Special purpose acquisition companies (SPACs), are a hot investment — by early March 2021, 207 new SPACs have raised $66.4 billion, compared with 248 SPAC IPOs and over $83 billion in offering proceeds for the entirety of 2020.1
This explosion in SPAC deals has created an intensely aggressive market for the IPO alternative and led to “SPAC-offs” — a competitive selection process to partner on high quality assets.
Along with rapid growth has come increased regulatory attention. Recently appointed Securities and Exchange Commission (SEC) Chairman Gary Gensler has indicated SPACs would be subject to heightened scrutiny.2 Gensler’s announcement came on the heels of the SEC’s formal disclosure guidance for SPAC sponsors, made public in December 2020.
What does this mean for SPAC sponsors, investors and targets?
The rewards of investing in and targeting a business for your SPAC are great; subsequently, there’s also a lot at risk as well.
Sponsors, who source deals, negotiate transactions and take a company public, face exposure for loss of at-risk capital and potential reputational damage should the SPAC deal go bad.
Investors making an investment in a SPAC face significant exposures, as they could be liable for excessive valuation and failure to target due diligence.
Target businesses have less market risk than a traditional IPO but will face dilution from sponsor promotion or warrants, as well as market execution risk.
D&O coverage: can’t SPAC without it
Directors and Officers (D&O) coverage helps shield sponsors and investors from the risks mentioned above, as well as claims of breach of duty, fairness, conflict of interest or underperformance.
D&O insurance for the SPAC period (pre-combination) aligns with the search period, and unlike traditional IPO coverage, policy terms are often offered up to two years.
Tail coverage is also pre-negotiated to cover claims against the SPAC brought after completion of a business combination. This coverage typically has a six-year window to report a claim arising from an alleged wrongful act before the business deal is complete. A new D&O program would be put into place for the company post-combination.
The explosion of SPAC growth and the anticipated increase in regulatory scrutiny have created a hard market for SPAC D&O insurance coverage, meaning prices have little or no downward movement and coverage can be difficult to obtain. SPAC sponsors and investors will want to consider creative levers to help determine their D&O coverage, as well as avoiding popular exclusions.
Work with your broker to get the right coverage for your SPAC
The hard D&O market has led to lower limits and fewer carriers willing to underwrite insurance. Discuss with your broker specific tactics to deliver the right coverage.
Coverage exclusions can present a major gap in D&O coverage, which you should work with your broker to eliminate. Leveraging the expertise of a D&O SPAC expert will be critical to securing the right coverage and avoiding additional risks.
Contact HUB’s SPAC experts for more information on securing the right D&O coverage for your SPAC.
1 SPAC Research. Accessed March 3, 2021.
2 Bloomberg, “Gensler Is Poised to Confront Stock Market Hit by Historic Mania,” January 28, 2021.