As the Special Purpose Acquisition Company (SPAC) market experiences a resurgence, major law firms are exercising caution to avoid past financial pitfalls. During the previous SPAC boom in 2021 and 2022, many law firms rushed into the market, often overlooking the risks involved, particularly the dependence on successful mergers to secure their fees. This resulted in significant financial write-offs when many SPACs failed to complete their proposed mergers, leaving firms unpaid for their work. For detailed insights, please visit Bloomberg Law’s full report.
Elliott Smith, a partner at Perkins Coie, highlights that law firms suffered from substantial credit risks during the last SPAC wave but have absorbed these losses elsewhere. This time around, they are adopting strategies like negotiating broken deal fees and securing payment commitments at the IPO stage to mitigate risks. Typically, law firms charge a flat fee for the initial public offering, while de-SPAC transactions, which represent the merger phase, promise larger financial returns but also carry greater risks.
Many firms are now more selective, preferring to engage with SPACs backed by institutional investors to increase the likelihood of completed mergers. Joel Rubinstein of White & Case notes that thorough due diligence has become paramount. Firms are now more wary about undertaking de-SPAC deals with new clients due to the risk of incurring substantial unpaid bills if such deals fall through.
Despite the current caution, some firms, such as Ellenoff Grossman & Schole, continue to see potential in SPAC transactions. Douglas Ellenoff, a senior partner at the firm, views the SPAC industry as a venture portfolio where success and failure are part of the operational risk.
Though the SPAC market has not reached the same levels seen during the pandemic and is still a shadow of its former self, with only 46 SPAC IPOs raising $9.5 billion this year, firms like White & Case remain active in the space. These firms continue to advise on notable transactions, managing significant deals that demonstrate investor confidence through mechanisms like private investments in public equity (PIPEs).
As the landscape evolves, legal professionals are strategically planning for the future, learning from past experiences and assessing client credibility before committing to SPAC-related work. This cautious optimism reflects a broader understanding that quality, revenue-generating companies are now the ideal targets for successful public offerings, a necessary condition for ensuring sustainable practices in the SPAC market.