Recently a purported shareholder of certain special purpose acquisition companies (SPACs) initiated derivative lawsuits asserting that the SPACs are investment companies under the Investment Company Act of 1940, because proceeds from their initial public offerings are invested in short-term treasuries and qualifying money market funds.
Under the provision of the 1940 Act relied upon in the lawsuits, an investment company is a company that is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities.
SPACs, however, are engaged primarily in identifying and consummating a business combination with one or more operating companies within a specified period of time. In connection with an initial business combination, SPAC investors may elect to remain invested in the combined company or get their money back. If a business combination is not completed in a specified period of time, investors also get their money back. Pending the earlier to occur of the completion of a business combination or the failure to complete a business combination within a specified timeframe, almost all of a SPAC’s assets are held in a trust account and limited to short-term treasuries and qualifying money market funds.
Consistent with longstanding interpretations of the 1940 Act, and its plain statutory text, any company that temporarily holds short-term treasuries and qualifying money market funds while engaging in its primary business of seeking a business combination with one or more operating companies is not an investment company under the 1940 Act. As a result, more than 1,000 SPAC IPOs have been reviewed by the staff of the SEC over two decades and have not been deemed to be subject to the 1940 Act.
The undersigned law firms view the assertion that SPACs are investment companies as without factual or legal basis and believe that a SPAC is not an investment company under the 1940 Act if it (i) follows its stated business plan of seeking to identify and engage in a business combination with one or more operating companies within a specified period of time and (ii) holds short-term treasuries and qualifying money market funds in its trust account pending completion of its initial business combination.1
None of the firms subscribing to this document intends hereby to give legal advice to any person. Any person seeking legal advice should consult with an attorney.
- Akin Gump Strauss Hauer & Feld LLP
- Alston & Bird LLP
- Arnold & Porter
- Baker & McKenzie LLP
- Baker Botts LLP
- Blank Rome LLP
- Cadwalader, Wickersham & Taft LLP
- Cleary Gottlieb Steen & Hamilton LLP
- Clifford Chance US LLP
- Cooley LLP
- Covington & Burling LLP
- Cravath, Swaine & Moore LLP
- Crowell & Moring LLP
- Davis Polk & Wardwell LLP
- Debevoise & Plimpton LLP
- DLA Piper LLP (US)
- Ellenoff Grossman & Schole LLP
- Eversheds Sutherland (US) LLP
- Faegre Drinker Biddle & Reath LLP
- Fenwick & West LLP
- Freshfields Bruckhaus Deringer US LLP
- Fried, Frank, Harris, Shriver & Jacobson LLP
- Gibson, Dunn & Crutcher LLP
- Goodwin Procter LLP
- Graubard Miller
- Greenberg Traurig, LLP
- Hogan Lovells US LLP
- Hughes Hubbard & Reed LLP
- Katten Muchin Rosenman LLP
- King & Spalding LLP
- Kirkland & Ellis LLP
- Kramer Levin Naftalis & Frankel LLP
- Latham & Watkins LLP
- Loeb & Loeb LLP
- Mayer Brown LLP
- McDermott Will & Emery LLP
- Milbank LLP
- Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
- Morgan, Lewis & Bockius LLP
- Morrison & Foerster LLP
- Nelson Mullins Riley & Scarborough LLP
- Nixon Peabody LLP
- Orrick, Herrington & Sutcliffe LLP
- Paul Hastings LLP
- Paul, Weiss, Rifkind, Wharton & Garrison LLP
- Perkins Coie LLP
- Proskauer Rose LLP
- Reed Smith LLP
- Ropes & Gray LLP
- Schiff Hardin LLP
- Schulte Roth & Zabel LLP
- Shearman & Sterling LLP
- Sheppard, Mullin, Richter & Hampton LLP
- Sidley Austin LLP
- Simpson Thacher & Bartlett LLP
- Skadden, Arps, Slate, Meagher & Flom LLP
- Sullivan & Cromwell LLP
- Vinson & Elkins LLP
- Wachtell, Lipton, Rosen & Katz
- Weil, Gotshal & Manges LLP
- White & Case LLP
- Willkie Farr & Gallagher LLP
- Wilmer Cutler Pickering Hale and Dorr LLP
- Winston & Strawn LLP
1 Certain of these lawsuits also claim that personnel of the SPAC sponsor are acting as unregistered investment advisers under the Investment Advisers Act of 1940 by advising on the SPAC business combination (which the plaintiff incorrectly asserts constitutes advice as to investing in, purchasing, or selling securities). The law firms listed herein also view this claim as without legal basis and do not believe that such personnel or the SPAC sponsor are unregistered investment advisers.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.