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FINRA is Investigating Unnamed Special Purpose Acquisition Companies (SPACs) and Their Affiliates

October 20, 2021 Blog

The Financial Industry Regulatory Authority (FINRA) recently announced that it is investigating unnamed special purpose acquisition companies (SPACs) and their affiliates for possible securities law violations. In order to do so, the self-regulatory organization is requesting records from brokerage firms that may have offered investments in the subject SPACs to their clients. Financial fraud attorney Jake Zamansky explains:

What is a Special Purpose Acquisition Company (SPAC)?

A special purpose acquisition company is a shell company that raises money from investors for purposes of acquiring a private company that the SPAC intends to take public. FINRA notes that “[a]n unprecedented number” of SPACs have conducted initial public offerings (IPOs) in recent years. According to FINRA, “[i]n 2020, SPACs raised over $80 billion, and in the first nine weeks of 2021 SPACS raised over $70 billion.”

While some SPACs form with a specific target industry or company in mind, others do not. In any case, an SPAC typically has 18 to 24 months to find a suitable company to pursue. Crucially, as FINRA notes, the SPAC IPO process can be completed, “without much of the financial reporting, due diligence and disclosure involved in a traditional IPO,” as, “the SPAC process back-loads the documentation requirements to the latter stages of the [acquisition and merger].”

What are the Investment Risks Involved with SPACs?

While SPACs can be attractive to retail investors because they afford the opportunity to invest in private companies without meeting the accredited investor requirements that apply in other circumstances, SPAC investments also present a number of risks. For example:

  • SPAC investors typically have limited access to information before and during the IPO process
  • SPACs tend to be highly speculative investments, particularly when a target company has not yet been identified
  • SPAC sponsors often charge substantial fees, and FINRA estimates that as much as a third of investor funds may go to fees and other forms of compensation
  • Due to the limited disclosure requirements and other unique aspects of SPACs, conflicts of interest and other forms of fraud are serious concerns

Why is FINRA Investigating SPACs and Brokerage Firms that Offered SPAC Investments?

So, why is FINRA investigating unnamed SPACs and brokerage firms that offered SPAC investments? At this point, it is not entirely clear. FINRA is seeking documentation pertaining to SPACs’ investment offerings and brokerage firms’ policies and procedures, due diligence practices, client communications, and other activities related to SPAC investment offerings, and it is specifically focusing on the period from July 2018 through September 2021.

Schedule a Free Consultation with a Financial Fraud Attorney

If you have lost money investing in an SPAC, you should speak with a financial fraud attorney about your legal rights. Depending on the circumstances involved, you may be able to recover your losses from your brokerage firm through FINRA arbitration. To schedule an appointment with an attorney at Zamansky LLC as soon as possible, call 212-742-1414 or tell us how we can reach you online now.