SPAC Seizes On SEC’s Proposed Rules to Fight Investor Suit

(Bloomberg) -- A blank-check company co-founded by Noam Gottesman told a court that newly proposed SEC rules support its legal defense against an investor.

The company's filing appears to be the first to invoke the U.S. Securities and Exchange Commission proposal in a legal battle over whether certain SPACs are really investment companies.

The rules would require SPACs, or special purpose acquisition companies, to disclose more information about their sponsors and potential conflicts of interest. Gottesman's SPAC, Go Acquisition, which he founded with Hertz Global Holdings Inc. Chairman Greg O'Hara, told a federal judge in a letter Thursday that the rules bolster Go's case against the investor, George Assad.

“In multiple ways, the SEC's proposed rules reinforce what defendants have said from the outset of this litigation: GO is a SPAC, not a secret investment company,” according to the letter.

Read More: SEC Plans to Curb Bullish SPAC Forecasts, Add Disclosures 

Assad sued Go in August. The SEC issued its proposal on Wednesday.

Lawyers for Assad didn't immediately return emails seeking comment on the letter.

SPACs, or blank-check companies, are shells that promise to buy another company with the money they attract. Go is one of a number of SPACs targeted by a group of lawyers led by former SEC commissioner Robert Jackson and Yale Law School professor John Morley. Their effort started with a lawsuit against Bill Ackman's Pershing Square Tontine Holdings Ltd. alleging the company is acting illegally as an investment company.

The litigation could have broad implications for the financial industry if a court determines that SPACs in general should be regarded as investment companies subject to the 1940 Investment Company Act. That law requires registration with the SEC and places restrictions on fees charged for investment advice.

Read More: Ackman Investors on Reddit Defend SPAC Against Claims by Assad

Assad, who is seeking to represent Go against its founders, claims it is operating in violation of U.S. securities laws. It is seeking to use what it thinks is a legal loophole to grant its founders special shares that would give them control and at least 20% of the company, he alleges. The result is “to charge its public investors what amounts to more than $100 million” in compensation, according to his suit. 

Go is seeking to have the suit dismissed, arguing it was filed too late and that Go isn't an investment company.

Only 54 SPACs have gone public in the U.S. so far this year, raising $9.9 billion, about a tenth of the total in the same period last year, according to data compiled by Bloomberg. Enthusiasm for blank-check companies has waned as some of the mergers have delivered lackluster stock market performance and others have seen increased regulatory scrutiny. 

The IPOX SPAC Index, which tracks the performances of SPACs and postmerger companies, is down 40% since its peak in February 2021.

After voting to propose the regulations, the SEC will now take public comment on the plan for as long as 60 days before making changes and holding a second vote to finalize the rules.

The case is Assad v. Go Acquisition Corp., 21-cv-7076, U.S. District Court, Southern District of New York (Manhattan).

Read More: Ackman's SPAC Says Claim That It's Illegal Is ‘Fictional' 

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