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Vol. VI, Issue 1 Journalon Governance 2023

CHARACTERIZING SPACS: THE CHALLENGES TO INDIAN

REGULATION

Piyush Raj & SahilAgarnva*

ABSTRACT

SPAC companies offer an alternative to Initial Pub/ic Oferings (IPOs) by raising

capital to acquire a company instead of going through the traditionalIPO process.
They are sometimes known as 'shell companies' because they do not have any operating
assets or business activities at the time of their IPO. A private or unlisted company
may go public by raising cash via an acquisition, buyout, or reverse merger. Once the
target company has been acquired by the SPAC, it becomes a publicly traded company,
avoiding the lengthy process requiredfor a traditionalIPO. Therefore, a SPAC can be
an attractive option to purchase a commer'al4' viable business that maiy generate
signi icant returnsfor investors since it can be simpler and aster than a traditional
IPO. Given the popularity of SPACs in India, regulatory authorities have taken steps
to promote and regulate this investment vehicle. However, it is important to considerthe
characteristicsof SPACs and how they have been regulated in the US to determine the
best approachfor regulation in India. This paper will argue that we need to step-back a
little and contemplate the characteristicsof a SPAC in light of its development in the
US. The questions like whether it is a regulatory arbitrage (which requires it to be
treated on par with an IPO) or whether it is a pure alternative to the IPO process goes
to the heart of how SPAC regulation should be structured. Thus, this articleproposes
that a more balanced approach to SPAC regulation should be considered on the
question whether it should be treated as a regulatory arbitrageor as a pure alternative
to the IPO process.

Keywords: Special Purpose, IPO, Board Structure, Germany.

TABLE OF CONTENTS

I. INTRODUCTION....................................................72

* The Authors are fourth-year students at National Academy of Legal Studies and
Research.

72
 Characternjzng SPACS: The Challenges to Indian Regulation

II. SPECIAL PURPOSE ACQUISITION VEHICLES:

BACKGROUND...........................................................................74
III. SPAC v. TRADITIONAL IPO
....................................................................... 78
IV. REGULATROY HURDLES: A SCOPE FOR
CONTEMPLATION......................................................................80

V . CO N CLU SIO N ............................................................... 93

I. INTRODUCTION

The market of securities provides various kinds of investment vehicles

including private equity funds and venture capital funds. In recent times,
another investment vehicle has garnered much attention in India and even
globally, namely, the Special Purpose Acquisition Companies ("SPACS").
SPAC is a company which has minimal or almost non-existent operating
business and assets, that seeks to launch an initial public offering
(hereinafter, IPO) in order to raise capital. Thereafter, it effects a merger,
asset acquisition or any other form of business combination with a 'target'
company, benefitting from such listing without going through the
formalities and rigours of an IPO.1In March 2021, the Securities and
Exchange Board of India (SEBI) formed a group of experts to examine
the feasibility of bringing regulations for SPAC as it can substantially
increase the prospects of domestic listing of startups. 2

Recently, concerns were raised as to the regulatory domain of SEBI,

and the potential of some future SPACs to be outside its regulatory

1 Abir Roy and Vyapak Desai, What's spedail about spedalpurpose acquisition vehicles?, Eco.
TIMES, (June 4, 2008)
http://www.nishithdesai.com/ fileadmin/userupload/pdfs/What-
s_specialabout_special purposeacquisitionvehicles-.pdf.
2 Team, SEBI's Expert Group to Study SPAC PotentialforIndian Startups, INc42, (Mar 11,
2021) https://inc42.com/buzz/sebis-expert-group-to-study-spac-potential-for-indian-
startups/

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Vol. VI, Issue 1 Journalon Governance 2023

jurisdiction. The suggestion was that we need clarity as to the role of the
SEBI and the NCLT when it comes to reverse mergers and mergers, as
currently, this issue is a subject matter of the NCLT. 3 Since, under Section
232 of the Companies Act, 2013,4 the NCLT has the power to sanction a
scheme of merger or amalgamation, it effectively allows the 'target'
companies to go public without the scrutiny of eligibility under the SEBI
Regulations.5 This is one preliminary example of regulatory challenges that
SPAC, as an investment vehicle, faces in India. However, we argue that
this issue pertains to a much foundational inquiry as to the nature of
SPAC as a regulatory arbitrage or an innovative investment avenue. The
notion of regulatory arbitrage implies that SPAC is an attempt to avoid
the SEBI's scrutiny and thus requires a strict regulatory overview, similar
to the case of an IPO, if not stricter. On the other hand, the approach
towards SPAC as a novel investment avenue requires a fresh look at it
without any presumptive inhibitions of regulatory arbitrage, posed
theoretically. Accordingly, throughout this paper, we intend to show that
the characterization of SPAC as a regulatory arbitrage or novel investment
avenue for India will eventually influence the drafting of regulations
around it. Therefore, we attempt to delineate those regulatory
considerations, in detail, to show that the conception of SPAC is as
complex as it is innovative. This paper will attempt to provide a
suggestion as to the reorientation of the approach we should observe
towards SPAC regulation in order to fill the gaps in the current regulatory
framework.

In Part II, we shall briefly dwell on the rise and mechanism of SPACs
in the US, in order to determine the causes of its coming into being, and
determine whether from its inception, SPAC was meant to be a regulatory

s PTI, SEBI in no rush to come out with SPACpolig: Tyagi, THE HIN. Bus.LINE, (December
29, 2021) https://www.thehindubusinessline.com/markets/sebi-in-no-rush-to-come-
out-with-spac-policy-tyagi/article38060374.ece.
4 The Companies Act, No. 18 of 2013, §232 (Ind.).
5 Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2018, SEBI, Reg. 6 (Feb. 07, 2023).

74
 CharacterizjngSPACS: The Challenges to Indian Regulation

arbitrage or an innovative approach of investment. In Part III, we shall

initially investigate the regulatory hurdles for SPACs in current Indian
regulatory framework in order to highlight that, firstly, the choice of
orientation towards SPAC regulation would decide its efficacy in the
Indian scenario and secondly, that in making such choice, the regulators
need to reach a balance between the broader goals of securities law
namely, investor protection, and the growth of investment and economy.
Moving further, we will explore the idea of 'economic substance'
approach, as proposed by Halbhuber,' which has been used to argue in
favour of considering SPAC, as a workaround for an IPO. In contrast, we
will argue that such a steadfast approach to regulating SPAC is not
favourable in the context of India. Thus, we shall argue that in order to
regulate SPACs properly, we need to conceptually reorient ourselves and
shall provide clarity on regulatory aspects which have so far been
identified. This will also provide a leverage to SEBI to deal with the
challenges which may arise in future SPAC regulations.

II. SPECIAL PURPOSE ACQUISITION VEHICLES:

BACKGROUND

A. REGULATORY WORKAROUND: HISTORY OF SPAC

In the 1980s US, the capital market was replete with something called
'blank check offerings' which refers to a type of IPO of a company, that
did not yet have a specific business plan or purpose. These offerings were
also known as "blank check companies" or "blank check IPOs." After the
IPO process, the funds raised through the investors were used to pursue
an acquisition or merger with another company that had a specific
business plan or purpose. The essential attraction of such companies was
to offer 'penny-stock' 7 which tempted a large mass of retail investors.

6 Harald Halbhuber, Economic Substance Approach to SPAC Regulation, 40 YALE J. ON REG.:

BULLETIN 2022, 45, 45 (2022). (hereinafter, Halbhuber)
7 Securities Exchange Act of 1934 §3(a)(51), 15 U.S.C. 78a.

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Vol. VI, Issue 1 Journalon Governance 2023

However, such strategy resulted in a serious abuse of market and

investors.9 The primary reason for such abuse was that penny-stocks were
not approved or registered and were also not traded on security exchange
platforms.10 Realizing the gravity of the situation, the Congress passed the
'Securities Enforcement Remedies and Penny Stock Reform Act of
1990'", ("PFRA") with the objective of preventing the use of blank check
companies as a tool for fraud. However, it seemed that the legislation was
so restrictive, that it was extremely difficult to attract investors for them.
As a solution, the SPAC structure was developed which avoided the
regulatory binds of the PFRA by using exceptions in the definition of
'penny-stock'.' 2 For instance, one exception to the definition was that a
company with post-issue capital of more than $5 Million was not covered
under the PFRA. Accordingly, the SPAC were shaping their offering in
such a way that it left the company, with greater than $5 million in net
tangible assets, post-IPO. 3

Nonetheless, this new structure, abided by the requirement of the Act

as to not attract the regulatory glare of Securities Exchange Commission
(SEC). For instance, requirements such as deposit of the funds raised in
IPO in an escrow account, and to retain investor funds without
completing an acquisition for not more than 18 months, were adequately
followed. 4 Such provisions ensured that the funds raised by reincarnated

8 Karen Richardson and Peter Lattman, FinandersNow Say 'Trust Us', THE WALL STREET
JOURNAL, (Feb. 1, 2007). https://www.wsj.com/amp/articles/SB117029862200094571.
9 Gerald V. Niesar and David M. Niebauer, The Small Public Company after the Penny Stock
Reform Act of 1990, 20 SEC. REG. L.J. 227, 239 (1992).
10 Derek K. Heyman, From Blank Check To SPAC: The Regulator's Response to The Market,
and The Market's Response to The Regulation, 2 ENTREPRENEURIAL BUS. L.J. 531, 533 (2007).
(hereinafter, Derek K. Heyman)
1 Securities Enforcement Remedies and Penny Stock Reform Act of 1990, §508, 15
U.S.C. §78a, (1990).
12 Derek K. Heyman, supra note 10 at 540.
13 Derek K. Heyman, supra note 10 at 541.
14 Daniel S. Riemer, Spedal PurposeAcquisition Companies: SPAC and SPAN, or Blank Check
Redux?. 85 Wash. U. L. Rev. 931, 946 (2007).

76
 Characterbjzng SPACS: The Challenges to Indian Regulation

blank check structures, or SPACs in a public offering could not be

misused by the company's management.

However, it is notable that the growth of SPAC was not just

reincarnation of blank-check companies; it was fundamentally an
investment vehicle which wanted to avoid the regulation of traditional
IPOs. Yet its utility from business perspective must not be overlooked."
Generally, the investment banks only provide underwriting service to
large IPOs, it is difficult for small companies and startups to successfully
go public. SPACs are uniquely situated to counter this problem" however,
as we shall see in case of India, it seems that SPAC itself gets restricted
because of multiple regulatory hurdles.

B. SPAC: A MECHANISM FOR POOLING FUNDS

1. Issuance of an IPO

A SPAC, just like any other public company intending to get listed,
must go through the typical IPO process of filing prospectus in order to
raise public capital. However, such a SPAC IPO is much quicker than a
traditional IPO process, since the details which are to be disclosed are
much shorter. A SPAC does not have any prior financial statement to
disclose or any assets to be described, and the risk factors associated with
the IPO are also minimal. This is because crucially, investors are
essentially betting on the ability of the SPAC's management team to find a
suitable acquisition target, rather than the success of an unproven
business.

15 Iqbal Tahir, Dua Associates, Supportive SPAC Regulations Can Unlock Significant Value For
Indian Companies, MONDAQ (May 26, 2021)https://www.mondaq.com/india/corporate-
and-company-law/ 1072796/ supportive-spac-regulations-can-unlock-significant-value-
for-indian-companies.
16 Id.

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Vol. VI, Issue 1 Journalon Governance 2023

2. Allotment and Apportionment of Pooled Funds

The capital raised from an IPO is, thereafter, held in a trust or escrow
account until it gets released to fuel the acquired target company or
redeem investors for an exit. Since, the 'management or 'sponsor had, with
their private equity, established the SPAC, they continue to hold nominal
stock in the SPAC after the IPO. The remaining stake in the holdings is
allotted to the public who subscribed to the common stock of SPAC and
a proportional warrant of future fund utilization.1 7 A portion of the
proceeds collected is not held in the escrow account and is used for
paying insurance, legal, and accounting expenses related to the SPAC
processes.

3. Negotiation and Acquisition

After the identification of target acquisition, the sponsor declares the

target company which must be approved by majority shareholders. The
finalization of a SPAC acquisition must be made within the stipulated
time otherwise it will be terminated, moreover the management cannot
collect salaries for finalization of the deal.' 8 Once approved, the SPAC
acquires the target company through consolidation/merger commonly
referred to as reverse-merger or "De-SPAC" transactions. In such
transactions, a private company may ensure more certainty as to pricing
and control terms as compared to conventional IPOs. 9 This is because,
during the reverse-merger, the target company negotiates the price and

17 Ramey Layne and Brenda Lenahan, Special Purpose Acquisition Companies:An Introduction,
HARVARD L. SCHOOL FOR. ON CORP. GOVERNANCE (July 6, 2018)
https://corpgov.law.harvard.edu/2018/07/06/special-purpose-acquisition-companies-
an-introduction/.
18 OFFICE OF INVESTOR EDUCATION AND ADVOCACY, WHAT YOU NEED TO KNOW
ABOUT SPACS - UPDATED INVESTOR BULLETIN, U.S. Securities And Exchange
Commission, (2021), https://www.sec.gov/oiea/investor-alerts-and-bulletins/what-you-
need-know-about-spacs-investor-
bulletin#:~:text--Similar%20to%20an%20escrow%20arrangement,a%20certain%20perio
d%20f o20time.(hereinafter, USEC Investor Bulletin)
19 Id.

78
 CharacterizingSPACS: The Challenges to Indian Regulation

terms of the deal directly with the SPAC sponsor, rather than relying on
market demand to set the price (as done in conventional IPO). This can
give the target company more control over the transaction and ensure that
it receives a fair value for its shares.

III. SPAC V. TRADITIONAL IPOS

A. PURPOSE AND TIMING

As noted above, the use of a SPAC structure can provide a quicker

and more efficient path to going public for both the SPAC sponsor and
the target company, while also providing investors with an opportunity to
invest in a potentially high-growth company. This is because, firstly, the
SPAC being a shell company, does not require providing extensive
information or undergoing strict scrutiny of regulator. Secondly, it may
already have a target identified, which means that the extensive process of
identifying a suitable target company, performing due diligence, and
negotiating terms can be completed before the SPAC goes public.

B. MORE LUCRATIVE THAN TRADITIONAL IPOS

A SPAC offers lucrative and easier alternatives to investors and

private equity firms without resorting to the hurdles of typical IPO
transactions. In terms of the Sponsor, they generally hold about 20%
equity in the SPAC. However, post the de-SPAC transaction, if the
acquisition has substantive returns and growth, then the final stakes of the
new entity have much higher value in comparison to nominal price for
which the equity was purchased initially. 20This equates to a massive return
for sponsors which fuels them for taking such risks. For instance, In
February 2021, Lucid Motors announced that it had agreed to merge with
CCIV, with the resulting company named Lucid Group Inc. The deal
valued Lucid at $11.75 billion, and was one of the largest SPAC mergers

20 Lola Miranda Hale, Special Pupose Acquisition Companies: A Financing Tool with Something
for everone, 18(2) Journal of Corporate Accounting & Finance, 67, 68 (2007).

79
Vol. VI, Issue 1 Journalon Governance 2023

at the time. After the completion of the merger, shares of Lucid Group
Inc. began trading on the Nasdaq under the ticker symbol LCID. The
stock saw a surge in price in the months following the de-SPAC
transaction, reaching an all-time high of $64.86 per share in early
September 2021." This is because in a traditional IPO, the price per share
is typically set by the underwriters based on the demand from investors.
In contrast, the price of a SPAC's share is determined by the market after
the de-SPAC transaction is completed, and can be influenced by various
factors such as market conditions and the performance of the target
company.

C. LESS COSTLY THAN A TRADITIONAL IPO AND

ELIMINATION OF INTERMEDIARIES

In addition, as suggested above, the SPAC presents an excellent

opportunity to circumvent the costs and time associated with traditional
IPOs. Traditional IPOs have implied costs and fees which may amount to
5-7% of the total IPO proceeds. 22 Most of all, SPAC provides an
opportunity to startups and small businesses to circumvent the stringent
listing requirements which they otherwise may not be able to fulfil. SPAC
also helps companies to go public without getting involved in hurdles
such as multiple investor negotiations, underwriter negotiations, valuation
uncertainty and overwhelming documentations/filings.

21 Chavi Mehta and Niket Nishant, EV maker Lucid rises in Nasdaq debut after merger with
Klein-backed SPAC, THOMSON REUTERSjuly 27, 2021)
https://www.reuters.com/business/autos-transportation/ev-maker-lucid-rises-nasdaq-
debut-after-merger-with-klein-backed-spac-2021-07-26/.
22 Michael D. Klausner, Michael Ohlrogge, and Emily Ruan, A Sober Look at SPACs,
39(1) YALE J. ON REG., (2022) 1, 48.; (Stanford Law and Economics Olin Working
Paper No. 559, NYU Law and Economics Research Paper No. 20-48, European
Corporate Governance Institute - Finance Working Paper No. 746/2021).(hereinafter
Michael Klausner).

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 Characterbjzng SPACS: The Challenges to Indian Regulation

D. RISKIER THAN A TRADITIONAL IPO

Nonetheless, a SPACs is a risky venture too. Underlying each

regulatory requirement of traditional IPOs is the primary aim of
regulators, namely, investor protection. In that sense, SPAC primarily
relies on the expertise and experience of the management to attract
investors (instead of concrete business plans, generally) to invest in the
profitable target company, which is a contingent matter. Consider this, in
a traditional IPO issuance, SEBI relies on intermediaries like merchant
bankers, banker to an issue, etc. to enhance disclosure and other
compliances by a primary actor that is the company intending to get
listed. 23 But, in a business combination deal, the merchant bankers are not
required to act as disclosure gatekeepers with the responsibility of
ensuring that the information flowing from the company to the retail
investors is true, adequate or correct. Additionally, SPACs often have
complex structures and arrangements that can create conflicts of interest
or result in dilution of shareholder value. Therefore, given the mechanism
of SPAC, there is much scope, regardless of the effectivity of regulations,
of fraud and misrepresentations at each stage of the process.

IV. REGULATORY HURDLES: A SCOPE FOR

CONTEMPLATION

Presently, the Indian capital market does not have any uniform
regulations to govern the operation of SPACs and the subsequent
transaction they undertake. However, given that in the entire SPAC
mechanism, the retail investors are inevitably the most vulnerable parties
as due diligence is not as strict or rigorous in de-SPAC transactions as in
an IPO; a higher degree of caution is required on the part of the investors
as well as the regulators. The limitations with respect to information and
uncertainty of the markets together create an undesirable affair for both
SPAC and investor protection in India.

23 See, Reinier H. Kraakman, Gatekeepers: The Anatomy of a Third-ParyE nforcement Strategy,

2 J.L. ECON. & ORG. 53, 82-83, 94-100 (1986).

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Vol. VI, Issue 1 Journalon Governance 2023

A. BROAD REGULATORY HURDLES TO SPAC IN THE

INDIAN CONTEXT

The regulatory hurdles for the SPACs can be attributed to the strong
resentment to "shell companies" by the Indian legal regime. De-SPAC
transactions are still technically prohibited in India as it is in contravention
to various provisions of Indian law such as SEBI Regulations, FEMA,
RBI Master Directions, and the Income Tax Act, 1961.24 In this part, we
shall look at some of these hurdles to argue that firstly, SPAC structure of
investment comes with its own individual challenges which force us to
question its characteristics from the perspective of a regulatory arbitrage
and an independent avenue. Secondly, we have tried to highlight
regulatory challenges, which have not yet been considered in Indian
scholarship in order to argue that if India adopts SPAC structure in its
current mature state, it will create complex challenges for Regulators to
ensure its promotion as an investment avenue, and its regulation for
investor protection.

5
To begin with, for instance, Regulation 6 of SEBI ICDR Regulation
stipulates the minimum eligibility conditions for an IPO to be permissible
for listing, including a net tangible asset of at least INR 3 crore in each of
the preceding three years, minimum average consolidated pre-tax
operating profit of INR 15 crore during any three of the last five years of
operating, and net worth of at least INR 1 crore in each of the previous
three years. These requirements go against the fundamental model of
SPAC, which is meant for accessing public money within a shorter period.
However, SPACs in India may still go public through a book-building
process, but this mandates that 75% of the IPO must be allotted to

24 See, Anant Roy & Aviral Deep, Skipping the Rigmarole of Listing: CriticalAnalysis of Indian
Regulations and Tax ProvisionsRelated to SPACs, 9 RGNUL FIN. & MERCANTILE L. REV. 24
(2022).
25
SEBI ICDR Regulations, Supra note 5, Reg. 6.

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 CharacterilzngSPACS: The Challenges to Indian Regulation

qualified institutional buyers, limiting investment opportunities for retail

investors who can only invest for a few percentage of stakes of the entity.

Further, a SPAC merger is likely to be a cross-border merger, making

it subject to FEMA regulations. The Foreign Exchange Management
(Cross Border Merger) Regulations 201826 states that in an inbound
merger, the transferee company can issue or transfer securities to persons
outside India according to RBI guidelines 27 and sectoral caps. 2 However,
as SPAC companies do not have a specific business object, determining
the maximum foreign shareholding is difficult, and RBI guidelines impose
intensive reporting requirements for cross-border mergers. This creates
higher compliance requirements for SPAC entities, lengthening the time
required to complete SPAC listings.

In this context, as noted earlier, the SPACs do not necessarily have

tangible assets or an identifiable business objective. For instance the SEC
notes that "a SPAC may identify in its IPO prospectus any industry or business
that it ill target as it seeks to combine with an operating company, but it is not
obligated to pursue a target in the identified industy."2 Given this, the Section
4(1)(c) of the Companies Act, 201330 ("the Act") mandates the stipulation
of definitive objective of the company in its memorandum for
incorporation. This seems to restrict the liberty with which the SPAC can
operate and identify targets. Similarly, as per Sections 248(1)(a) and 248(5)
of the Act,3' the Registrar has been given the power to remove a
Company's name from the register of companies, if it fails to initiate "its
business within one ear of its corporation." This acts as the biggest roadblock to

26 Foreign Exchange Management (Cross Border Merger) Regulations 2018, Notification

No. G.S.R. 244(E), Reg. 4 (March 20, 2018).
27 Reserve Bank of India Master Direction - Liberalised Remittance Scheme (LRS),
Notification No. RBI/FED/2017-18/3.
28 Reserve Bank of India Foreign Exchange Management (Transfer or Issue of Any
Foreign Security) Regulations, 2004, Gazette of India, pt. II sec. 3(i) (July 07, 2004).
29 USEC Investor Bulletin, supranote18.
30 The Companies Act, Supra note, §4(1)(c).
31 Id. §248(1) and 248(5).

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Vol. VI, Issue 1 Journalon Governance 2023

SPAC, as a typical acquisition timeline of SPACs in itself is 18 to 24

months until which it has no existing business structure.

B. COMPLEXITIES OF SPAC: AN INDEPENDENT

ALTERNATIVE TO IPO MECHANISM

1. SPAC as an 'Entity': Private Equity Structure

Moving beyond, and this is where we are reminded of the

fundamental difference between a conventional IPO and SPACs. That is,
an IPO is a transaction where the issue is selling stock against purchasers'
money, and to that extent, "the issuing corporation owes no fiduciay duy to IPO
purchasers."32 However, the SPAC is an entify which makes significant
decisions for its future by deciding on business combinations. It is notable
here that the legal commentators have time and again, emphasized on the
similarities between private equity funds and SPACs. 33 Essentially, in the
"Private Equity Fund" Structure of SPAC, it is the sponsor who exercises'
significant control rights, which saps the limited avenues available to the
public holders to exercise influence. 34

Moreover, one recent study notes that the SPAC sponsors tend to
fare much better than SPAC shareholders. 35 For instance, the 'sponsors',
generally constituted by institutional investors, formulate the strategy of

32 Minor Myers, The Corporate Law ReckoningforSPACs, HARVARD L. SCHOOL FOR. ON

CORP. GOVERNANCE (Aug. 17, 2022).
https://corpgov.law.harvard.edu/2022/08/ 17/the-corporate-law-reckoning-for-spacs/.
33 See generally, Usha Rodrigues & Mike Stegemoller, Exit, Voice, and Reputation: The
Evolution of SPACs, 37 DEL. J. CORP. L. 849, 851 (2013) (hereinafter, Usha
Rodrigues).and Steven Davidoff Solomon, Black Market Capital, 1(1) COLUM. BUS. L.
REv. 173, 224-28 (2008).
34. Usha Rodrigues & Mike Stegemoller, Exit, Voice, and Reputation: The Evolution of
SPACs, 37 DEL. J. CORP. L. 849, 851 (2013).
35 Michael Klausner, supra note 23. See also, Minmo Gahng, Jay R. Ritter & Donghang
Zhang, SPACs, The Review of Financial Studies (Forthcoming) (Jan 26, 2023)
https://papers.ssrn.com/sol3/papers.cfin?abstractid-3775847 (hereinafter, Minmo
Gahng).

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 Characterbjzng SPACS: The Challenges to Indian Regulation

acquisition post-IPO, subject to the shareholder's approval. Further, the

SPAC structure allows the investors to redeem their investment before
the proposed merger, sometimes regardless of the fact that they might
have voted in favor of it as a shareholder. However, this has led to the
problem of opportunistic 'hold-out rights'36 by sophisticated investors in
the SPAC mergers. In response to which, Sponsors have started to follow
two trends in contractual formulations:

1. SPAC sponsors have started to design contracts where they have put
higher threshold for the redemption rate in order to cancel an
acquisition, and thus have effectively dissolved the purpose of voting
on an acquisition. 37Further, in order to compete for targets with
hundreds of similar SPACs in the market, the terms of the De-SPAC
contract are further diluted against the interests of the unredeemed
shareholders. 38This means that the unsophisticated investors who do
not generally redeem their money are left with no influential rights on
the choice of acquisition the SPAC will make.

2. There is a recorded tendency of the shareholders to 'approve and

redeem' their shareholding, by exercising the exit option after
approving the acquisition of a particular target. While these investors
(majorly constituted by sophisticated institutional investors with
ample information about strategies of investment)" redeem their
shares for their pro rata value in the trust/escrow account, holding the
IPO proceeds plus accrued interest, the non-redeeming shareholders
(generally, these are less sophisticated retail investors and

36 See generally, Thomas Friedmann & D. Chad Larson, Special Purpose Acquisition
Companies:A SPAC Evolution, THE HEDGE FUND J. (May 2008) and Usha Rodrigues,
supra note 34 at 857.
37 See, Usha Rodrigues, Supra note 34 at 894.
38 Holger Spamann and Hao Guo, The SPAC Trap: How SPACs Disable Indirect Investor
Protection, 40 YALE J. ON REGUL, 75, 78 (2022). (hereinafter, Holger Spamann.)
39 Michael Klausner, Supra note 23 at 232-36.

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institutions) 40 are left with shares with value less than the share price
they paid. 41

This is extended to show that the retail investors may fare poorly in
comparison to the 'sponsors' and other institutional investors in a De-
SPAC transaction. 42 Similar issues have been raised as to the governance
structure, provisions of bylaws, compliance with formalities, existing
under the company law. 43 In that context, the regulators must also be
conscious of these possibilities while considering regulation of SPACs.
But this also brings us to the foretasted confusion, whether securing the
interests of stockholders of SPAC come in the domain of NCLT or SEBI.
Should we consider them stockholders of an entity or investors in a
transaction?

2. Forward Looking Statements: A Challenge to SPAC

The SPAC structure of investment also necessitates another

consideration. Unlike a public company aiming for conventional IPO,
SPACs do not have business operations or assets which can be disclosed
to initial investors. Therefore, when SPAC narrows down on a
prospective small target company, it sends a statement to the stockholders
which often include ""forward-looking statements" regarding anticipated
performance or financialprojections of the post-merger company. " In India, the
liability for making forward looking statements is intermingled with the
jurisprudence on misstatements in general. 45 Given that a SPAC would
inevitably rely on forward looking statements to project an attractive

40 Holger Spamann, Supra note 39 at 80.

41 See, Holger Spamann, Supra note 39 at 81-82.
42 Michael Klausner, Supra note 23 at 246-51.
43 Minmo Gahng, Supra note 36.
44 Roger E. Barton and Michael C. Ward, SPACs and speculation: the changinglegal liabiliy of
fonrard-looking statements, THOMSON REUTERS (July 2, 2021)
https://www.reuters.com/legal/legalindustry/spacs-speculation-changing-legal-liability-
forward-looking-statements-2021-07-07/.
4s Mini Gupta, L iabili For Forward Looking Statements - Discussion Of Indian Law,
55(2)Journal of the Indian Law Institute 228, 235 (2013).

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 Characterbjzng SPACS: The Challenges to Indian Regulation

avenue for investment during De-SPAC transactions, it is potentially an

area of considerable need for regulation" and litigation.47 Consider this,
the Regulation 6 of SEBI Issue of Capital and Disclosure Requirements
Regulations, 201848 provides a reasonable eligibility threshold (that is, for
investor protection only) which restrict the entry of budding startups to
go public. Currently, Schedule VI of the same Regulations prohibits use of
forward looking statements which cannot be substantiated. Considering
that, SPAC will act as a saviour for private companies to avoid these
requirements about which the retail investors basically would know
nothing but the claims that SPAC makes, it would be very complex to
determine stringency of this regulation.49 In the US, SPACs have enjoyed
the 'safe harbor' exemption, which protects them from liabilities in private
litigation for making forward-looking statements in good faith and with
cautionary language. 50But if a similar exemption is adopted in the case of
India, it would not favor the retail investors, as it will burden them for
proving that a particular SPAC made some false and misleading
statement, while knowing that the statements were false and misleading.
In a sense, we find that any regulation must enhance the gatekeeping role
of SEBI to protect investors, otherwise it will get compromised in case of
shell companies such as SPAC. Therefore again, a jurisdictional question
arises - whether SEBI can have authority to govern a De-SPAC

46Yaxuan Wen and Mengnan Zhu, Is Going Public via SPAC Regulatoy Arbitrage?: A
Textual Analysis Approach, Brandeis University 9-
10(2022)https://papers.ssrn.com/sol3/papers.cfm?abstractid-4066641.
47 Wendy Gerwick Couture, Top Ten Issues in De-SPAC Securties Litigation, 44 UA LITTLE
ROCK LAW REVIEW, University of Arkansas (2022). (hereinafter, Wendy Couture).
48 SEBI ICDR Regulations, supra note 26, Reg. 6.
4 John Coates (Acting Director, Division of Corporation Finance), SPACs, IPOs and
Liabilizy Risk under the Securties Laws, Statement on U.S. Securities Exchange Commission
(April 8, 2021) https://www.sec.gov/news/public-statement/spacs-ipos-liability-risk-
under-securities-laws. (hereinafter, John Coates)
50 Roger E. Barton and Michael C. Ward, SPACs and Speculation: The Changing Legal
Liabiliy of Forward-Looking Statements, THOMSON REUTERS (July 07, 2012)
https://www.reuters.com/legal/legalindustry/spacs-speculation-changing-legal-liability-
forward-looking-statements-2021-07-07/.

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transaction which is essentially a business combination deal where a

public company acquires a private company.

In this light, we see that there are an umpteen number of

considerations which are required to be given to SPAC structures in
Indian regulatory regime. In this part, we saw that the governance
structure in SPAC may suggest that since it is an entity, it should be treated
differently from an IPO, yet some challenges like the possibility of
forward looking statements, makes it similar to an IPO and therefore
warrants protection of SEBI. This is to show that in categorizing SPAC as
a regulatory arbitrage, we effectively argue that it must be regulated as
strictly as an IPO. That would mean curtailing the freedom of contract of
the parties involved in De-SPAC transactions. On the other hand, if we
categorize it as an independent alternative, we run the risk of failing in
investor protection efficiently. Similarly, there has been much discussion
around other regulatory hurdles like cross border or taxation
5
considerations to SPAC as well.
'

Given these challenges have already arisen in evolved jurisdictions like

the US and the EU, it is not implausible that Indian regulators will also
have to account for them at this stage of the economy when they are
trying to promote the SPAC structure of investment in the country.
Therefore, it becomes a serious challenge for them to allow is sufficient
flexibility to the sponsors to attract SPAC while securing
investor/shareholder protection simultaneously. Thus, underlying each
regulatory hurdle discussed herein, we see ourselves staring at a single
problem: How to characterize SPAC? That is, is it merely an investment
structure that is truly and inherently a regulatory arbitrage, or does it
represent scope for certain reconsiderations?

51 See generally, Medha Pandey & Adarsh Choubey, Regulatosy Challenges Arising due to the
Emergence of Spedal Purpose Acquisition Companies (SPAC) in the Indian Corporate Environment,
4 INT'l J.L. MGMT. & HUMAN. 1094 (2021) and Sireesha Mamidenna, Speial Purpose
Acquisition Companies: An Overview of Their Structure and Legal Status in India, 21(1) IUP
Journal of Accounting Research & Audit Practices; 56, 61 (2022).

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 CharacterilzngSPACS: The Challenges to Indian Regulation

C. A SCOPE FOR REGULATORY CONTEMPLATION IN INDIA

Understandably, the conception of SPAC will come with its own

challenges. But this has led many scholars as well regulators to treat
SPACs as an 'alternative' or a run-around to a conventional IPO regulation.
Therefore, the prevalent positions with respect to the character of SPAC
are that it should be treated as a functional equivalent of IPOs, and thus
be subjected to a regime as restrictive as an IPO regulation."On the other
hand, some have argued in the context of recent regulatory proposals53
released by the SEC that,

"The SEC proposed a series of regulations thatpromised to appy some of the

lessons of history, by forcing SPA Cs into some of the old regulatory boxes, that
SPACs initiallypurportedto escape through the shiny packaging of novelty." 54

However, it must be noted that India is uninitiated in context of

SPAC and the challenges accompanying it as a conception in other
jurisdictions have matured significantly. While these challenges will
require a well-drafted regulatory regime, which ensures that the goal of
investor protection does not get undermined, it will also dissuade the
investors to opt for SPAC when it is treated in an identical manner as the
traditional IPOs.55

52 See, Minmo Gahng, Supra note 36 and Wendy Couture, Supra note 48.
s3 Securities Exchange Commission, Speial Pupose Acquisition Companies, Shell Companies,
and Projections, SEC Release Nos. 33-11048; 34-94546; IC-34549 (Proposed Rules) (Mar.
30, 2022) https://www.sec.gov/rules/proposed/2022/33-11048.pdf.
S4 John Morley, How SPACs Made Old Things Old Again, 40 YALE J. ON REGUL, 13, 16
(2022). (hereinafter, John Morley).
ss Gillian Tan, Citi to Pause New SPAC Issuance as SEC Signals Crackdown, BLOOMBERG
(Apr. 4, 2022,) https://www.bloomberg.com/news/articles/2022-04-04/citi-said-to-
pause-new-spac-issuance-as-sec-signals-crackdown. See also, Lauren Mosery, YTD 2022
Saw Dramatic Slowdown in Global IPO Activity from a Record Year in 2021, EY GLOBAL
(June 30, 2022)https://www.ey.com/engl/news/2022/06/ytd-2022-saw-dramatic-
slowdown-in-global-ipo-activity-from-a-record-year-in-2021.

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1. Economic Substance Approach

The SPAC structure, when located in the context of its history and
functionality, represents a sale of stock for cash.56Essentially, in a SPAC
structure, the target company is enabled to raise capital from the public,
but not from the primary market but the secondary market. Nonetheless,
the role of SPAC has been described as follows,

"SPACs act as intermediariesin this sale process, effectively selling target stock to
public investors for afee. They advertise target shares as an investment, validate target
quality, and receive compensation only if the transaction closes."

And because of the absence of this conception, there are still existing
regulatory gaps in the US regime. Halbhuber argues that when SPAC
shareholders decide to invest their escrowed cash without redeeming their
shares at the time of combination deal, it translates into a purchase of
stock for cash. On a similar note, but in the context of liabilities for
making forward-looking statements, the then Acting Director of the
S.E.C.'s Division of Corporate Finance, John Coates, suggested that an
IPO is where we most typically need protection to overcome the
information asymmetries, and if this fact of "economic and information
substance" about IPO drives our understanding, then it is a De-SPAC
transaction which shall be treated as "Real-IPO". 58

The idea here is that such a conceptual reorientation towards SPAC

will ensure that the regulatory gaps are filled in context of strong investor
protection. For instance, Companies that use a SPAC merger to
effectively sell their shares to the public for cash do not have to disclose
as much information to investors as those who do so through a
conventional IPO. In fact, practically, the same liability criteria for
financial predictions that apply in IPOs do not apply to businesses that

56 Halbhuber, supra note 6, at 61.

57 Idat 46.
58
John Coates, Supra note 50.

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 CharacteribzngSPACS: The Challenges to Indian Regulation

receive public capital via SPAC mergers. And here is the reason why we
cannot equate an IPO with De-SPAC transaction as, practically, there
should be different liabilities for making projections, or any statement in
case of SPAC as there is relatively less information and track record in
SPAC's possession than a company fulfilling conditions of ICDR
Regulations of SEBI5 9As Halbhuber notes,

"The pressure to embellish projections may be especaly pronounced in SPAC

megers because SPACs and their sponsors have incentives that are quantitatively and
qualitatively different... from an IPO."6"

Regardless, for now the argument of economic substance, that is

treating De-SPAC as a sale of stock for cash, still holds strong.

Moving forward, in the case of considering De-SPAC as a mere

business combination deal distinct from an IPO, the intermediaries like
Merchant or investment bankers are also not provided with the same
incentives "to act as disclosure gatekeepers" in case of De-SPAC transactions
as in case of IPOs. That is, a De-SPAC merger cannot be dealt by similar
rules as other intermediaries in an IPO. For instance, Clause 12 of the
Code of Conduct for Merchant Bankers" provide that the Merchant
Banker should avoid conflict of interest by taking reasonable steps to
ensure truth and fairness of information. On a similar note, Halbhuber
argues that, as a regulatory gap, SPACs are not subject to the conflict of
interest rules, that govern conventional underwriters in IPOs. However,
this proposition is practically impossible in the context where it is given
that SPAC and their controlling person have aligned special financial
interests in the merger. That is, even if in the real world, data shows that a
median sponsor contributed no cash at all to the target practically," this
does not mean that the intention of the sponsors to make profits out of

59 SEBI ICDR Regulations, supra note 26, Reg. 6.

60
John Morley, Supra note 56.
61 Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992, SEBI
Notification No. LE/11112/92, Sch. III, Cl. 12.
62 Michael Klausner, Supra note 23 at 241.

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the SPAC structure dissolves. In that sense, the fact that "SPACs offer
public investors a way to co-invest side-by-side with sponsors," holds
true./Therefore, the economic substance approach conceptualized by
proponents fails on different practical grounds given the innovative
structure of a SPAC.

Nonetheless, there are several implications of such approach. First,

the economic substance approach can be instrumental in clarifying the
jurisdictional confusion for SEBI. In history and structure, a SPAC
essentially represents an investment vehicle which enables the public to
invest in a private company or start-up. To that extent, the notion that a
De-SPAC transaction may be equated with a conventional IPO, though at
the stage of secondary market, can be helpful. Since, through a De-SPAC
transaction, the investor's money is being invested in a business venture, it
aligns with the underlying economic and financial substance of an IPO.
Although, in terms of regulation, liabilities and implications, a De-SPAC
merger and IPO differ significantly, therefore, SEBI has to be mindful of
that. 4 Secondly, this approach also enables the regulator to locate the
SPAC corporate structure as distinct from the transactional dynamic
between the investors and the target company. In that, the SPAC
corporate governance structure can be strictly governed by Company law
separately, to ensure that the representation of retail investors does not
get overwhelmed by the seeming influence of the sponsors. Similarly, the
regulation of disclosure and compliance requirements can be oriented to
treat De-SPAC transaction as an IPO issue, however, while being
conscious of the practical distinction between them." For instance, a
special guideline as to the scope of forward-looking statements (& ensuing

63 NASDAQ, SPACs: Spedal Pupose Acquisition Companies: Listing a SPAC on Nasdaq,

https://www.nasdaq.com/solutions/listings/markets/americas/ways -to-list/spac.

65 UshaRodrigues, and Michael A. Stegemoller, Redeeming SPACs, Research Paper No.

2021-09, University of Georgia School of Law Legal Studies Research Paper
Series,(2021) https://papers.ssrn.com/sol3/papers.cfm?abstractid-39061964.

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 CharacteribzngSPACS: The Challenges to Indian Regulation

liabilities different from an IPO) and the misuse of the language can be
provided to the SPACs in the interest of investor protection.6 6

2. Economic, Functional and Strategic Utility: A Case for

Relaxed Regulation

It is important here to take a pause and remind ourselves of the

sudden surge of SPAC as an investment vehicle in the market.67Forgetting
for the moment that the SPAC represents a regulatory arbitrage, it
essentially propels us to ask that why do we need to look for an alternative
to traditional IPO or whether the IPO process can be improved?
Consider this, if a De-SPAC and an IPO are subjected to identical
regulation and liability, what would a target company prefer? The likely
answer is that it will prefer an IPO, this is because

"A de-SPAC, if coupled with a low conversion threshold, introduces contingeny.

A taget cannot be certain that the deal will close until the redemption date has
passed."

In a SPAC market, the risk to the investors categorically changes its

nature. In that, SPACs generally become a fundraising vehicle for the
budding start-ups with interesting business plans. Given the
aforementioned uncertainty that a deal may not go through, such start-ups
will either dissolve before reaching the post-IPO stage or will become
public while losing out on strategic 8 and functional utility of SPACs. For
instance, in 2020, the surge of SPAC was partly attributed to the

66 Michael Klausner, Michael Ohlrogge and Harald Halbhuber, Net Cash Per Share: The
Key to Disclosing SPAC Dilution, 40 YALE. J. ON REGUL. BULLETIN 18, 20 (2022).
67 See, Matthew Goldstein, SPACs Were All the Rage. Now, Not So Much, N.Y. Times (June

2, 2022) https://www.nytimes.com/2022/06/02/business/spacs-inflation-
regulation.html. (hereinafter, Mathew Goldstein).
68 Editorial, What is a SPAC?, CBInsights (April 2022).
https://www.cbinsights.com/research/report/what-is-a-spac/. See also, Usha
Rodrigues, and Michael A. Stegemoller, Why SPACs: An Apologia, Research paper No.
2022-04, University of Georgia School of Law Legal Studies Research Paper
Serieshttps://ssrn.com/abstract-40728342.

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prominent financial firms and venture capitalists embracing the SPAC

process as a prompt and an easier route to public markets than an IPO."

On the other hand, SPACs increase the public's access and exposure
to these companies which is not possible in venture capital funds which
are generally limited to institutional or wealthy investors, or mutual funds
where retail investors participate indirectly.7 0Effectively, the argument
here is that by harping on investor protection too much and equalizing
the SPACs and IPOs, the regulator runs the risk of excluding the retail
investors from the market and the gap between the private companies and
the investors widens. 71 The idea here is that SPAC holds utility other than
being a regulatory arbitrage or a pseudo IPO. In that sense, its
implications on the capital markets must be governed differently from an
IPO.

V. CONCLUSION

This paper has made the case that the development of SPAC in India
must be looked from a different orientation while keeping in mind the
incumbent challenges it faces in other jurisdictions. India, being a
developing economy finds itself in a different position than other
countries where it wants to promote economic growth by increasing flow
of money in the market through investment, and at the same time it faces
challenges from a matured investment structure like a SPAC. Thus, the
regulation of SPAC in India requires a scope for contemplation as to
strike the balance between encouraging SPACs as well as protecting
investors simultaneously. And, the current debate surging in the US
provides an important case study for that.

69 Mathew Goldstein, Supra note 69.

70 Bob Zider, How Venture Capital Works, 1998 HARV. BUS. REV. 131 (1998). See also,
Usha Rodrigues, and Michael A. Stegemoller, Why SPACs: An Apologia, Research paper
No. 2022-04, University of Georgia School of Law Legal Studies Research Paper Series
https://ssrn.com/abstract=4072834.
71See, C. P. Chandrasekhar, Sarat Malik and Akriti, The elusive retail investor: How deep can
(and should) India's stock markets be, SEBI.
https://www. sebi.gov.in/sebidata/DRGStudy/elusiveretailinvestor.pdf.

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 CharacterizjngSPACS: The Challenges to Indian Regulation

In this article, we looked at the history of the SPAC structure in order

to show that its invention was a response to the IPO regime in the US. In
that limited sense, we see it as an attempt to bypass the existing laws and
scrutiny of the regulators. However, when we look at the diversity of
challenges it poses to the regulators in India, we are reminded of its
characteristics which makes it difficult to regulate it with an IPO
transaction. In that sense, the economic substance approach which
promotes the idea of equating IPOs and SPACs, by arguing that they
essentially represent a transaction of stock sale and purchase only,
represents only a limited understanding. This paper has tried to argue that
we cannot reduce the regulation of SPAC to a mere intermediary in the
investment transaction because such an approach will firstly, ignore the
economic, function and strategic utility of SPAC which it has over IPO
transactions. Secondly, such an approach ignores the dimension of 'entity'
which SPAC carries beyond its IPO and thus requires regulation in that
domain too. For instance, we noted that after the IPO process, Sponsors
and institutional investors, while leveraging their freedom of contract
(which represents an entirely different challenge)and information
asymmetry may enter into transactions which are not beneficial to the
retail investors (who become shareholders afterwards). Further, they may
profit unethically at the cost of the unaware shareholders.

Therefore, we argue that SPAC cannot be squarely placed in

categories of a regulatory arbitrage or a new independent alternative to
IPO. That the proposal that the De-SPAC transaction must be regulated
and treated on par with an IPO is impracticable yet not completely
dispensable. Rather, a creative regulatory structure is required to
contextualize the SPAC structure in India. In this structure, the economic
substance of the SPAC as being an investment vehicle (and not a
regulatory arbitrage) must be realized without undermining the investor
protection. One way of doing this is to ensure that the information
asymmetry between institutional investors and the retail investors is cured
through regulatory means. Again, such an approach must not be so
stringent that it demotivates the sponsors and institutional investors from

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even considering SPAC as an investment avenue, and thus limiting the

scope of market in India.

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