Does it SPARC Joy? Cleaning Up the SPAC Space

For the last few years, the special purpose acquisition company—SPAC—was one of the hottest investment trends on Wall Street. In a SPAC, an investment vehicle with a limited lifespan (usually two years), a sponsor raises money from investors up front with the goal of finding a target company to take public via a reverse merger with a publicly traded shell company. Once touted as a democratized way to access public markets that avoids the rigors associated with traditional initial public offerings (IPOs), those characterizations came under fire in 2021 as academics and regulators spotlighted the hidden costs and misaligned incentives that the SPAC structure precipitates. As a one-time deal that allows investors to opt out of a proposed merger, the SPAC lacks the “reputation” component that underpins private equity relationships by constraining agency costs and opportunism. Enter the special purpose acquisition rights company—the SPARC—a reconceived SPAC model that would allow investors to opt in when the sponsor identifies a good deal. This Note highlights how the SPARC promises to reintegrate the reputational component that the SPAC lacks by facilitating repeat deals and reframing the sponsor-investor relationship as a long-term one. For the SPARC model to become a reality, the Securities and Exchange Commission (SEC) needs only to pass a rule proposed by the New York Stock Exchange (NYSE) that would enable SPARC sponsors to issue tradeable Subscription Warrants before raising capital. Instead, the SEC issued a raft of proposed rules intent on killing the SPAC, prompting the NYSE to withdraw its proposal. This Note calls for the SEC to scrap the bulk of its proposed SPAC rules in favor of a revised rule allowing the issuance of Subscription Warrants for compensation that incorporate an oversubscription privilege to match investor appetites with target company funding needs