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SEC Enforcement Action Demonstrates Importance of Robust Conflicts-of-Interest Practices in SPAC Transactions

Special purpose acquisition companies (SPACs) and those associated with SPAC transactions have increasingly become targets for enforcement action by the U.S. Securities and Exchange Commission (SEC). Most recently, the SEC continued that trend by pursuing a New York-based investment adviser, Perceptive Advisors LLC, for failing to disclose conflicts of interest regarding certain SPAC transactions. Perceptive resolved the case by consenting to pay a $1.5 million fine. 

A SPAC is a publicly traded corporation that is promoted by “sponsors” that invest risk capital to cover expenses associated with consummation of an initial public offering and operating expenses as a public company (e.g., fees for bankers or lawyers). The SPAC raises public equity, hoping to combine with a privately held corporation during the SPAC’s lifespan, which is typically between one and two years. If no combination happens during its lifespan, a SPAC will be forced to liquidate and return the proceeds of the offering to public shareholders, and the sponsors will lose the risk capital. If there is a combination, the sponsors will be able to sell their shares after the expiration of their lock-up period, which often represent 20 percent of the equity interest of a SPAC prior to a combination.

According to the SEC, Perceptive advised many clients to invest in certain SPACs, but failed to disclose that the SPAC sponsors were owned by Perceptive personnel and by a private fund that Perceptive also advised. The SEC was concerned that investors did not know that Perceptive personnel “were entitled to a portion of the compensation the SPAC sponsors received upon completion of the SPACs’ business combinations.” [1]

The SEC’s order, which was entered into by agreement, found that Perceptive repeatedly invested assets of a private fund it advised in certain transactions that helped complete the SPAC’s business combinations, but that the firm failed to timely disclose these conflicts in violation of various provisions of Section 206 of the Investment Advisers Act of 1940. Those provisions make it unlawful to engage in any transaction that operates as a “fraud or deceit” on a client (Section 206(2)) or to engage in any act that is “fraudulent deceptive, or manipulative” (Section 206(4)). The SEC’s order also found that Perspective failed to timely file a required report on Schedule 13D about its beneficial ownership of stock in a public company.

It should be noted that the SEC’s Division of Corporate Finance has issued guidance on disclosures about the economic interests of SPAC sponsors, directors and officers. Among other things, Corporate Finance has provided guidance on disclosure considerations for de-SPAC transactions, including the process for evaluating the target company, material factors leading to approval of the transaction, conflicts of interest, and other additional financing necessary to complete a de-SPAC transaction.

The SEC’s decision to make an example of Perceptive is a reminder that SPACs and those involved in SPAC transactions would benefit from careful scrutiny of potential conflicts of interest. To that end, it may be worthwhile to consider developing, with the guidance of experienced legal counsel, written policies and procedures related to conflicts of interest, and conducting related training for staff to facilitate their understanding and the actual day-to-day application of those rules. 

FOOTNOTES

[1] SEC Press Release, https://www.sec.gov/news/press-release/2022-155

Copyright © 2022 Robinson & Cole LLP. All rights reserved.National Law Review, Volume XII, Number 271
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About this Author

Benjamin M. Daniels Attorney Business Litigation Robinson Cole Hartford
Counsel

Benjamin Daniels is a member of the firm’s Business Litigation Group, with a focus on complex litigation and education law. He assists Fortune 100 companies, sovereign nations, and institutions of higher education in navigating complex legal and regulatory disputes.

Domestic and International Business Disputes

Ben works with businesses on all aspects of a case, from pre-litigation strategy through appeal. He has experience at every level of litigation, serving as lead and co-lead counsel on trials, appeals,...

860-275-8223
Edward J. Heath Partner Government Enforcement and White-Collar Defense  Litigation  Internal Investigations and Corporate Compliance  Business Litigation and Dispute Resolution
Partner

Edward Heath is the chair of the firm's Business Litigation Group and leads its Government Enforcement and Corporate Compliance Teams.  In 2019, Benchmark named Ed as a Local Litigation Star for Commercial Litigation.

Resolution of Business Disputes

For the last 20 years, Ed has helped businesses across the globe resolve their disputes. An experienced trial lawyer, he has pursued or defended numerous nine- and eight-figure cases, which includes obtaining a full defense jury verdict following a multi-month trial for an institutional client facing $100...

860-275-8297
Arila Zhou Partner Robinson & Cole LLP
Partner

Arila Zhou represents special purpose acquisition corporations, emerging growth companies, funds and investment banks, with an emphasis on private and public transactions in relation to a broad range of corporate, private equity, capital markets, securities law, mergers and acquisitions, and regulatory compliance matters. She is fluent in English and is a native speaker of Mandarin. Arila is a member of the firm’s Business Transactions Group and its Capital Markets + Securities team.

212-451-2908
Dan A. Brody Litigation Lawyer Robinson+Cole Law Firm
Associate

Dan Brody is a member of the firm’s Litigation Section, including the Business Litigation Group and the Government Enforcement and White-Collar Defense, and Internal Investigations and Corporate Compliance Teams. He focuses his practice on complex business litigation matters, government and internal investigations, corporate compliance, and criminal defense.

Business Litigation

Dan routinely helps businesses navigate complex business disputes in state and federal courts. He handles a range of business disputes, including claims of breach of contract, unfair...

860.275.6416
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