- Bill Ackman’s SPAC is being sued for not operating as a blank-check firm, the New York Times reported.
- They argued that Ackman’s SPAC has behaved more like an investment company than an operating company.
- Ackman’s SPAC pushed back saying it has never held investment securities that would require it to be registered under the Act.
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Billionaire hedge fund manager Bill Ackman’s SPAC is being sued for not operating as a blank-check firm, the New York Times first reported Tuesday, a case that could affect the broader industry amid a boom in the past year.
Ackman’s Pershing Square Tontine Holdings was hit with a lawsuit by former SEC Commissioner Robert Jackson and Yale law professor John Morley.
Both argued that Ackman’s SPAC is operating more like an investment fund than an operating company -similar to his hedge funds – which means it should instead be regulated by the Investment Company Act of 1940.
Investing in securities is basically the only thing that PSTH has ever done,” the complaint viewed by Insider said, adding that buying stocks is not what a SPAC is supposed to do.
The lawsuit, filed in US District Court in Manhattan, also pointed to the warrants – the right to purchase common stock at a certain price – that sponsors and directors would receive.
“This staggering compensation was promised at a time when the returns to the Company’s public investors have starkly underperformed the rest of the stock market,” the complaint said.
Pershing Square pushed back against the lawsuit Tuesday saying it has never held investment securities that would require it to be registered under the Act – and does not intend to do so in the future.
“We believe this litigation is totally without merit,” the statement said. “The complaint bases its allegations, among other things, on the fact that PSTH owns or has owned US Treasurys and money market funds that own US Treasurys, as do all other SPACs while they are in the process of seeking an initial business combination.”
In July, Ackman scrapped his plan to buy 10% of Universal Music for $4 billion after federal regulators poured cold water on the proposed transaction, the billionaire announced in his shareholders’ letter.
SPACs, shell companies that list with the aim of merging with private companies and taking them public, have exploded in popularity in the past few years.
This method is typically done in lieu of an IPO or a direct listing and has garnered support from Wall Street heavyweights as well as pop icons and professional athletes.
Ackman, for his part, has tried to rewrite the rules for his SPAC.
For instance, he said he will be “taking no compensation” in a bid to appeal to more investors. “We created the most investor-friendly SPAC in the world,” Ackman said, adding that SPACs are an easier route to public markets than a traditional IPO.
But given the frenzy around blank-check listings, regulators have begun looking into tightening the rules.
In 2020, a total of 248 SPACs raised $83.3 billion according to SPAC Analytics. Over halfway through 2021 alone, data already show 412 SPACs that have raised $121 billion, comprising 53% of initial public offerings.
The past months however have seen a slight cooling off in the red-hot SPAC market as first-day trading spikes that were common in the space earlier this year begin to evaporate.