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December 15, 2021 Feature

Turbulent Times for SPACs: Ripples Through the D&O Insurance Market

Teresa Milano and Jonathan R. Walton
DNY59/E+ via Getty Images Plus

DNY59/E+ via Getty Images Plus

Coordinating and understanding D&O coverage is crucial to mitigating SPAC-related litigation risks.

SPACs, or special purpose acquisition companies, have exploded in popularity in recent years as an alternative to the traditional initial public offering (IPO). These “blank check” companies, which raise money through an IPO for the specific purpose of using that money to later acquire an existing, privately held business, are viewed as reducing some of the costs of going public and allowing private companies quicker access to public markets. For these reasons, they have become an attractive prospect for investors in private companies and for privately held businesses looking to raise capital through an IPO.

The proof is in the numbers. In 2003, there was only one SPAC IPO. This increased to 46 in 2018 and 59 in 2019. However, in 2020, when the COVID-19 pandemic brought uncertainties to the markets and many late-stage private companies were hesitant to go public, the conditions were right for SPACs.1 There were a whopping 248 SPAC IPOs in 2020, making up 55% of the IPOs for the year. However, the “year of the SPAC” was quickly outpaced in 2021. By September 2021, there were 443 SPAC IPOs, 63% of the IPO market.2

But, with this increased popularity has come greater scrutiny. SPACs have caught the attention of the Securities and Exchange Commission (SEC), which has issued various statements on SPACs and signaled that it is looking carefully at filings and disclosures by SPACs and their private company targets. Not surprisingly, private securities litigation involving SPAC-related transactions is on the rise as well. These civil suits present litigation risks to the SPAC entity, the privately held target company, and the newly publicly traded company formed by the merger between the SPAC and the private company (the “de-SPAC” transaction). In this article, we discuss these risks as well as their impact on the directors and officers (D&O) insurance marketplace.

How Do SPACs Work?

SPACs have grabbed the attention of investors and private companies in recent years because the SPAC process allows a private company to go public and raise money more quickly than a traditional IPO.3 Unlike a SPAC IPO, a traditional IPO will typically involve a company that has, over time, developed and operated a business and is seeking to raise capital on a public market only after developing the resources and structures necessary for a traditional IPO and the SEC reporting requirements. A SPAC, on the other hand, is a shell company when it goes public and does not have an operating business. It acquires an operating business only after going public. As a result, a privately held company without sufficient revenue to be brought public by an investment bank may gain access to private markets through a SPAC. Average public market investors are able to invest in a company that would otherwise be unavailable to them.4

The SPAC process involves three distinct phases. In the first phase, the SPAC is created, or sponsored, by investors to raise money through an IPO. After obtaining SEC approval, the SPAC offers its securities on the public market, usually at $10 per share. The offering may be available to both institutional and retail investors. The lure for investors is the idea that once the SPAC acquires a privately held company, its shares will increase in value and can be sold on the public market for a profit.

In connection with the offering, the SPAC may explain to potential investors that it is targeting a specific industry or business for a merger or acquisition. All of the IPO proceeds are held in a trust account until the business combination occurs or the SPAC is liquidated for not having completed a business combination during the investment period. SPACs typically have a specific period of either 18 or 24 months to identify a privately held company to target for a merger or acquisition and to consummate a combination with that company.

The second SPAC phase begins when the SPAC has identified a privately held company for a merger or acquisition. The SPAC will perform diligence on the business and negotiate a letter of intent. Before entering into a merger agreement, the SPAC may look to obtain additional financing. Most often, SPACs seek investment through a PIPE, or private investment in public equity.5 After financing is obtained, the SPAC will publicly announce the merger.

The SPAC will also seek approval from its investors, providing them with a proxy statement or registration statement containing information about the private business the SPAC wants to acquire, the financial statements, the interests of the parties to the transaction, and the terms of the deal.

The documents provided to investors will often include projections of the target company’s future financial performance. Some have argued that SPACs, unlike traditional IPOs, enjoy a safe harbor for forward-looking statements that is not available to traditional IPOs. The Private Securities Litigation Reform Act of 1995 (PSLRA) bars private lawsuits under the Securities Act of 1933 (1933 Act) and Securities Exchange Act of 1934 (1934 Act) based on false statements or material omissions in forward-looking statements, such as financial projections. This safe harbor is not available for forward-looking statements that are “made in connection with an initial public offering.”6 Thus, the safe harbor is not available for forward-looking statements made with respect to a traditional IPO. But this language suggests that forward-looking statements made in connection with a de-SPAC transaction, which only occurs after the SPAC has completed its IPO, may have protections from private securities lawsuits that are not available to traditional IPOs. However, John Coates, acting director of the SEC’s Division of Corporation Finance, has rejected this view. In an April 2021 statement, Coates expressed his view that whether the PSLRA safe harbor is available to de-SPAC transactions—which occur after the SPAC’s IPO—is “uncertain at best.”7 A bill in Congress aims to exclude SPACs from the PSLRA safe harbor.8

At the conclusion of the second phase of the SPAC process, the SPAC investors will either consummate the merger or seek the return of their pro rata share of the IPO proceeds held in trust by the SPAC. If investors in a SPAC do not want to be shareholders in the new company, they can exercise their redemption rights and exit the investment. In that event, the SPAC will have to repurchase the investors’ shares.9

During the third and final phase of the SPAC, the SPAC management executes a business combination with the targeted privately held company. In this process, the target company merges with and into the SPAC in what is referred to as a “de-SPAC” transaction, and the target company becomes a public company. After the de-SPAC transaction, the newly combined company carries on the target company’s business operations.

SPACs must obtain the SEC’s approval for a de-SPAC transaction and continue SEC filing and reporting obligations. Coates has indicated that the SEC is “continuing to look carefully at filings and disclosures by SPACs and their private targets” and that SEC staff “will continue to be vigilant about SPAC and private target disclosure so that the public can make informed investment and voting decisions about these transactions.”10 Responding to the view that SPACs are subject to less securities regulations than traditional IPOs, Coates argued that the de-SPAC transaction is the “real IPO” on which “as much as any other element of the process . . . we should focus the full panoply of federal securities law protections—including those that apply to traditional IPOs.”11 A key issue highlighted by the SEC is the disclosure of any conflicts of interest in the de-SPAC transaction. Going forward, both the SPAC and the newly combined company have SEC reporting requirements, and, going forward, the combined company must comply with traditional public company reporting requirements.

While increased scrutiny from the SEC has led to a slowdown in SPAC activity, we are continuing to see new SPAC IPOs filed. In turn, we are also seeing the number of de-SPAC transactions on the rise as SPACs look for private company targets. As of September 2021, there were approximately 361 SPACs looking for a target business, and another 75 had announced a potential merger or acquisition.12 Thus, significant M&A activity is expected to continue as these companies look to ink merger agreements with private company targets over the next few years. However, the litigation associated with SPAC-related transactions is on the rise, which may cause some to take pause.

The Rise of SPAC-Related Securities Litigation

The traditional IPO process raises the prospect of a new risk to the newly public company: federal securities litigation brought by its investors. The same is true for SPAC-related transactions, which are susceptible to securities suits like any other public company. In fact, due to regulatory and investor scrutiny, SPACs have seen a greater risk of litigation in recent years than traditional IPOs. In the first half of 2021, the likelihood of a filing against a U.S. exchange–listed company was 4.2%.13 SPACs, on the other hand, saw a litigation rate of roughly 14% from 2019 to 2021. There were 166 de-SPAC transactions between 2019 and July 15, 2021, and 23 of those transactions resulted in private securities litigation.14

SPAC-related litigation can also involve unique exposures. These suits can name different combinations of defendants: the SPAC and its D&Os, the private company and its D&Os, and/or the newly formed public company and its D&Os. We are also now seeing some SPAC sponsors named in these suits. Moreover, while some may have assumed that litigation comes only after the de-SPAC transaction, as explained further below, this is not the reality. Moreover, the funds raised by the SPAC through an IPO must be held in trust, and trust funds cannot be used to cover the costs of litigation; and any additional capital may be insufficient to cover these costs. Thus, securities litigation against SPAC D&Os may involve direct risk to the individuals’ personal assets.15

In one instance, a group of securities class actions were filed against a SPAC, its D&Os, the target company, and the target company’s CEO after the merger was announced but before the merger was consummated.16 In the suits, the SPAC investors alleged that, due to leaks and rumors that the SPAC planned a merger with Lucid Motors, an electric vehicle company, the SPAC’s share price jumped from $10 to $22. After Lucid Motors’ CEO gave various statements to the media concerning the company’s favorable financial position and a potential SPAC deal, the SPAC’s share price jumped even higher, to $58. According to the suit, however, once the merger was publicly announced and negative information was revealed about Lucid Motors’ vehicle production, the SPAC’s share price dropped to $19.52. Instead of seeking to halt the pending merger, the suits sought to recover losses for the SPAC’s investors caused by the allegedly inflated share price.

In another example of premerger litigation, in August 2021, a group of plaintiffs lawyers filed shareholder derivative suits against three high-profile SPACs alleging that they qualify as investment companies under the Investment Company Act of 1940. Under the act, an investment company is a company that is or holds itself out as being engaged primarily in the business of investing, reinvesting, or trading in securities.17 The suit asserts that SPACs should qualify as investment companies following their IPOs because they hold the IPO proceeds, which are held in trust and are invested in short-term treasuries and money market funds until they are used to consummate a merger or acquisition.18 In response, the securities defense bar has argued that SPACs are not investment companies because they are only temporarily holding the investments while engaging in the primary business of seeking a merger or acquisition with a private operating company.19 Additional lawsuits have been filed with similar allegations against two related SPACs. While SPACs have faced numerous lawsuits, these allegations are the first of their kind.20

Other securities class actions involving conduct before the de-SPAC transaction involve allegations that the SPAC management team rushed to close a deal before the applicable investment period ended in order to avoid having to liquidate the SPAC and return the IPO proceeds to investors. Additionally, like traditional IPOs, SPAC IPOs involve public statements that subject them to liability under section 11 of the 1933 Act for misstatements or omissions. These suits have a three-year statute of limitations. Investors may bring claims under section 14(a) of the 1934 Act alleging that the proxy was materially misleading and/or omitted material facts. Investors may also bring claims under section 20(a) of the 1934 Act alleging that, as a result of nonpublic information the SPAC D&Os had access to, they should have known that the proxy was misleading to shareholders.

However, most SPAC-related securities litigation involves conduct occurring after the de-SPAC transaction. These suits can take several different forms and can fall into two general categories. First, there are postmerger claims filed in connection with the acquisition, challenging, for example, how the transaction has been structured, the purchase price, and potential conflicts of interest. Second, there are postmerger claims related to posttransaction activities, operations, and statements. Additionally, securities class actions brought against SPAC D&Os can question the thoroughness of the SPAC team’s due diligence with respect to a target business or the proxy statement or other disclosures made in connection with a business combination.

One trend we are seeing with postmerger securities suits is that they are filed on the heels of short sellers’ reports critical of the planned de-SPAC transaction. In fact, over half of the suits filed against SPAC-related transactions are tied to a short seller report. Since SPACs are relying on the target’s future revenue and/or sales, the financial projections are often classified as speculative. Short sellers borrow shares in a company and sell them, and hope that the shares will fall in price so they can buy shares and return them to the lender while making a profit for themselves. Essentially, short sellers are betting against the company’s stock price rising. Short sellers are particularly attracted to de-SPAC companies because they have larger market capitalizations, making their shares easier to borrow, and because early SPAC investors are eager to sell their shares following a de-SPAC transaction in order to lock in the profit.

Accordingly, short sellers have an incentive to bring to light information that supports their view that the stock of the combined company following a de-SPAC transaction is overvalued. For example, Lordstown Motors, a light duty electric truck manufacturer, merged with a SPAC in October 2020 and began trading on NASDAQ. On March 12, 2021, a short seller, Hindenburg Research, issued a report titled, “The Lordstown Motors Mirage: Fake Orders, Undisclosed Production Hurdles, and a Prototype Inferno.”21 The report argued that Lordstown Motors had “no revenue and no sellable product” and that its valuation was based on vehicle preorders that were illegitimate.22

Shortly after the short seller report was issued, the price of Lordstown Motors’ stock fell approximately 16.5%, and, six days later, on March 18, 2021, an investor filed a securities class action lawsuit against Lordstown Motors and three of its D&Os.23 The lawsuit, which largely repeated the allegations of the short seller report, alleged that the defendants made false and misleading statements or failed to disclose information on vehicle preorders and other financial information following the de-SPAC transaction in violation of sections 10(b) and 20(a) of the 1934 Act and rule 10b-5 thereunder. Unlike many other SPAC-related securities cases, this suit, which was brought on behalf of a class of investors who purchased securities after it was announced that Lordstown Motors would merge with the SPAC, only named executives of the going-forward company. It did not name any of the SPAC D&Os as defendants.

Insurance Issues Facing SPACs

When securities suits are brought against participants in the SPAC process, the defendants will turn to their D&O insurance. With the influx of SPAC IPOs and de-SPAC transactions, the demand from SPACs on the D&O market has exploded—and, with the increase in litigation and regulatory risks, so have insurance premiums.

The first issue in dealing with SPAC-related insurance is determining which D&O policy is potentially in play. There are three main SPAC-related D&O policies, and they line up with the three SPAC phases discussed above. The first policy is issued to the SPAC and its D&Os at the time of the SPAC’s IPO, and is intended to cover specified conduct of the D&Os occurring between the IPO and ultimate business combination through a de-SPAC transaction. Instead of a one-year policy period, which is more typical in the industry, the SPAC’s policy will usually have a policy period of 18 or 24 months that is consistent with the SPAC’s investment period.24 The SPAC will also obtain tail or runoff coverage to ensure that there is coverage when a claim arises after the de-SPAC transaction but where the conduct at issue took place before the closing date. The tail coverage, like the SPAC policy, would not cover conduct taking place after the closing date. Because a de-SPAC transaction is anticipated at the outset of a SPAC, tail coverage is typically negotiated with the initial SPAC D&O policy.

Because the SPAC’s IPO proceeds are held in trust and its available capital is usually very limited, these policies must be planned and budgeted properly. An issue could arise, for example, if a SPAC D&O policy contains a self-insured retention that must be satisfied before the D&O policy is implicated. The SPAC, however, may claim that it is unable to meet its self-insured retention due to limitations on its use of IPO proceeds.

D&O insurance also plays an important role in the second SPAC phase, which begins when the SPAC has identified a privately held company for a merger or acquisition. The targeted company will likely have its own D&O policy. D&O policies issued to privately held companies are typically less complex and less expensive than their public company counterparts. This policy would provide specified coverage to the target company and its D&Os for conduct occurring prior to a de-SPAC transaction. The targeted company will also need to purchase tail coverage for claims made after the de-SPAC transaction that involve, for example, the targeted company’s pretransaction disclosures. Because private company insurers typically do not cover securities claims, the private company will often have to obtain tail coverage from another insurer.

In the third SPAC phase, after the de-SPAC transaction, the combined company and its D&Os will obtain a third D&O policy. This policy binds at the time of the merger and works like any other traditional public company D&O policy. This policy will provide specified coverage for the new company for claims based on conduct taking place after the transaction has closed.

While SPAC participants may obtain the necessary coverage for each phase of the SPAC, litigation is not so clearly demarcated. As explained above, securities litigation may name defendants associated with the SPAC, the privately held company, and/or the combined business. Additionally, securities litigation may allege a series of wrongful acts occurring over time—for example, both before and after a de-SPAC transaction—or may allege different wrongful acts occurring during one or more of the SPAC phases. This can have significant implications for D&O coverage and lead to disputes concerning how D&Os are covered under the various policies. Questions may arise as to which policy or policies are implicated by a securities action. This can lead to disputes between the policyholders and the insurance carriers, as well as disputes between the various towers of insurance.

Similarly, the three policies would only offer coverage to the extent the D&Os are sued in an insured capacity, and D&O policies often exclude coverage for claims involving wrongful acts committed in a noninsured capacity. For example, a director of both the privately held company and going-forward public company would need to seek coverage under the private company’s policy for claims alleging wrongful acts before the pre-SPAC transaction. The director would need to seek coverage under the public company policy for claims alleging wrongful acts occurring after the de-SPAC transaction. It is not hard to see how this too can lead to disagreements.

Additionally, D&O insurance may not always respond to a claim. More and more SPACs are also obtaining M&A representations and warranties insurance (RWI). An RWI policy protects against losses arising from a seller’s breach of certain representations and warranties made in the merger or acquisition agreement. Widely used in traditional M&A, these policies respond when representations in the agreement prove to be incorrect. Where a D&O policy does not respond, an RWI policy may be able to cover the risk.


The full implications to the D&O market caused by the sudden increase in SPAC popularity by investors, target companies, and, of course, securities litigation plaintiffs are yet to be seen. The insurance coverage issues raised by the unique process of the SPAC are largely untested. However, as the current flock of SPAC IPOs identifies and acquires target companies, and new SPACs IPO, insurance disputes are likely to result in litigation and guidance from the courts. In the meantime, however, it is important for SPAC participants and their insurers to work with sophisticated counsel and brokers knowledgeable in this space.


1. Anis Uzzaman, SPACs: Creating New Opportunities for Both Private and Public Market Investors, Forbes (Apr. 26, 2021),

2. SPAC Analytics, (last visited Sept. 28, 2021).

3. Michael Birnbaum et al., Five Key Takeaways from the SEC’s Evolving Response to the SPAC Boom, JD Supra (Apr. 23, 2021),

4. Uzzaman, supra note 1.

5. Anurag Agarwal, A Primer on SPACs and PIPEs: How They Work, Menabytes (Aug. 1, 2021),

6. 15 U.S.C. § 77z-2(b)(2)(D).

7. Public Statement, John Coates, Acting Dir., U.S. Sec. & Exch. Comm’n Div. of Corp. Fin., SPACs, IPOs and Liability Risk under the Securities Laws (Apr. 8, 2021),

8. A Bill to Amend the Securities Act of 1933 and the Securities and Exchange Act of 1934 to Exclude Certain Special Purpose Acquisition Companies from Safe Harbor for Forward-Looking Statements, 117th Cong. (discussion draft May 24, 2021),

9. Jelmer Kalisvaart, Redemption Rights at SPACs, Fin. Investigator Mag. (June 28, 2021),

10. Public Statement, Coates, supra note 7.

11. Id.

12. SPAC Statistics, SPACInsider, (last visited Sept. 28, 2021).

13. Cornerstone Rsch., Securities Class Action Filings—2021 Midyear Assessment 1 (2021),

14. Id. at 8.

15. Emily Maier & Yelena Dunaevsky, SPAC Litigation Case Studies: How Insurance Responds, Bus. L. Today (Sept. 15, 2021),

16. Phillips v. Churchill Cap. Corp. IV, No. 1:21-cv-00539 (N.D. Ala. filed Apr. 18, 2021); see also Arico v. Churchill Cap. Corp. IV, No. 3:21-cv-12355 (D.N.J. filed June 9, 2021).

17. 15 U.S.C. § 80a-3.

18. Kevin LaCroix, 49 Corporate Law Firms Trash SPACs-Are-Investment-Companies Lawsuits, D&O Diary (Aug. 29, 2021),

19. 49 of the Nation’s Leading Law Firms Respond to Investment Company Act Lawsuits Targeting the SPAC Industry (Aug. 27, 2021),

20. Yelena Dunaevsky, Abandoned SPAC Merger Leads to Claims of Investment Company Act Violations and Outright SPAC War, Woodruff Sawyer (Aug. 31, 2021),

21. The Lordstown Motors Mirage: Fake Orders, Undisclosed Production Hurdles, and a Prototype Inferno, Hindenburg Rsch. (Mar. 12, 2021),

22. Id.

23. Rico v. Lordstown Motors Corp., No. 4:21-cv-00616 (N.D. Ohio filed Mar. 18, 2021).

24. Woodruff-Sawyer & Co., Guide to Insuring SPACs in 2021, at 6 (2021),

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Teresa Milano, Esq., is Vice President, Management Liability at Woodruff Sawyer. She has experience in all areas of the management and professional liability spectrums, with a specialization in public D&O.

Jonathan R. Walton is an attorney with BatesCarey LLP. He serves as coverage and litigation counsel to domestic and international insurers in a variety of complex insurance coverage matters.