SPAC Founders, Beware: SEC Targets Founders Shares

The Securities and Exchange Commission ("SEC") charges a special purpose acquisition company ("SPAC"), its CEO, and sponsor, as well as the merger acquisition target, with securities law violations, resulting in significant civil penalties and forfeiture of "founders shares" by the SPAC sponsor.

On July 13, 2021, the SEC charged a SPAC, its CEO, and its sponsor, as well as the SPAC's merger target and its founder and former CEO, with alleged violations of the federal securities laws arising out of alleged misrepresentations concerning the target's business. 

The SEC alleged that the target, an "early-stage space transportation company," and its founder misrepresented: (i) that the target's propulsion technology had been "successfully tested" in space when the company's single in-space test had failed to achieve its objectives; and (ii) the extent to which national security concerns regarding the target's founder had undermined the target's ability to secure government licenses.

The SEC further alleged that the SPAC and its CEO repeated those misleading statements in public filings related to the proposed merger in violation of Section 17(a) of the Securities Act and Section 14(a) of the Exchange Act, and failed to conduct sufficient due diligence on the target (including with regard to the target's in-space test and the national security concerns associated with its founder). In that regard, SEC Chairman Gensler acknowledged that the target may have lied to the SPAC in connection with the merger negotiations, but stated that the target's conduct "does not absolve [the SPAC] of its failure to undertake adequate due diligence to protect shareholders." The SEC's claims against the target's founder are proceeding in federal court, while the other defendants agreed to settle the charges (without admitting or denying the SEC's findings). 

Notably, as part of the settlement, the target and the SPAC agreed to pay civil penalties of $7 million and $1 million, respectively, and the SPAC's sponsor agreed to forfeit 250,000 "founders shares" it would have received in the merger. Such "founders shares," often acquired by the SPAC sponsor(s) when the SPAC is formed, can be enormously valuable to the sponsor(s) when an acquisition is consummated, and thus their forfeiture is a significant development in this case (and may be a signal of what the SEC might require in future settlements). In addition, the charges in this case follow several public statements by the SEC earlier in 2021 regarding enhanced scrutiny of SPAC disclosures and the inclusion of SPACs on the SEC's list of areas of proposed rulemaking in June 2021. See our previous Alert, "SEC Threatens to Slap SPACs." Market participants should be aware of the SEC's ongoing focus on SPACs, and should closely monitor its proposed rulemaking in the area.

Insights by Jones Day should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request permission to reprint or reuse any of our Insights, please use our “Contact Us” form, which can be found on our website at This Insight is not intended to create, and neither publication nor receipt of it constitutes, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.