An Insight into the World of SPAC Fraud

Abstract

A special purpose acquisition company (SPAC) is an alternative way to take a company public and avoid the traditional initial public offering (IPO) route. It has no business model or commercial operations: it is to raise capital to acquire or merge with an existing company, known as a “blank check” (Chen). SPACs are nothing new to the public markets, but the SPAC world has surged over the last two years. For example, in 2020, $80 billion was invested into 247 SPACs, and in the first quarter of this year alone, $96 billion was invested into 295 SPACs (Chen).

The research in this paper revolves primarily around two SPAC transactions that occurred in 2020. Nikola (NASDAQ: NKLA) and Clover Health Investments (NASDAQ: CLOV) were two of the biggest SPACs to become public in 2020 and consequently are both currently undergoing fraud investigations conducted by the Securities and Exchange Commission (SEC) and Department of Justice (DOJ). The insight will be provided into both business models, their founders, and the severity of their respective investigations by short-seller Hindenburg and the DOJ.

Ultimately, these investigations will be connected to other significant SPACs that have been accused of fraudulent business operations by comparing them to what happened with reverse mergers in 2011-2012. The lack of morality from reverse mergers resulted in the SEC posting a bulletin that warned investors to be cautious when investing in such companies, noting that they are risky investments.