In setback for Ackman, proposed investment vehicle ‘SPARCs’ more SEC scrutiny of NYSE rule

Bill Ackman, CEO of Pershing Square Capital, speaks at the Wall Street Journal Digital Conference in Laguna Beach, California, U.S., October 17, 2017. REUTERS/Mike Blake

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  • Cadwalader, Wickersham & Taft LLP

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Dec 15 – The U.S. Securities and Exchange Commission has thrown a big roadblock in the way of billionaire Bill Ackman’s plans for a public offering of a novel investment vehicle that he has described as “substantially more favorable and protective of investors” than blank-check special purpose acquisition companies, or SPACs.

In a little-noticed order last week, the SEC said it needed more information about a proposed change in New York Stock Exchange rules that would allow the listing of warrants issued by a company organized solely to identify a merger acquisition target. The SEC said it was concerned, among other things, that the stock exchange’s proposal did not adequately protect investors against potential fraud and manipulation in the market for the warrants.

Intriguingly, in light of high-profile litigation alleging that some SPACs should be subject to regulation under the Investment Company Act of 1940, the SEC’s Dec. 8 order also said that companies seeking to offer warrants under the stock exchange’s proposed new rule might meet the definition of an investment company.

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The stock exchange rule change is a critical element in Ackman’s plan to offer investors a stake in what he calls a special purpose acquisition rights company, or SPARC. In the traditional SPAC model, as you know, investors buy shares in a public company specifically created to acquire a private company that will go public through the SPAC’s listing. SPAC sponsors hold investors’ cash – typically in money market accounts or government securities – while they look for acquisition targets. When the SPAC makes a deal to acquire a target, investors who don’t like the deal can redeem their shares at the purchase price.

In Ackman’s SPARC model, by contrast, investors don’t put up any cash until the acquisition company has negotiated and proposed a deal with a target. Instead of selling shares to the public, the SPARC offers warrants that provide holders with a right eventually to purchase shares in the merged 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 Nov. 26. If the SEC declares the SPARC’s registration statement effective, the new company will distribute more than 244 million warrants to investors in Pershing Square Tontine Holdings Ltd, Ackman’s previously-registered $4 billion 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 for more than a year without finalizing an acquisition, were subject to regulation under the Investment Company Act because their only real business was managing their investors’ money. Ackman informed Pershing Square Tontine SPAC investors in August that the lawsuit had accelerated his plan to seek approval of the SPARC.

“If we are successful in securing SPARC’s approval, and I am confident that we will get it done, we will have a clear path to mitigate the harm that this litigation has and will continue to cause to Tontine shareholders and warrant holders,” Ackman said in the August investor letter.

But the SPARC can’t move forward without SEC approval of the New York Stock Exchange rule allowing its warrants to be listed. That’s why the SEC order expressing concerns about the stock exchange rule is a setback for Ackman and Pershing Square. (So far, no entity except for Pershing Square has proposed a SPARC.)

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

In Ackman’s comment letter to the SEC on the stock exchange’s proposed rule, he said the SPARC’s structure would eliminate windfalls for SPAC sponsors, give acquiring companies a longer time frame to find promising targets and empower investors to make better-informed decisions about whether to buy in to deals.

The SEC’s order, however, said the stock exchange rule didn’t explain how the market would value SPARC warrants, which can be issued with no consideration and derive value only from the expectation that the SPARC sponsor will eventually find a worthy deal.

That kind of security, the SEC said, could be “particularly susceptible to rumors about potential acquisition targets and the terms of potential transactions.” If the warrants trade at penny-stock valuations, the SEC suggested, a “bad actor” could manipulate the market without even spending much in upfront costs.

The SEC also said it wasn’t clear from the stock exchange proposal whether investors who exercised their warrants would be entitled to sue if they came to believe that the SPARC misrepresented the acquisition in SEC filings. And finally, the Dec. 8 order said, SPARCs might trigger the Investment Company Act, which would require an additional New York Stock Exchange rule “that contemplates the company’s status under the 1940 Act.”

Ackman’s lawyers at Cadwalader, Wickersham & Taft seemed to anticipate some of the SEC’s concerns in their comment letter on the NYSE proposal, specifying, for instance, that the warrants should only be redeemable once the SPARC has provided full disclosures to the SEC about its intended acquisition.

The SEC’s order said the commission needs more information from the New York Stock Exchange before it can decide whether to approve the listing of SPARC warrants. Any other interested party, the order said, can also submit comments. The timetable for comments extends 35 days from the date the order is published in the federal register.

It looks, in other words, like Ackman’s novel SPARC will have to wait until at least 2022 to go public.

Opinions expressed here are those of the author. Reuters News, under the Trust Principles, is committed to integrity, independence and freedom from bias.

(UPDATE: This column was updated to reflect that a spokesperson for the New York Stock Exchange declined to comment.)

Read more:

Bill Ackman’s Pershing Square SPARC files for New York listing

Law profs defend theory that SPAC is illegal under Investment Company Act

49 firms in 72 hours: How the SPAC bar united against law profs’ splashy lawsuits

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Our Standards: The Thomson Reuters Trust Principles.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

Alison Frankel

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

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