A blog post this week caught our attention because it provides some interesting data about investor lawsuits over SPACs, the hot (though cooling) Wall Street trend — and what can lead to the class actions, hopefully helping litigation communicators prepare.

A simplified version of how SPACs, or special-purpose acquisition companies, work: Sponsors set up an empty shell company that does an initial public offering and is then publicly traded. The shell company promises to merge with an operational company within a certain period of time. SPACs are a way for operational companies to go public with less red tape than a traditional IPO.

Cynicism has grown over how good an investment SPACs are and how many merger targets are out there.

15th Suit

The 2020 SPAC merger involving DraftKings Inc., the Boston-based fantasy-sports and sports-betting outfit, is often cited as a successful example of the species. Yet, investors sued over the merger July 2 in Manhattan federal court. Kevin M. LaCroix, who writes a highly respected blog on securities litigation, The D&O Diary, said in a July 6 post that this marks the 15th such SPAC suit filed this year.

The DraftKings filing comes after the release of a report by a short-seller (an investor that bets a stock price will drop). That’s not unusual, LaCroix says. It was the case in eight of the 15 suits. And of the eight, four reports came from the same short-seller (which targeted DraftKings): Hindenburg Research.

We’ve written about Hindenburg-induced explosions before, specifically concerning electric-truck makers Lordstown Motors Corp. and Nikola Corp. (the latter was last year). It’s reaching the point where a short-seller’s attack will almost always lead to an investor class action. That’s something for which SPAC companies should be on the lookout and be prepared to communicate about.

Third Party

One allegation in Hindenburg’s June 15 report on DraftKings concerned a third company that was part of the merger. SBTech Global Ltd. provides technology for sports betting. Hindenburg alleges half of SBTech’s revenue comes from places where such gambling isn’t allowed, exposing DraftKings to black-market gambling. Another important crisis preparation concept: due diligence.

“The sheer volume of SPAC activity and the likely coming wave of SPAC-acquisitions makes it likely that we will see more of these SPAC-related lawsuits in the months ahead,” LaCroix writes. “The level of short-seller scrutiny of post-SPAC companies even further increases the likelihood.”

Thus far, we’ve been unable to find any comment from DraftKings on the new suit, which is surprising because the company has always been diligent in communicating about state legislation that affects its business.

Image Credit: DraftKings

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