May 18, 2021

Coffee & Conversation - The SPAC Boom Through an Investigator's Lens, Part 2

This episode of Coffee & Conversation continues a two-part discussion of the rise of special purpose acquisition companies (SPACs). Partners Jessica Magee and Michael Stockham are joined by Todd Ranta, a partner at PwC, and Scott Mascianica, an assistant director in the U.S. Securities and Exchange Commission's (SEC) Division of Enforcement. Part two takes a closer look at some of the risks involved in SPAC transactions, including considerations related to disclosures, financial projections, target companies and "temporary insiders" like lawyers and brokers. The speakers also talk about recent SEC enforcement actions involving SPACs and offer key takeaways for anyone currently involved in or considering becoming involved in the SPAC process.

Click here to listen to part one.


Podcast Transcript

Jessica Magee: Hello again, everybody. Welcome back to part two of our two-part Coffee and Conversation — I said that weird, two-part Coffee and Conversation — on the SPAC boom from an investigator's perspective. If you were able to join us for part one, then you know and love as much as I do, Michael Stockham, my partner from TK, joining me again today and PwC partner Todd Ranta with whom I've had and Michael's had the great pleasure of working on many matters in the past, and Scott Mascianica, my old colleague and assistant director in the Division of Enforcement in the SEC's Fort Worth Regional Office. Guys, our part one was chock full of investigative insights and helpful, at least to me, ways to think about things. My big takeaway is investigation is investigation is investigation. The rules that have always applied will continue to apply, but it's important to know the differences and special nuances that come along when you are in the SPAC world. We left off in part one, having just wrapped up a discussion about the IPO phase and some of the SEC statements there and our thoughts. Scott, I want to turn it back to you and get your thoughts — and I know they're yours and not those of the commission — but talk to us about the lifecycle. So the SPAC has gone through the IPO process, and now it's on a cadence, 18, 24 months, to conclude a business combination. What disclosure obligations, disclosure considerations and really other things, to put it very broadly, should the participants be thinking about? Again, I know you want an investigative hat. I'm not sure yet if that's more a fedora or like a wooly cap for you, but pretend you're wearing it right now. What from an investigative angle you think are the key things to be thinking about as the participants move closer to that business combination?

PIPEs and Other Disclosure Considerations for SPAC Participants

Scott Mascianica: I feel like the hat may be more of like a helmet. So to your point, there's a lot that's happening here, and I think to orient ourselves, there's just a few sort of factual predicates that we want to lay out here. As we're coming up to the de-SPAC transaction, there's likely, at least for most SPACs, there's probably some sort of shareholder approval process that is going to go on for the shareholders to approve the business combination, which likely means since a SPAC is usually going to be listed, often on Nasdaq, at least if you're going by percentages, and is registered with the SEC, then you're going to end up having possibly some sort of proxy disclosure. Depending on the structure of the contemplated business transaction, there might be an S-4 filing. So essentially, the SPAC is going to be needing to issue some sort of public report around this contemplated transaction. There may also need to be some contemplated financing, maybe in the form of a PIPE that may need to be disclosed in order to raise additional funds for the business transaction to occur. Some investors may be redeeming shares coming out of this vote for the business combination. They may rather pull their money out, their pro rata share from the trust account, like we had talked about during the prior episode. That is happening around this time as well, potentially. So again, there's a lot of moving parts here, and I think it's important to lay those out before we even talk about the disclosure considerations because I think the disclosure considerations sort of flow from a lot of those moving parts.

Jessica Magee: Can I ask about one of those moving parts?

Scott Mascianica: Yeah. If I said no, there would you have stopped?

Jessica Magee: I'm just hanging up on you, I'm just ending, I'm ending the zoom and I'm walking away. Lose my number. I'm trying to think why, and I know it's happened, why or when a PIPE would happen? Is it because you just didn't raise 100 percent of what you thought you'd raise in the IPO or you've raised X, you've found your business target and you just need to, there's a delta that needs to be covered, and so you do, you just bolt on the PIPE?

Scott Mascianica: Yeah, it's a good question. There could be a variety of reasons for it. Depending on the target, the valuation of the target may just exceed what the contemplated IPO was for the SPAC. So the SPAC raised $100 million, there needs to be $200 million in cash, therefore, the PIPE is going to fill the delta. The other scenario could involve a certain number of redemptions. Shareholders redeemed from the SPAC at different points of time, possibly in connection with some vote to extend that 18- or 24-month deadline for the SPAC to complete the transaction, and the SPAC investors redeemed their funds instead of voting to extend. So that might have dwindled the trust account, meaning that there needs to be additional financing. Yeah, so those are just a couple of examples as to why there may need to be a PIPE. I don't know if you want to get more of that.

Jessica Magee: That's really helpful. It just it pings, my antenna pop up when you think of a PIPE transaction, while there's also a SPAC on a cadence to a de-SPAC, because then you're thinking about, OK, are there competing or diverging disclosure? Are people getting better access to information, unequal, etc.? I mean, so really, it's just — I'm going to offer a pun here — you're piping in additional things, potentially additional risk, that you need to consider in terms of foot vaulting by maybe creating an uneven playing field. There are a few different analogies and metaphors in there, so I'm going to shut up and get you back to talking to us about some of the top line obligations and considerations as you're moving toward the de-SPAC.

Scott Mascianica: But I think your comments are good ones. I mean, just the idea of possible informational asymmetry, I guess. That sounded like a $12 phrase, but I think it's the best way to describe it. I mean, it certainly, the potential exists and may in fact exist just depending on what's happening for a given SPAC around this time period. But from the disclosure perspective, I think there are, there are a number of topics I mentioned in the last, the last session Corp Fin's December 20 disclosure, I think it's called Topic 11, that actually also touched on some of the disclosure topics here. John Coates, the acting director for the Division of Corporation Finance, issued a few weeks ago a statement that was his, I think it was on April 8, that also touched on some topics around disclosure and considerations around the de-SPACing timeframe and lots of other considerations. And not the least of which is when is the IPO. But I'm sure we can talk about that more. But in terms of just pure disclosure, I just want to highlight three areas. The first is around just the evaluation of potential acquisition targets. What targets, or why was this target chosen? How was the valuation reached? What factors were important to SPAC, SPAC sponsor, management, in terms of identifying this target? Those are the types of considerations that a SPAC needs to take into account before they engage in those filings that I mentioned earlier. There's certainly going to be key, or almost certainly going to be key, for any type of reasonable investor. The second area relates to conflicts. Again, we talked about that during the prior episode. I would say that there needs to be almost a refresh, sort of a supplemental assessment of conflicts, because now there's actually a specific target in play. So are there any new conflicts that have come about because this particular target has been identified? Are there relationships between the SPAC sponsor, directors and officers? Is there an underwriter that is serving in an additional capacity, such as identifying SPAC target, and did they have some sort of conflict here that would be important for the SPAC investors to know about? So just another consideration. The third area relates to financial projections, and we didn't talk about this during the first episode in terms of what some of the differences between a traditional IPO and a SPAC, because at that time, we're talking about the SPAC IPO and then the traditional IPO. But now as we get to the de-SPAC transaction, what we typically will see is that the SPAC will include some of the financial projections for the target company. And this is important because there are certain PSLRA protections, and I'll leave it to you all very capable defense counsel to talk about those, that may exist in the private litigation space, but they don't apply to SEC enforcement actions. And so one of the things that John Coates highlighted is that selectively choosing favorable projections over maybe some less favorable projections could result in some exposure. Now again, I think whenever you're looking at forward-looking information and what that looks like from an SEC liability perspective, there are layered aspects to that. That's really facts and circumstances. But I think just again, kind of hitting on the themes that we've talked about, there's the possibility of exposure depending on what the facts and circumstances are. And just the very nature of the possibility of exposure, I think should send up that little red flag there to say when you're thinking about disclosure considerations, this is something that we need to thoughtfully process before we're starting to put out this information to the public. So I think those three areas, again, just a very quick flyover, but they provide, I think, some examples of why it's so important for there to be some thoughtful consideration around disclosures at this time period.

Jessica Magee: You know, the financial forecasts, so you mentioned the PSLRA, Private Securities Litigation Reform Act (I always have to think it through my head) and protections around, safe harbors around, forward-looking statements, future expectations. And it's an important distinction between what the SEC allows and what the PSLRA allows, and those are different arenas as well. But in either when you're talking about financial forecasts, how the target company has financially performed, how it's expecting and planning it will financially perform, I think in addition to just disclosure, Todd, Michael, tell me your thoughts, it also means what are you doing as the sponsor to understand the substance, the work papers, the methodologies behind all that financial information. You know, it's one thing to disclose everything that you know and understand or think you understand. It's another thing if the math itself is questionable or needs more substance. Todd, I mean, I'm getting a little over my skis here because you're the accounting expert in the group, and I dare say Michael is as well with his background, but am I wrong on that?

Todd Ranta: I think it is a great point, Jessica. Thinking about in any transaction in the deal world, what is the financial due diligence that is done to make sure, whether it's projections, historic financials, have the basis behind them and are reliable, are reasonable, there's not a bigger risk there and you really understand how it's put together. And I think later we'll probably talk more about other risks that exist, but I just think about the documentation that's required relative to what's the basis for what you're doing and making sure that is very well documented. And a lot of times that's, you know, there might be a large gap relative to what private companies do in that space compared to what is required by the SEC for books and records and internal controls. And I think it's really thinking about are you documenting things well and are you documenting the basis behind them, which then gives you and Michael in situations you need to defend something the right contemporaneous support to say, "Hey, something may have gone awry, but here's what happened at that time, here's what people were thinking about it, it wasn't mal intent." Maybe there was a mistake or an error or whatever happened, but I think if you really spend the time in your diligence to lay that out, you're going to be in a better protected state later if things go sideways.

Considerations for Private Companies Targeted by SPACs

Jessica Magee: Michael, to Todd's point about documentation thoughtfulness, you work a lot with boards and directors, a lot of times at private companies, many of whom could well find themselves, if not already, being targeted for by many SPACs. What would you say to or what do you say to those individuals and groups? Again, to me, perfection is nice, but reasonableness and good faith are the goal and really the rules of the road. So when maybe still young or growing private companies find themselves all of a sudden being courted for a really existential change into a public life, what would you say to them or what do you say to them in terms of thoughtfully preparing for that, putting themselves in a good position to maybe become a target for a SPAC, to make sure that their financial systems, for instance, or their disclosure readiness is at least able to make that journey?

Michael Stockham: So once you get to sort of that point in time as a private company that may be participating in a de-SPAC transaction, when you think of it from a board standpoint, you've got to start thinking about the process that you're going to put in place because I think we're going to find, ultimately, that there's a tail on most of these SPACs of about 12 to 15 to 18 months before plaintiffs' attorneys, plaintiffs' firms find something they can latch onto that they think was a missed projection or an unfounded projection, etc., and maybe some stock drops and other stuff. They're going to see it play out just a little bit. So, as you approach this as a board member, you're going to want to be thinking about, well, how do we go through the analysis of this thoughtfully? How do we document that appropriately without, always the balance of that creating an entire file cabinet of evidence for a plaintiff's attorney to potentially misconstrue? How do you go about setting up that kind of process so that you can do it in the right way? I mean, talking about the forward-looking statement issues, a lot of people give or take a lot of comfort, directors and executives and otherwise, from the idea that as long as they have all that cautionary language around there, that it's going to be OK. Well, I think one of the problems in this, or one of the potential pitfalls, if you will, that might make that sort of a myth is the compressed timeframe in which all of this is happening and then perhaps an overconfidence that we can go to market with a lot of projections and paint a rosy story when things that are completely unforeseen. For example, who would have seen negative oil last June? Things that are completely outside of your control or even worse, things that are in your control: market factors that you could have seen or should have seen coming five, six months down the line in your industry, certain themes that might be going on in the industry that you should have been aware of. So when we defend or are talking to directors about what's going on, it all comes back to the process. What have they done? How have they set it up? One of the things a lot of these companies are going to have to be thinking about is who's independent? Who is really independent? What's that board going to look like the moment that you pop out as a de-SPAC public company with all of the other things that you have to learn immediately? The listing requirements for the exchanges are going to require independence, but in a private company, it might have a long history of folks that have built this company over a decade or two decades trying to create something of great value. And then now it's going to go public, and what doesn't seem like a conflict to them is something that could be flagged immediately by plaintiff's counsel outside as an independence problem. So, for example, and that piece, independence, what does it show about how the board debate is? What independence is, are people truly independent, have we actually diligenced the type of relationships people have, whether it's in charities or other businesses or friends, etc.? Are we truly ready for that kind of thing? Again, it always goes back to, no matter where we are when we're around a board, it's always a process, process, process.

Jessica Magee: I mean, we find ourselves talking about thoughtful process, a process you can repeat, a process you adhere to and a process that is demonstrably reasonable. And I know that you want to talk to Todd about financial statement, foot noting, risk identification, but before you do that, you touched on the forward-looking statement issue again. Scott, is there, you touched on this a little earlier, when is the IPO? The SPAC IPOs, there's a de-SPAC. I don't know that there is a bright line answer right now. We know what an S-1 is, and we know what a de-SPAC transaction is. Am I fair if I go home tonight thinking, maybe the important answer is, make sure you're engaging in robust and complete disclosure and thoughtfulness throughout the lifecycle, or is there some perfect answer that I've not landed on about when the IPO is happening?

Scott Mascianica: A couple of things. One, I think if that's your takeaway from all of this, that's a pretty good takeaway. Nothing more to be said. I think in terms of when the exact IPO, what is the IPO here?

Jessica Magee: That's a better way of putting it.

Scott Mascianica: I think John Coates' statement is one that's worth a read. And I think there's a lot to unpack there. I think it was well thought out. It's very detailed. And my personal takeaway from it is that it's something that everybody that's involved in this space should read and read carefully. Because I think that if nothing else, it will spark conversation in terms of what are risks, what are considerations that we need to have, and at a bare minimum, I think it slows the thought process down. We talked about the time pressures earlier, I think Todd touched on it. I think that is a very thoughtful piece to get participants in this area to bring the heartbeat down a little bit, think through some of the different scenarios and make sure that their disclosure is as balanced and robust as possible to provide as much clarity to the different investors and stakeholders involved in the various phases of this transaction, whether it's considered a singular IPO transaction or not. I think that's the ultimate takeaway.

Jessica Magee: And fortunately for people watching today, others that they work with, all of those statements by acting director Coates, Corp Fin pronouncements, anything that the SEC or any of its people have said in speeches, public statements, all available at SEC.gov. You can click on news, press releases, google it, you'll find it. You can also reach out to Michael or me for links to those pieces of information. But there's no, it's not hard to find it, and I agree the conversation is an important one day to be had. Michael, I know you wanted to nerd out with Todd a little bit on financial reporting risks. And I stole the mic from you a bit longer, so I'm going to let you pick back up with that.

"A Lot to Do and not a Lot of Time to Do It": Potential Pitfalls and Other Risks to Keep in Mind

Michael Stockham: Yeah, no problem. I'm happy to visit with Todd. I mean, one thing I find particularly important about the Coates address is the idea that the safe harbor, the PSLRA safe harbor, may not apply at all to what's said in the de-SPACing transaction, that you may be at a point where they're going to look at it essentially as an IPO and so that safe harbor is going to disappear, even in the civil realm, from private litigants, and that is something to be well aware of. And Scott mentioned something else earlier about what did the directors actually rely on. I mean, if you're a director sitting around a table and there are projections that form a basis for your decision, those pretty much need to be disclosed, I would think. The idea that you can cherry pick and tell a different story than what actually filled the bucket of information you were relying on to decide on the transaction, that is fraught with peril, both from a regulator side and a private plaintiffs' side, creates a lot of trouble. But we've talked a lot about disclosure and getting stuff out on, out into the market so people can understand what's going on. One specific area that's going to be the financials. And so since we have Todd here and he combs through financials all the time for fun on his time off, I thought maybe we'd ask him about what are some pitfalls, some places where people can stub toes or problems you see in this whole SPAC area related to the financials?

Todd Ranta: Yeah. And I'll start off with the same thing. Every one of these transactions is going to be distinct, and you've got to really look at the individual facts and circumstances. When I put on the investigator hat again, a lot of times we talk about risks relative to the fraud triangle: opportunity, pressure, rationalization or intent. And so here you talk about the opportunity and access to the public markets, the funds that go with those in taking a company public, the pressure relative to the time window that we've been talking about here for that combination to occur and the pressure of finding a transaction and a suitable target. And in this boom scenario, there are probably less targets that are out there that are suitable, and I think there's some pressure there as well. And then I think the rationalization part is back to everybody's doing it, hey, this is a good way to make money. When I listen to the conversation around a lot of the SEC, more recent pronouncements, to me, if I'm trying to digest it all and simplify it, it's really to say this isn't a shortcut method, guys, you have to be ready at the date of the combination, no different than if you're going through a traditional IPO. I mean, that's kind of my take on trying to condense it all down to something very simple, and there's a lot of details behind that. So if we look at these different areas, I'd probably have just a lot of questions that need to be asked. If you look at the timing, how long should it take to become a public company and get ready, what is the right amount of time, it's going to be different depending on that starting state of the target. Do you have that right governance structure in place both at the SPAC entity and at the target entity, and how are you going to combine them? What does your audit committee look like? What are they doing? All the things, Michael, you were talking about relative to governance and boards and what are they doing in this period of time. Does that combined company have the right public company experience? When I see that boom, there's only so many people out there with this experience, and if you have more companies becoming public quickly, you've got to be picking off people in the second or third chair at other companies to come in with that experience and be part of these transactions. IT systems, do you have the right IT systems in place to do what you need to get your financials out on time? What kind of manual controls are in place to fill those gaps? I think one of the important points is thinking about do you have enough funds budgeted for compliance. When you're talking about in your forward-looking financial statements, there's going to be a larger cost relative to being public and ensuring you're in compliance with these laws and regulations, and is that factored in? Because I really look at that as a big change from the historic operating point. The more recent SEC guidance, I think, looking at books and records and internal controls and being ready on day one, I mean, this area, it really reminds me of early in the FCPA area, where most of the companies who are getting in trouble, usually the settlements were on the SEC side because of books and records and internal control violations. And I think for private companies, it's ensuring that they have their internal control structure in place and their books and records meet the regulations. What's been done in this period of time to test and remediate any gaps that are identified? At the end, I think the governance is going to be really, really important. What is the board and what is the audit committee doing to become and get ready to be public? Do the target company auditors have experience with public company clients? I mean, the board should be asking that relative to the due diligence on the target. Are they going to be ready? Because usually, if you want an auditor with public company experience, it's not something that happens in a very short time window. It takes them a while to get up to speed, especially if they're auditing prior years. I think last, and we talked about it before, do you have the right experienced accountants, lawyers and others that have the right amount of bandwidth to make this transactional timeframe? There's a lot to think about and there's a lot to do here, and I think getting the right advice from their lawyers, probably first and foremost, in navigating this process is going to be important to staying out of trouble later. And that's where we always see things, is when these questions are asked later and things are missing and then that the compressed timeframe always makes things hard because I think it's not that something was done intentionally wrong, it's just someone ran out of time and someone took a shortcut in a corner, a corner was cut, and it comes out later and that caused the problem. So it's just trying to be aware of those risks and dealing with them head on. And I think the board, audit committee and others from a governance standpoint have a lot to do to feel comfortable and ask those questions to get there.

Jessica Magee: Todd, the point about it's a lot to do and not a lot of time to do it in is one of our big themes in this conversation because talking about the fraud triangle, it really exacerbates those risks. And even assuming best intentions by the best people, a compressed timeline can sometimes result in very good, very experienced people making a quick decision that they don't even — they're not intending to make the wrong decision, but some would say with the benefit of hindsight, some would say with the hammer of hindsight, can be called into question. And that can bring a lot of havoc and trouble and expense to the parties involved, and I think that compressed timeline of just the shorter runway of getting public juxtaposed against the day-to-day lift of being public and staying public really shouldn't be underestimated. You really need to want to be public and embrace the responsibility and obligation that comes with that. And on the shortened timeframe, I think another area of risk, and we've touched on this a little bit this morning, especially in part one, is when you've got 18 to 24 months in your trust to get to your business combination, if, just basic elasticity principles, if we're in — I know there's been an April slowdown, but let's talk about the SPAC boom that we've been tracking — if you've got potentially an over-demand for target companies and an undersupply or a limited or less frothy supply of targets, and you're coming up on a deadline to get a transaction done or liquidate, that also creates a pressure cooker for a company to make a less desirable decision. Or even we've got to get a deal done, our diligence process is going to be less deep, less substantive than it might ideally be. Again, that might be totally reasonable in the circumstances, but you need to be thinking about your governance, your reasoning, your decision making, who's involved in the decision making and how you're disclosing that because there are time pressures, both ways, both in terms of the getting public and being public and also the decision making around the de-SPAC transaction.

Scott Mascianica: And Jessica, can I jump in just real quick? Actually, this is probably a point that Todd can confirm, but it's my understanding that, Todd did a great job of explaining the various factors that need to be considered sort of in the lead up to the de-SPAC to ensure that this company within a very compressed timeframe can be prepared to go public. But after the de-SPAC, it's a matter of days, as I understand it, before the new entity, post de-SPAC transaction, has to file information that's typically included in a 10-K in a Super 8-K. I think it's within four days. So when we're talking about compressed timeframes, and Todd, you can correct me if I'm wrong, but I think that it doesn't just apply to sort of be the now instead of six months, we're talking two months. We're also talking coming out of the transaction that you have very compressed timeframes that you might be dealing with in terms of specific financial information that needs to be provided to the market. Todd, do I have that right?

Todd Ranta: I believe that is right, and I think it goes back to knowing what you're getting into, when things need to be done, so you're planning well and in ahead so you can meet very aggressive timeframes. When I think about this, Jessica, Michael, we've been doing investigations for a long time, and I think back to when I first started doing this on SEC registrants where there was an investigation, it was like the filing deadline was the hard deadline to get done. People were working 20 hours a day, as many people as possible, because nobody wanted to miss that deadline. And then what you saw industrywide was you had restatements and restatements and restatements. And finally, people kind of said, hey, let's just say, hey, we have this going on, there's a process that we're trying to get our arms around. It didn't have a big, the perceived impact on the stock price was less than what people thought it would be by just coming out and saying, Hey, here's what we know, we're working through it, we'll get back to you in that process. To take that time pressure off so you don't end up in that restatement of a restatement situation. And I just look at this as having those similar pressures of, hey, if you've got hard deadlines, it makes it hard to sometimes get things done. And that's where you get, you know, good people, you know, doing the wrong thing or missing something, right? Because they're tired because they've been, you know, working 20 hours a day to get there. It's not because of bad intent, and it's just so important to keep that in mind and be very thoughtful about, Hey, what are we getting into and can we get things done?

Temporary Insiders and Addressing Related Risks

Jessica Magee: Well, on that point, good people in the flurry of information, speed of information and decision making. Michael, this is a bit of a dogleg, but I think it's an important one. You and I have had some hallway talks about, I think, heightened risk for insider trading. And that's an area that we can talk at length about. Regulatory risk, risk to the enterprise from stockholders and others. But what about specifically insiders, yes, but temporary insiders, the lawyers, the brokers, people that are coming into these transactions, maybe seriatim transaction, and have access to material nonpublic information. Do you think that risk is heightened, is any different? I think at the very least, it's just something that parties involved in or considering being involved in SPACs need to think about. And what are the processes around preventing that risk? What are your thoughts there?

Michael Stockham: So on temporary insiders, I think there are a couple of features in a SPAC that make it particularly vulnerable. I want to loop back real quick on just one issue about the pressure run or side of the fraud triangle. There are other pressures, especially on the governance side, that are going to create here and just some of it's even just logistics. So last count, I heard there's 430 SPACs looking for a target, and all of those are in some sort of compressed timeframe before they have to liquidate. And if you think that each one of those SPACs wants to have a board that qualifies for proper independence, that means they're probably going to have to pick up at least one or two independent directors, which means that in the next 12 to 24 months or shorter, you've got somewhere around 500 to 1,500 independent directors for people to find. So there's going to be, all of this different froth in the market is going to create all kinds of different pressures for people where maybe, like Todd said, they can cut a corner. Maybe the independence doesn't have to be as clean as we think because we're just not finding qualified candidates. And all of that is, when you're in the middle of the battle trying to put it together and you're stuck in the center of the fraud triangle, try and figure a way out, it can cloud your judgment a little bit. And so there's a lot of points in here where you want to step back and just make sure that the pressure isn't driving a quasi-poor decision that people can then second-guess on the way out. On the insider, the temporary insiders, you had mentioned some of the typical ones, correct? Underwriters, auditors, lawyers, people that, you know, most professionals that understand material nonpublic information and are not going to get into somewhat of a problem. I think in the SPAC world, there's something very enticing that could be a flection point for a lot of people to make a misjudgment, and that's sort of at the beginning when the SPAC identifies its target. That's something that becomes real concrete and might trigger somebody to want to jump in and try to profit, if you will, off of that particular information without really thinking about it. Because the SPAC at this point is nothing more than an investment vehicle. To a certain extent it is a public company, but maybe in some people's mind it doesn't behave exactly like a public company. It's not like taking a new discovery at Coke or Lockheed Martin or something and just deciding that you're going to trade in the shares. But one sort of temporary insider that I think is unique to the SPAC is going to be anybody related to a PIPE, so the public investment or private investment in public equity. If you're short cash to pull this transaction, you're going to have to go out and raise money through a PIPE, which means somebody is going to have to act as a placement agent. Somebody is going to have to go out and approach accredited investors to get this cash and that person, those accredited investors, are not going to want to know what the financials on the SPAC are. That's pretty simple and pretty vanilla at this point. They're going to want to know about the target. So somehow the placement agent, which is often going to have been the placement agent underwriter for the IPO or the SPAC way back when, has to get some sort of crossover agreement, a wall-crossing agreement, to get inside the target, to bring out information to provide it to potential private investors. I think at that point, you're probably talking about nondisclosure agreements, you're trying to paper it so that anybody involved in that wall crossing understands that it's material nonpublic information and can't be put out. So I think there are ways to do it, but there's a whole different level of temporary insiders in this, especially reaching out to get more cash, that can be problematic, and again, I mean, it's been the theme throughout this morning's conversation, is there are a number of places to step back, take a breath, understand what the risk is and then implement some sort of process to demonstrate that you address that risk in a reasonable manner to try to prevent something from happening. You can't protect against every rogue operator, you can't protect against people that will lie to you or won't fess up or misrepresent things. But you do have to be able to explain to the regulators, to a chancellor in Delaware or elsewhere, wherever you are incorporated, and to private plaintiffs, the plaintiffs' firms that might be coming. You really want to, especially, let's say, an interview at the SEC or a deposition, say, in an injunction hearing to try to stop a transaction. What are your directors going to say about the processes that were put in place to deal with these risks? If you're starting to think about how it might play out in litigation, nobody wants to think about it, but if you think about that and game at that far forward, that can be a big boon. And this is a sort of a, I guess, public service announcement for folks like you and me, Jessica. We're on the private side, but a lot of corporate attorneys think about litigators as litigators, almost like emergency room doctors. We only want them when things are bad, but there's a lot of stuff that we can bring to the table early on. Anyone in all the different firms that does this work. Questions that should be asked early on because we've been in the trenches and know how this gets used in a deposition and can help formulate those processes.

Jessica Magee: Yep. Yeah.

Todd Ranta: But Michael, I was going to say, the other thing maybe to add to that in addition to the insiders, and I think we touched on a little bit earlier, but is really thinking related parties and how public or private companies get set up. And a lot of times, it's based on a circle of people you know or other companies that have been formed, whether it's customers or vendors who may have that related link to somebody at the company that nobody's even thinking about it, right? And then you're pushing through a process, do you really have a thorough process to identify those in some way that you could help defend the company later that, hey, they got them off, so something, it's always some fact that comes out later that starts the look-back process. But have we done the right due diligence at the right and appropriate time and then disclosed it as necessary?

Michael Stockham: Well, and there are a lot of resources for experienced directors out there, companies that are looking to engage in this kind of transaction, looking for experienced operators. There's the National Association of Corporate Directors, there's the Private Directors Association, there's the Institute for Excellence in Corporate Governance here in Dallas at UTD at the Jindal School of Management. There are, if you want to, if you spend just a little time through the Googler looking for people, there are a number of different organizations that can help you find very knowledgeable, very experienced operators that can also help keep a company from stubbing a toe in this area.

Recent SEC Enforcement Actions Involving SPACs

Jessica Magee: Well, speaking of stubbed toes, Scott, if past is prolog at all, what can you tell us about recent prior enforcement actions involving SPACs by the SEC's Division of Enforcement? You know, I think it's no revelation to say that we can learn a lot by the enforcement actions your agency files, the messages they send about acceptable conduct, unacceptable conduct. Can you in our waning minutes together this morning, summarize some of those and what you think people ought to know or want to know about them?

Scott Mascianica: Sure. So, to I believe a discussion between Todd and Michael earlier, this SPAC space isn't new, I think it's just being used in sort of an explosive way over recent years. But because it's not new, there have been enforcement actions in prior years. I will say that you probably are looking at a sizable gap between sort of the mid-2010s and then more recently. One of the more recent actions was out of California in a case called Ability Computer —  actually it's filed in Southern District in New York. But the case is Ability Computer, and it involved a SPAC, I believe out of Florida, Cambridge Capital, that was founded by an individual named Benjamin Gordon. And I'll sort of pause here and say that there are aspects of that case that are in litigation right now, contested litigation. For that portion of the case, I would encourage listeners to look at the SEC's complaint. And then I believe from September of last year, the court issued an order on the defendant's motion to dismiss. I think both those two documents provide a lot of detail that I think listeners would be able to glean a lot from. One interesting takeaway from that case is Mr. Gordon, who, as I mentioned, was the SPAC sponsor, he settled to various charges, including 17(a)(2) negligence anti-fraud violations and then 14A Proxy Statement violations. On a no admit, no deny basis, to be clear, but the fact that a SPAC sponsor was part of an SEC enforcement action, in part due to, at least based on the factual findings in the commission's order, failing to exercise reasonable due diligence in connection with the issuance of certain proxy materials, that's a very interesting order, I think one that anybody that's involved in the SPAC process would be well-served to read. And to your point, Jessica, that's something that's available on SEC.gov. to be able to to dig into the details there. But that's one case that I think recently provides a lot of insight. I'd expect there to be more in the future, but Ability Computer is one of the more recent ones.

Jessica Magee: You know, there's a case that I believe your office filed that I've been following and that I may mispronounce, Akazoo, Akazoo. I know it was, the private company there was purportedly an online music streaming service. I believe that the private company that went through a business combination with a SPAC, also Southern District of New York filing. And I've been following that case. I noticed that following some agreements about preserving assets, things like that, that just earlier this month, I think a bifurcated judgment was entered. Again, I think it was a no admit, no deny, and I'm using some SEC verbiage. But for people that aren't as familiar, the takeaway for me, and tell me if I'm wrong, is that they are, the company, Akazoo, however I'm supposed to say it, agreed on a no admit, no deny basis to be enjoined under the 33 and 34 Act anti-fraud provisions, but leaving for the court to determine whether and to what extent any disgorgement or prejudgment interest would be ordered. Am I understanding that correctly and anything more you can tell us? I know that matter's still pending, so you might not be able to, but to me, that's also a case that is somewhat instructive, not maybe as publicized, but that people can go read about if they want to.

Scott Mascianica: Yeah, you're absolutely right. And I sort of intentionally stayed clear of that one because that did come out of our office and my group. So I am very familiar with the case. I would say that, just to your point, in terms of the allegations there, would definitely encourage people to review the complaint. I think that there's, even just from a general perspective of understanding the SPAC space and at least how this particular SPAC worked, I think there's a lot to be gleaned from that complaint there. There is a bifurcated judgment, but given that the monetary piece is still outstanding, I'll sort of leave it at that. But I do think that it's important to note that case is 2020, Ability Computer I believe is 2019. I would expect that just given the prevalence of SPAC transactions, de-SPAC transactions that have occurred, enforcement, there's naturally going to be a little bit of a lag. So you're going to see the explosive growth in the use of this business arrangement for mergers, and then there will be some lag behind in terms of enforcement, identifying problematic transactions or bad actors in the space. So if we were to revisit this a year from now, 18 months from now, I would imagine that we would be having probably a more robust conversation in terms of recent enforcement actions. That's just my individual perspective.

Jessica Magee: I share it.

Final Thoughts: Continuing as a Public Company and Watching out for SEC Activity

Michael Stockham: Todd, let me, I know we're coming to the end of our time together, but any last thoughts on sort of generally the idea? We know that everybody's getting, wanting to get to be public, but what about the idea of continuing to be public, any last ideas there as you look at it? I know that on the forensic side in investigations, you guys often are a shadow team watching the auditors and the attestation team look at everything, and they're watching the company on the financials and the internal controls for financial reporting. So any last thoughts in that space?

Todd Ranta: Yeah, it's a good question. And I think one of the things you need to think about, you may get a lot of assistance in the process of getting ready to go public, whether it's traditional IPO or a SPAC. But once you're there, you need to continue on with that, and some of that help may go away. So do you really have the structure in place from controls, the right resources, the right people, to continue it on? And I think that's where going through the appropriate, appropriate readiness process is so critical. So that way, when the transaction occurs, you feel confident in moving forward. And I think, thinking about the things your auditor thinks about too, from the standpoint of assessing the board and management as a starting point, do they have the right experience, both as a public company or in the industry they're working on? On the other side of that, are there any integrity issues in their past that as an auditor, we might not be willing to take their representation? So I think there's, there's a lot of work to be done no matter what path you take, SPAC or traditional IPO. It's just making sure you do the right things, you're not cutting corners and you're essentially set up to be successful. Governance controls, disclosures, there's a lot, there's a lot of areas and a lot to do. It's the reason we're talking about it because, in some ways, what we've seen and what we do over the years, and anything that starts with special purpose usually is an area that it seems like people are coming back to look at later and making sure that that special purpose is used appropriately for the purpose as intended. And I think that's where it's been a very good conversation today. And I've really enjoyed it.

Jessica Magee: Well, it's a great takeaway theme that the special purpose is what will be looked at, was that special purpose achieved. And we'll continue this conversation. I know that this is something near and dear to our four hearts and we'll reconvene and nerd out on it further as things develop. And Scott, I completely agree. I fully expect to see a lot more investigative activity, both within corporations by outsiders, stockholders, regulators, etc. And I'm smart enough to know to give the government the last word here. So with Gensler, Mr. Gensler, Chairman Gensler having now been confirmed and a full complement of five commissioners, your new enforcement director Alex Oh having been named, what can you tell us? Your personally held beliefs, we know you don't bind the commission, but parting words? Final Thoughts? Close it out for us, and thank you again to you and Todd both for joining us.

Scott Mascianica: Thank you and Michael, this has been great. My personal view, if you look at what the SEC's three-part mission, a SPAC is really the intersection of all three parts and particularly on the idea of capital formation and investor protection. This is an area that is naturally going to perk a lot of interest within the walls of the SEC. And I think with any new investment product or a type of transaction that's being used in sort of novel or more explosive ways, the SEC is always going to be taking notice to ensure that bad actors that are out there or false and misleading information that's being put out, that that's being policed appropriately. And I think we can look at former, now former, acting chairman Lee issued a statement  — I think it was earlier this month or last month — just noting that there might be a misalignment between the hype associated with SPACs and the actual returns that exist, and that the SEC is closely scrutinizing the structural aspects and the disclosure aspects of these transactions, like we talked about today. Since that time, we've seen a half dozen pronouncements from the various divisions that have been issued from everything from warrant accounting to what corporate governance considerations a SPAC needs to have to disclosure considerations. And that's not typical. And so I think that when you take all of those data points, I don't have a crystal ball, but my personal view is that I think this is going to continue to be a space, at least in the near future, where the SEC is going to continue to be vigilant in policing it and ensuring that it achieves its mission.

Jessica Magee: The speed of information is mind boggling some days. But anything you want to know, is it from the SEC, again is available at SEC.gov. I know PwC puts out thought leadership in this space, and Michael and I work hard to stay up to date and communicative through our client alerts and social media channels on these matters and relevant developments. You can reach out to us at any time with questions. If you want copies of any of the guidance and statements discussed today, you're welcome to reach out to us. On behalf of Michael and myself and Thompson & Knight. I just really want to thank Todd Ranta of PwC, Scott Mascianica of the Securities and Exchange Commission, for giving us so much time today. This is our first two-part session. I'm wondering now if we should have made it a three- or four-part because we didn't even get into the warrants issue, so we might have to do a command repeat performance. But thank you both for your time, for your insights and for what you do and wishing you a happy rest of your day and a good weekend ahead. Bye all.

Todd Ranta: Thank you all.

Scott Mascianica: Thank you.

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