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As we’ve discussed, a special-purpose acquisition company is essentially a giant bucket into which people throw their money in hopes that the people running said blank-check operation will do something with that money that will turn it into more money, preferably lots more money. In this way, it is not entirely unlike the hedge funds that many of the people starting SPACs also run. Indeed, having successful money managers at the helm of these things seems a large part of their appeal, something that burnishes the reputation and gives investors hope that these consummate analysts will make them a good deal.

On the other hand, the increasingly litigious SPAC investor has noticed, blank-check companies are not like hedge funds in one crucial respect: They are not registered with the SEC and therefore not subject to all sorts of rules, such as those that might prevent a SPAC’s sponsors from hilariously enriching themselves at the expense of everyone else involved. Take the biggest of them all, Pershing Square Tontine Holdings. As its name implies, it was created and managed by Bill Ackman, a hedge fund manager who also runs a similarly-named hedge fund, and whose reputation therefrom is presumably what made people wish to buy shares of Pershing Square Tontine Holdings. And like pretty much every other SPAC on earth, it cut some sweetheart deals with its sponsors, giving them a quick and handsome 13-fold return on the warrants issued them before ever actually doing anything that a SPAC is supposed to do, and trying to do something that they apparently aren't supposed to do.

No matter, sayeth these aggrieved investors. No matter, also, that Ackman’s role at Tontine was and is the only reason anyone would ever buy a share of it, nor that Tontine has more investor protections than most SPACs. They have changed their minds about the wisdom of the endeavor, and therefore want to destroy it and every other blank check in the hands of a professional investor.

The case, which is being argued by Robert Jackson, a former S.E.C. commissioner, and John Morley, a law professor at Yale, contends that Ackman’s SPAC isn’t an operating company, but is actually an investment company like Ackman’s funds, which should be regulated by the Investment Company Act of 1940. If certain SPACs were regulated as investment companies, much of the industry could be affected because it would make it harder for anyone in the investment business to participate in a SPAC…. “Investing in securities is all the company has ever done since its I.P.O.,” the complaint says of Pershing Square’s SPAC. Simply buying some stock is not what a SPAC is meant to do, the lawsuit argues.

Of course, Tontine didn’t actually buy those shares of Universal Music Group (although Ackman’s hedge fund did, which is admittedly not a good look for the purposes of this lawsuit), as Ackman was quick to point out. And even if it had, it would have required the approval of those shareholders, and asking permission of investors before buying and selling stock is not something that hedge fund managers managing hedge funds are generally in the practice of doing. Still, no matter.

If the suit succeeds, it could make professional investors who have found SPACs attractive wary of potential legal challenges, chilling the market. Proving damages will be difficult because the Universal Music deal was scrapped. But more important, perhaps, the case attempts to address underlying issues about the motivations of some SPAC sponsors. And its analysis of the meaning of investing in securities — part of any M.&A. deal — raises existential questions about the purpose and treatment of SPACs in general.

Bill Ackman’s SPAC Gets Sued [DealBook]
Bill Ackman SPAC sued, plaintiffs say directors were promised ‘staggering compensation’ [CNBC]

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