Pershing Square Tontine Holdings, the SPAC run by the billionaire hedge-fund investor Bill Ackman, got sued this morning in a novel case that could have far-reaching implications for the SPAC industry, The New York Times reports.
The case, which is being argued by Robert Jackson, a former SEC 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.
Ackman last month in a letter to shareholders said his SPAC would not proceed with a $4 billion deal to acquire a 10 percent stake in Vivendi’s Universal Music Group.
Ackman said the decision was based on concerns raised by the SEC over whether Pershing’s post-deal IBC structure would qualify under NYSE rules. The SPAC’s legal counsel tried unsuccessfully to dissuade the SEC from its position, he added.
Instead, Ackman decided to buy the stake through his hedge fund.
Meanwhile, securities law experts have raised questions about whether SPACs are used as a means to avoid the more onerous rules that apply to investment funds. The lawsuit highlights this increasingly common complaint.
“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.
The case may be difficult to prove since the Universal Music deal was abandoned. Read more.
