Financial Innovation and Unforseen Consequences: SPACS, SEC Lending, and Shorts

Although publicly traded “special purpose acquisition companies” (SPAC) have been trading for decades, the effect of the unique shareholder rights found in SPAC shares should be fully studied and compared with the rights of publicly traded non-SPAC shares. Because of their differences, SPAC shares will not necessarily behave in the same way as non-SPAC shares in certain situations. The short selling of SPAC shares offers a useful case study as well as lessons for regulators, investors, and short sellers about the unforeseen and unintended consequences of financial innovation in the otherwise understood corner of securities lending and short selling of securities. This article argues that market participants and regulators must fully understand the impact of the unique characteristics of SPAC shares that differentiate these shares from non-SPAC shares.1 The first part will discuss the nature of SPACs and the issuance of SPAC shares. It will then identify and discuss the unique characteristics of SPAC shares in comparison to nonSPAC shares. The second part will discuss the lending of SPAC shares and the potential consequences of the short sale of SPAC shares, focusing in particular on the right of a lender of SPAC shares to vote and redeem its SPAC shares in certain circumstances. The third part will discuss recommendations to SPAC lenders, words of caution to short sellers, and possible areas of additional study for SPAC shares by the Securities and Exchange Commission (SEC)