Legal Troubles 👩‍⚖️

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Legal Troubles

SPACs have been another highlight of 2020. A SPAC is a blank-check company that is listed on the stock market for the purpose of raising capital and acquiring a private business. Many electric vehicle businesses have entered the market through this route, but you have DraftKings and Virgin Galactic, the companies who started the SPAC trend of 2020. Companies use this method as it accelerates the process of entering the market while also allowing more capital to be raised, and these blank-check companies often have experienced people in the finance industry behind them.

SPACs do have their flaws, and one is playing out now. The most common lawsuit towards SPACs was the idea of the company misleading investors, which was especially true with Nikola Motors, one of the hottest SPACs that ended up crashing as they had no car sales or plans to back it up. Their CEO, Trevor Milton, is in hot water, but the new lawsuits have gone deeper. Two law professors opened a lawsuit against Bill Ackman’s SPAC, Pershing Square Tontine Holdings, and a few other ones. They allege that these SPACs are violating the Investment Company Act of 1940, which was made to protect retail investors after the stock market crash. One thing the lawsuit is hitting hard on is Ackman’s SPAC proposing to buy a 10 percent stake in Universal instead of acquiring a private company, which they allege violates the act. People in the financial industry expect these lawsuits to continue and even increase, which could drop an ice cube in the already cold SPAC market. What do you think about these lawsuits?

I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.

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