Should a Special Purpose Acquisition Company (“SPAC”) be classified as an investment company? This is the question currently plaguing the SPAC industry, creating a divisive split between a long list of America’s biggest law firms on one side, and two preeminent securities law professors interested in investor protection on the other.
Robert Jackson, a professor at NYU School of Law and former SEC Commissioner, and John Morley, a Yale Law School professor, recently filed three suits against high-profiles SPACs in New York federal court. The suits argue that each SPAC is operating as an unregistered investment company, and under the Investment Company Act of 1940 (the “Act”), compensation paid to the SPAC’s sponsors and directors was illegal and void under the Act. However, in the decades-long history of SPACs, these entities have never been classified as investment companies under the Act, nor has the SEC purported that they should.
At the center of this debate lie two secondary, though potentially even more important, questions: what is a SPAC, and what is a SPAC’s primary purpose? The answer to these questions determines whether SPACs should indeed be classified as investment companies under the Act, as Jackson and Morley contend, or whether SPACs may continue to operate independently of the Act, as the SPAC industry and a wide coalition of law firms believe.
A SPAC is a type of blank check company which operates with the aim of finding an existing company to merge with, thus taking that company public. Typically, a SPAC is founded by an institutional investor, or group of institutional investors, who raise capital to go public via a SPAC IPO. The SPAC’s sponsors typically must then find a company with which to merge within 18 to 24 months. While SPAC sponsors search for a merger target, investors’ dollars are typically placed in trust accounts which hold various securities. 
Because SPACs have no sales or operations of their own, investors face a considerable degree of risk when they choose to invest in a SPAC before a merger occurs. At the same time, the merging company reaps the benefit of bypassing rigorous and time-consuming financial disclosures which the traditional IPO process entails. Once a merger occurs, the company has automatically gone public.
Under the Investment Company Act of 1940, “an investment company that is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, o trading in securities.”  Jackson and Morley argue that because SPACs invest the proceeds from their IPOs in trust accounts while they search for a target to merge with, most SPACs are just this – entities who engage primarily in investing in securities.
SPAC industry players, including the group of over 60 large law firms in the United States, contest this view. The law firms quickly signed onto a statement which refutes the factual and legal basis of the lawsuits, arguing that the primary business of a SPAC is that of identifying and acquiring a company within a specific period of time. 
Their argument centers on a plain text analysis of the Act’s language, and states that so long as a SPAC engages in its primary business of acquiring a company, their short-term investments in their trust accounts do not make them an investment company under the Act. 
While this public refutation from some of the country’s leading law firms is noteworthy, its impact on the three lawsuits filed is attenuated. It is also important to note that some of these firms represent and receive earnings from SPAC dealings themselves. 
The outcome of each of these anti-SPAC cases will be interesting to track, particularly considering their potential impacts on the SPAC industry. One expert maintains that if a court were to determine that SPACs are investment companies subject to the Act, the decision would “wreak havoc in the industry, forcing sponsors to restructure their compensation and find new ways to safeguard investors’ capital.”  As these cases progress, please reach out to our attorneys with any questions you might have.