Research from Water Tower Research, Water Tower Research

Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Research from Water Tower Research

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Thematic (Sector/Industry)

Multiple Countries / Thematic (Sector/Industry)

<h2>KEY HIGHLIGHTS</h2>
<div></div>
<ul>
<li>The SPAC IPO market is all but moribund.&nbsp;At the risk of sounding like a broken record, it has been another quiet week on the SPAC IPO front. As a matter of fact, we have not seen a completed IPO for almost two weeks. So far this month, only six IPOs have been priced and as we enter the last week of May, and should there be no further IPO pricings, May 2022 will end up being the slowest month for SPAC IPOs since April 2020 when only five were priced. Meanwhile, the number of new IPO registrations continues to drop and remains outpaced by the number of registration withdrawals/abandonments by a ratio of more than two to one. This leaves the backlog of pending IPOs at 146, which is likely to shrink further.</li>
<li>New deal announcements.&nbsp;New Initial Business Combination (IBC) announcements continue to chug along as approaching deadlines press SPACs into action. We can add another two smallish deals (transaction value under $1 billion) since last week’s SPAC Talk. KludeIn 1 Acquisition Corp. (INKA) is acquiring a privacy-led data intelligence company,&nbsp;Near Intelligence Holdings, while Alpine Acquisition Corp. (REVE) will merge with&nbsp;Two Bit Circus, creators of the world’s first micro amusement parks. These new deals bring the total number of new SPAC IBC announcements to 13 so far in May. We would add that two SPAC liquidations were announced in the past week, which brings the total to six for the<br>year-to-date. As of writing, the number of live SPACs seeking merger partners is 597, dropping below the 600 level for the first time this year, although still above the 2021 year-end figure of 575.</li>
<li>Legal jeopardy.&nbsp;Our SPAC Talk Focus looks more closely at a rising, albeit unwanted, trend in SPAC Land – Litigation. Last year saw a big jump in private lawsuits, a trend that is expected to continue this year given that 95% of de-SPACs completed since the start of 2021 are trading below the SPAC redemption price and ~60% under half of that value.</li>
</ul>
<h2>SPAC STATISTICS</h2>
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<p>Source: WTR Research</p>
<h2>SPAC/DE-SPAC RETURNS</h2>
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<h2>SPAC TALK FOCUS</h2>
<h2>Legal Jeopardy</h2>
<p>If 2021 was a banner year for SPAC sponsors, underwriters and yes, even investors, albeit for a fleeting period in the earlier part of the year, it is the lawyers that are licking their lips with much excitement. Last year’s surge in SPAC IPO activity and de-SPACing transactions, perhaps not surprisingly, roused increased scrutiny from the SEC, leading to an increase in SEC investigations of and enforcement actions against SPAC-related transactions, culminating in the release at the end of March 2022 of comprehensive proposals (currently going through the public comment phase of the process) for regulatory changes that would materially expand the liability regime for SPAC transactions.</p>
<p>The SPAC exuberance of 2021 has also brought with it a mounting number of private lawsuits. Most of these are based on complaints regarding (1) material omissions or misstatements in the proxy statement, which include financial projections for the post-merger company, and (2) conflicts of interest and breach of fiduciary duty. The SEC has reported that accounting restatements in the US hit a 15-year high with 1,470 issuing restatements in 2021; SPACs accounted for 77% of these restatements. Moreover, many of these involved the issue of a completely new set of financial statements rather than just prior period revisions in a new report. The restatements mainly reflected concerns about the accounting treatments of warrants and redeemable shares adopted by SPACs helping to inflate their equity.</p>
<p>According to Stanford Law School Securities Clearing House (a collaboration with Cornerstone Research), disgruntled SPAC investors have filed Federal Securities Class Action Lawsuits against 49 SPACs/de-SPACs since the start of 2021 (of which all but one are ongoing), with many of them based on the accounting restatements as well as accusations of making positive statements about business, operations, and prospects that were materially misleading and/or lacked a reasonable basis. This represents almost four times the number of SPAC-related lawsuits filed in 2019 and 2020 combined. In fact, ~ 70% of these lawsuits have been filed over the past year.</p>
<p>The rise in SPAC-related class action lawsuits becomes even more apparent when seen from the perspective of a percentage of total litigation. SPAC-related litigation accounts for approaching 20% of all securities class action suits in the US, up from 1-2% in 2019.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/276/773/original/image_15763991591653607549116.png?1653607551" class="editor-image img-responsive" data-smartkarma-image-id="276773"></figure>
<p>Of the class action lawsuits filed, there are 48 ongoing cases, of which 47 were filed post de-SPACing (see Figure 8). About one-third of the list of ongoing litigation involves de-SPACs operating in the Automotive sector (predominantly in the EV space), which currently represents the most litigious sector for de-SPACs.</p>
<p>Figure 8: Ongoing SPAC-Related Transaction Lawsuits Filed in 2022 and 2021</p>
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<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/276/775/original/image_217178987111653607588377.png?1653607591" class="editor-image img-responsive" data-smartkarma-image-id="276775"></figure>
<p>Source: Stanford Law School, WTR Research</p>
<p>With SPACs in the regulatory spotlight and given that 95% of companies de-SPACed since the start of 2021 are trading below their SPAC redemption price, the risk is that there are more class action lawsuits against de-SPACs on the way. With 16 already filed so far this year, we would not be surprised if the number of SPAC-related lawsuits filed in 2022 continues to mount and even exceed the 33 filed in 2021. That should make the legal profession happy if no one else in SPAC Land is (other than disgruntled SPAC/de-SPAC investors).</p>
<h2>DISCLOSURES</h2>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Robert Sassoon, who is the writer of this report, covers the Emerging Growth &amp; Special Situations sector for WTR. Mr. Sassoon and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY HIGHLIGHTS


The SPAC IPO market is all but moribund.&nbsp;At the risk of sounding like a broken record, it has been another quiet week on the SPAC IPO front. As a matter of fact, we have not seen a completed IPO for almost two weeks. So far this month, only six IPOs have been priced and as we enter the last week of May, and should there be no further IPO pricings, May 2022 will end up being the slowest month for SPAC IPOs since April 2020 when only five were priced. Meanwhile, the number of new IPO registrations continues to drop and remains outpaced by the number of registration withdrawals/abandonments by a ratio of more than two to one. This leaves the backlog of pending IPOs at 146, which is likely to shrink further.
New deal announcements.&nbsp;New Initial Business Combination (IBC) announcements continue to chug along as approaching deadlines press SPACs into action. We can add another two smallish deals (transaction value under $1 billion) since last week’s SPAC Talk. KludeIn 1 Acquisition Corp. (INKA) is acquiring a privacy-led data intelligence company,&nbsp;Near Intelligence Holdings, while Alpine Acquisition Corp. (REVE) will merge with&nbsp;Two Bit Circus, creators of the world’s first micro amusement parks. These new deals bring the total number of new SPAC IBC announcements to 13 so far in May. We would add that two SPAC liquidations were announced in the past week, which brings the total to six for the year-to-date. As of writing, the number of live SPACs seeking merger partners is 597, dropping below the 600 level for the first time this year, although still above the 2021 year-end figure of 575.
Legal jeopardy.&nbsp;Our SPAC Talk Focus looks more closely at a rising, albeit unwanted, trend in SPAC Land – Litigation. Last year saw a big jump in private lawsuits, a trend that is expected to continue this year given that 95% of de-SPACs completed since the start of 2021 are trading below the SPAC redemption price and ~60% under half of that value.

SPAC STATISTICS



Source: WTR Research
SPAC/DE-SPAC RETURNS




SPAC TALK FOCUS
Legal Jeopardy
If 2021 was a banner year for SPAC sponsors, underwriters and yes, even investors, albeit for a fleeting period in the earlier part of the year, it is the lawyers that are licking their lips with much excitement. Last year’s surge in SPAC IPO activity and de-SPACing transactions, perhaps not surprisingly, roused increased scrutiny from the SEC, leading to an increase in SEC investigations of and enforcement actions against SPAC-related transactions, culminating in the release at the end of March 2022 of comprehensive proposals (currently going through the public comment phase of the process) for regulatory changes that would materially expand the liability regime for SPAC transactions.
The SPAC exuberance of 2021 has also brought with it a mounting number of private lawsuits. Most of these are based on complaints regarding (1) material omissions or misstatements in the proxy statement, which include financial projections for the post-merger company, and (2) conflicts of interest and breach of fiduciary duty. The SEC has reported that accounting restatements in the US hit a 15-year high with 1,470 issuing restatements in 2021; SPACs accounted for 77% of these restatements. Moreover, many of these involved the issue of a completely new set of financial statements rather than just prior period revisions in a new report. The restatements mainly reflected concerns about the accounting treatments of warrants and redeemable shares adopted by SPACs helping to inflate their equity.
According to Stanford Law School Securities Clearing House (a collaboration with Cornerstone Research), disgruntled SPAC investors have filed Federal Securities Class Action Lawsuits against 49 SPACs/de-SPACs since the start of 2021 (of which all but one are ongoing), with many of them based on the accounting restatements as well as accusations of making positive statements about business, operations, and prospects that were materially misleading and/or lacked a reasonable basis. This represents almost four times the number of SPAC-related lawsuits filed in 2019 and 2020 combined. In fact, ~ 70% of these lawsuits have been filed over the past year.
The rise in SPAC-related class action lawsuits becomes even more apparent when seen from the perspective of a percentage of total litigation. SPAC-related litigation accounts for approaching 20% of all securities class action suits in the US, up from 1-2% in 2019.

Of the class action lawsuits filed, there are 48 ongoing cases, of which 47 were filed post de-SPACing (see Figure 8). About one-third of the list of ongoing litigation involves de-SPACs operating in the Automotive sector (predominantly in the EV space), which currently represents the most litigious sector for de-SPACs.
Figure 8: Ongoing SPAC-Related Transaction Lawsuits Filed in 2022 and 2021


Source: Stanford Law School, WTR Research
With SPACs in the regulatory spotlight and given that 95% of companies de-SPACed since the start of 2021 are trading below their SPAC redemption price, the risk is that there are more class action lawsuits against de-SPACs on the way. With 16 already filed so far this year, we would not be surprised if the number of SPAC-related lawsuits filed in 2022 continues to mount and even exceed the 33 filed in 2021. That should make the legal profession happy if no one else in SPAC Land is (other than disgruntled SPAC/de-SPAC investors).
DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Robert Sassoon, who is the writer of this report, covers the Emerging Growth &amp; Special Situations sector for WTR. Mr. Sassoon and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.  The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

SPAC Talk: Legal Jeopardy in SPAC Land