosure requirements and potential liability for non-compliance.


Corporate governance: The corporate legal department will be asked to advise SPACs and investors on corporate governance requirements, including board composition, director duties and responsibilities, and the legal framework that governs SPACs. They are also responsible for ensuring that the SPAC and its directors are in compliance with regulatory requirements, including SEC rules and regulations.

  • Examples of work: Advising a SPAC board of directors on their fiduciary duties in connection with a proposed merger, including conflicts of interest and the duty to maximize shareholder value.

Securities offerings and disclosure requirements: The Corporate legal department is responsible for advising SPACs and investors on securities offerings and disclosure requirements, including registration requirements and disclosure obligations under securities laws. They are also responsible for ensuring that the SPAC and its directors comply with securities laws and regulations.

  • Examples of work: Advising a SPAC sponsor on disclosure obligations related to the target company's financial statements and other material information. Reviewing and commenting on SEC filings related to the SPAC merger, including proxy statements and registration statements.


Shareholder lawsuits: Litigation lawyers could represent SPACs or investors in shareholder lawsuits arising from SPAC mergers or investments. For example, if a SPAC merges with a target company and the resulting company underperforms, shareholders may sue the SPAC sponsor for failing to disclose material information about the target company. Litigation lawyers could also represent the SPAC sponsor in defending the lawsuit and minimizing potential damages.

Regulatory investigations: Litigation lawyers may represent SPACs or investors in regulatory investigations related to SPACs. For example, if the SEC launches an investigation into a SPAC sponsor for failing to comply with securities laws or regulations, the Litigation legal department would represent the SPAC sponsor in responding to the investigation and minimizing potential penalties. Additionally, the litigation lawyers could advise investors on their rights and options in the event of a regulatory investigation, including potential claims for damages.

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