SPACs v. IPOs: Are The Differences Opportunities For Fraud?

Some investors are increasingly opting to put their money in Special Purpose Acquisition Companies (SPACs) rather than Initial Public Offerings (IPOs). But some of the very same reasons why SPACs are comparatively more attractive may also be reasons why SPAC investors are more vulnerable to losses—and even outright fraud. Let’s explore a few of these differences to see why that’s the case.

Less Regulation

SPACs are faster and cheaper to execute than IPOs because they are less regulated than IPOs. But that also means that SPAC sponsors have fewer requirements to disclose conflicts of interest. They aren’t required to warn investors about the risks of their investment, such as those that come from dilution—when other investors come into to reduce the value of their stake

Faster Timelines

IPOs can take 12-18 months. By contrast, SPACs may take only 4-6 months from creation to its acquisition of a target company. The shorter timeframe means independent analysts have less time to evaluate a SPAC’s claims. Unscrupulous SPAC sponsors can take advantage of that by distributing exaggerated forward-looking statements and hiding other issues of concern.

Private Valuations

In contrast to IPOs’, SPAC valuations are usually done in private. This can help fraudsters since that investors will have a hard time knowing if the valuation is accurate. There’s even the possibility that different investors would receive different information.

Failure To Find A Target

Unlike an IPO, which funds an existing company, a SPAC promises to find a target that can be acquired. However, there’s no guarantee that the SPAC will find an ideal target within the allotted time frame. So the SPAC sponsors may choose a target company that isn’t worth the investment.

While there are proposed rules to tighten up SPAC activity, until they are adopted, holding SPACs accountable is going to be dependent on whistleblowers.

If you are considering becoming a whistleblower for investment fraud relating to an IPO or SPAC, don’t hesitate: Contact the experienced attorneys at Silver Law Group and the Law Firm of David R. Chase. As lawyers who have helped many whistleblowers, they can help you understand the legal ramifications of your case and come up with the best strategy to proceed. For a free, confidential consultation, email or call us today at (800) 975-4345.