Big Law Is Bullish on SPACs Even as Large Banks Pull Out

Proposed US rules causing banks to sour on SPACs are having the opposite effect on Big Law firms that see an uptick in inquiries about special purpose acquisition companies.

Lawyers are advising SPACs, investors, and target companies on what the rules will mean for deals being negotiated now and those that could occur down the line.

“In the past few weeks the work has increased,” said Josh DuClos, co-head of the SPACs group at Sidley Austin. “We’re having conversations with investors, banks, sponsors, about what these rules will mean.”

The US Securities and Exchange Commission proposal is creating business for law firms that benefited from the boom in the vehicles. SPACs raised more than $83 billion in 2020 and $160 billion last year, constituting more than half of all IPOs in both years, according to Skadden, Arps, Slate, Meagher & Flom.

The market had already cooled off significantly this year, even before the SEC released its proposal last month. “The SPAC space is definitely much slower than it was a year ago,” said Bob Bodian, managing partner of Mintz Levin.

Top banks including Goldman Sachs Group Inc. and Bank of America Corp. last week pulled back from SPAC work, citing liability guidelines in the SEC rules. The proposal makes it easier for investors to bring lawsuits against companies for faulty projections.

But attorneys are optimistic the vehicles will survive the rules that will now be debated after the SEC opened a month-long comment period last week. While SPACs won’t likely to return to the headiest days of the craze that drove record profits to their firms, they expect robust activity for years to come.

“I have not seen or experienced any pullback whatsoever from law firms,” DuClos said. “Nor would I expect to.”

Work for Lawyers

The SEC proposal would require legal work akin to what lawyers perform for traditional IPOs, said Robert Downes, co-head of Sullivan & Cromwell’s capital markets group. That would include due diligence around the forward-looking projections SPACs have provided, he said.

“Sullivan & Cromwell is still very interested in being in the market,” Downes said. The firm is prepared to help financial advisers “so they can do the kinds of due diligence they should be doing under the new rules.”

Lawyers expect to play a major role in the SEC rulemaking. They’re also advising clients on how to lessen the threat of lawsuits if the rules eliminate a protection from litigation regarding forward projections.

Douglas Ellenoff, whose firm Ellenoff Grossman & Schole has been a pioneer in the SPAC practice, said the new rules don’t change his view of the market’s importance.

“We will be even more committed and continue to believe with the decline in the number of public companies that SPACs have become an even more important entry point,” he said.

Sidley’s DuClos said on some deals, boutique investment banks are interested in stepping into roles vacated by larger banks.

Closing deals will become harder for SPACs that have lost their financial advisers, Sullivan & Cromwell’s Downes said. SPACs often have two years to close a deal or return money to investors.

He said he anticipates the SPAC market to return to activity levels seen before the pandemic. Then, SPAC IPOs would raise about $1 to $2 billion a month. Those figures ballooned as high as nearly $50 billion raised in February last year.

“You’re still going to see SPACs entering the market,” Downes said, “but at a pace that is closer to what you saw before the pandemic.”