Downside for Ackman, proposed ‘SPARC’ investment vehicle over SEC review of NYSE rule


Bill Ackman, CEO of Pershing Square Capital, speaks at the Wall Street Journal digital conference in Laguna Beach, California, United States, October 17, 2017. REUTERS / Mike Blake

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  • Cadwalader, Wickersham & Taft LLP

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December 15 – The United States Securities and Exchange Commission threw a big obstacle to billionaire Bill Ackman’s plans for a public offering of a new investment vehicle he described as “substantially more favorable and protective of investors.” than the special blank check for final acquisition companies, or SAVS.

In a little-noticed order last week, the SEC said it needed more information on a proposed New York Stock Exchange rule change that would allow the listing of warrants issued by an organized company only to identify a merger and acquisition target. The SEC expressed concern, among other things, that the exchange’s proposal did not adequately protect investors from potential fraud and manipulation in the warrant market.

Oddly, in light of a high-profile litigation alleging that certain SPACs should be subject to regulation under the Investment Companies Act of 1940, the SEC order of December 8 also stated that companies seeking to offer warrants under the new rule proposed by the stock exchange could meet the definition of an investment company.

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Changing the rules of the exchange is a critical part of Ackman’s plan to offer investors a stake in what he calls a Special Purpose Acquisition Rights Company, or SPARC. In the traditional PSPC model, as you know, investors buy shares of a public company specially created to acquire a private company that will go public through the listing of PSPC. SAVS sponsors hold investors’ cash – usually in money market accounts or government securities – while they seek acquisition targets. When the SAVS enters into a transaction to acquire a target, investors who do not like the transaction can buy back their shares at the purchase price.

In Ackman’s SPARC model, on the other hand, investors don’t put money in until the acquiring company negotiates and comes up with a deal with a target. Instead of selling shares to the public, SPARC offers warrants that give holders the right to eventually purchase shares of the amalgamated company. If investors don’t like the deal, they can sell their warrants.

Ackman’s Pershing Square SPARC Holdings Ltd filed for SEC approval on November 26. If the SEC declares SPARC’s registration statement effective, the new company will distribute more than 244 million warrants to investors at Pershing Square Tontine Holdings Ltd, Ackman’s previously registered $ 4 billion company. SPAC.

Last August, two prominent law professors, Robert Jackson of New York University and John Morley of Yale University, sued the Pershing Square SPAC (and two others), alleging that the companies, which had been operating since more than a year without finalizing an acquisition, were subject to regulation under the Investment Companies Act because their only real business was managing their investors’ money. Ackman informed investors at Pershing Square Tontine SPAC in August that the lawsuit had accelerated his plan to seek SPARC approval.

“If we manage to get SPARC’s approval, and I am confident that we will, we will have a clear path to mitigate the damage this litigation has caused and will continue to cause to Tontine shareholders and mandate holders,” Ackman said. in the August letter to investors.

But SPARC cannot move forward without SEC approval of the New York Stock Exchange rule allowing its warrants to be listed. This is why the SEC order expressing concerns about the stock market rule is a setback for Ackman and Pershing Square. (So ​​far, no entity except Pershing Square has offered SPARC.)

A Pershing Square spokesperson declined to make a statement on the SEC’s Dec.8 order. A spokesperson for the New York Stock Exchange declined to comment.

In Ackman’s comment letter to the SEC on the exchange’s proposed rule, he said the SPARC structure would eliminate bargains for SPAC sponsors, give acquiring companies a longer time frame to find targets. promising and would allow investors to make more informed decisions about whether to buy into the business.

The SEC order, however, said the stock market rule did not explain how the market would value SPARC warrants, which can be issued for no consideration and only derive value from the hope that the SPARC sponsor will eventually find a valid deal.

This type of security, the SEC said, could be “particularly sensitive to rumors about potential acquisition targets and the terms of potential transactions.” If warrants are trading at penny stock valuations, the SEC has suggested, a “bad player” could manipulate the market without even spending a lot in upfront costs.

The SEC also said it was not clear from the stock exchange proposal whether investors who exercised their warrants would be entitled to sue if they came to believe that SPARC misrepresented the acquisition in SEC records. And finally, according to the decree of December 8, SPARC could trigger the Investment Company Act, which would require an additional rule from the New York Stock Exchange “which contemplates the status of the company under the law of 1940”.

Ackman’s attorneys at Cadwalader, Wickersham & Taft appeared to anticipate some of the SEC’s concerns in their comment letter on the NYSE proposal, specifying, for example, that warrants should only be redeemable after the SPARC has provided full information to the SEC on its intention to acquire.

The SEC order said the commission needed more information from the New York Stock Exchange before it could decide whether or not to approve the listing of the SPARC warrants. Any other interested party, specifies the ordinance, can also present observations. The comment period extends over 35 days from the date of publication of the decree in the federal register.

It looks, in other words, that Ackman’s SPARC novel will have to wait until at least 2022 to be released to the public.

The opinions expressed here are those of the author. Reuters News, under the principles of trust, is committed to respecting integrity, independence and freedom from bias.

(UPDATE: This column has been updated to reflect that a New York Stock Exchange spokesperson declined to comment.)

Read more:

Bill Ackman’s Pershing Square SPARC Files for New York List

Law professors defend theory that PSPC is illegal under the Investment Companies Act

49 companies in 72 hours: how the PSPC bar united against the meteoric lawsuits of law teachers

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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the principles of trust, is committed to respecting integrity, independence and freedom from bias.

Alison frankel

Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A graduate of Dartmouth University, she worked as a reporter in New York covering the legal and law industry for more than three decades. Prior to joining Reuters, she was a writer and editor for The American Lawyer. Frankel is the author of Double Eagle: The Epic Tale of the World’s Most Valuable Coin.


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