Published online in Washington University Law Review.

Abstract

Special purpose acquisition companies (SPACs) exploded in popularity in the past few years, to such a degree that they made up 60% of IPOs in 2020, 66.3% in 2021, and 69.4% in 2022. Celebrities from Colin Kaepernick to Jay-Z have launched SPACs, but perhaps the most feverish attention came in October 2021, when a SPAC called Digital World Acquisition Corp (DWAC) announced plans to acquire Trump Media & Technology Group (TMTG), a social media company headed by former president Donald Trump.

The SPAC frenzy has now abated, a casualty of some combination of higher interest rates, regulatory crackdown, and oversupply. But the SPAC phenomenon was an innovation in the capital markets unprecedented since the very beginning of modern securities markets in 1933. If SPACs are dead, an autopsy is in order.

It has been conventional to decry SPACs as exploiting the rules to create an end run around the more vexatious aspects of the traditional IPO process. On this view, SPACs can be dismissed as mere regulatory arbitrage, a product of pandemic-fueled retail investing exuberance best left in the rear-view mirror.

This article rejects that view. We argue that SPACs represent more than back-door, low-rent IPOs. They create a new kind of market for private companies—that, and not regulatory sleight-of-hand, is their real innovation. In a companion paper we describe how, in the buildup to the IPO, the Securities Act of 1933 (the “‘33 Act”) tightly constrains the kind of information a private company can disclose and the manner in which it is disclosed. This approach, premised on the assumption that the public is prone to hysteria, results in information trickling out over time. Only when the regulators and underwriters deem the offering ready for the public will they greenlight the IPO. Thus, U.S. securities law intentionally structures a traditional IPO by decoupling the accumulation of information about a still-private company from the time when it begins to trade.

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