Special Purpose Acquisition Companies

US markets have seen a surge in the number of SPACs. While some elements of the process are essentially the same for each SPAC, every transaction brings a unique set of challenges and risks.

It is important that SPACs understand the risks they face throughout the SPAC lifecycle, from IPO to de-SPAC and beyond.

One consideration is how to effectively protect the personal assets of the SPAC’s directors and officers. It is also important for you to have a deep understanding of the potential liabilities and risks associated with raising capital, pursuing a target, and completing the business combination.

Through their extensive experience and industry knowledge, Marsh SPAC risk specialists are positioned to help SPACs identify risks, customize programs, and secure insurance policies tailored to your exposures.

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FAQ's

Directors and officers liability (D&O) insurance should be a consideration for all SPACS. The directors and officers of SPACs face unique exposures and a direct risk to their personal assets as the funds held in SPAC trusts cannot be used to indemnify them. In the absence of a properly crafted insurance program, individuals could be forced to use their personal finances to cover the defense costs and potential settlements resulting from a claim.

A well-designed insurance program can protect the personal assets of directors and officers when a SPAC is unable to indemnify them. In building a D&O policy specifically for a SPAC, directors and officers should seek to obtain:

  • Broad personal assets protection coverage.
  • Coverage for alleged violations of the Securities Act of 1933, Securities Exchange Act of 1934, Dodd-Frank, Sarbanes-Oxley, and other relevant laws and regulations.
  • Coverage for regulatory investigations.
  • Policy terms that line up with a SPAC’s due diligence period.
  • Pre-negotiated tail coverage for claims brought after completion of a business combination.
  • Coverage for indemnity owed to sponsor entities and underwriters named in suits.
  • Coverage for claims brought by prospective targets and PIPE investors.

The reverse merger process that allows a private company to become a listed entity through a SPAC is typically simpler, shorter, less expensive, and less dependent on market conditions than a traditional IPO. But there can be unintended consequences and sources of liability for both the SPAC and its target, including:

  • Breakdown of negotiations with a target company.
  • Objections by the target company’s shareholders.
  • Masquerading public shell companies.
  • Private investment in public entity (PIPE) funding.
  • Post-merger stock selloff.
  • Lack of demand for post-merger shares.
  • Limited public company preparedness and experience.
  • Secondary public offerings.
  • De-SPAC performance and financial issues.

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Jacqueline Quintal

Managing Director & Digital Asset Leader

  • United States