Attorneys advise that the boom of blank-check initial public offerings (IPOs) is bound to spur more lawsuits as they continue to transform capital markets.

Also known as special purpose acquisition companies, or SPACs, blank-check companies are shell entities that raise money to acquire a private company and take it public, offering the target a ready-made public listing.

SPACs could draw scrutiny partly because these vehicles are generally designed to reward founders with a hefty payday. Founders often receive 20% of the target company's stock in exchange for a $25,000 fee. This assumes a deal is finalized within a certain time frame, usually 18 to 24 months. If no deal is completed, IPO investors get their money back and the SPAC liquidates.

"That's a structure that is very much biased in favor of doing a deal, even if it's somewhat marginal or not ideally priced or even somewhat mispriced," said Bruce Ericson, a Securities Litigation & Enforcement partner at Pillsbury in San Francisco. "From their point of view, any deal is better than no deal."

Lawsuits could also arise if an acquisition fails to materialize, but attorneys expect most litigation to occur post-merger. SPAC transactions, have distinct structures that could invite complaints. For one, a SPAC target may disclose projections of future performance before shareholders vote on whether to approve a proposed merger.

Yet proving that a company offered projections in bad faith won't be easy. Ericson noted that U.S. Supreme Court standards for challenging a forecast are high — litigants must show that a company not only put out flawed projections but also that it didn't believe its forecast. If a company's projections turn out to be only slightly off, it could be easier to defend.

"But if somebody misses by a mile, that's going to attract the attention of the plaintiffs’ bar," Ericson added.

Following the capital raise in the original IPO, blank-check companies will often seek a private placement known as a private investment in public equity, or PIPE, with select investors on special terms. PIPEs raise additional money to meet merger costs and guard against potential redemptions by original IPO investors, Law360 reported.

PIPEs require their own disclosures and bring new investors to the fold, which Ericson said provides an "additional layer of complexity" and could introduce risks that issuers need to guard against. That's because buyers of new shares issued to consummate the acquisition can pursue claims against the company and its directors if they find registration statements misleading.

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