One of the weirder recent developments in SPAC World is regarding Rose Hill Acquisition Corp. Rose Hill, which had a completion deadline of January 19, 2024, attempted to claw back redemptions in order to pay their creditors. However, Continental Stock Transfer & Trust, the Trustee for the SPAC, effectively said, nope, you can’t do that… the Trust is for the benefit of shareholders, not creditors.

To give some context, Rose Hill only had roughly $3 million held in trust at the time it exceeded its completion deadline, at which point Continental was obligated to liquidate the Trust and return money to shareholders.  However, Rose Hill claimed in a petition to the Cayman courts that it had roughly $600K in creditor claims and it wanted to use the Trust money to pay them.

However, as all SPAC investors know, SPAC sponsors cannot use investor money held in trust to pay sponsor’s bills. The Trust is sacrosanct and used as a means to protect investors from exactly this type of situation.  There is the caveat that some teams write into their IPO prospectus that they can remove some of the interest earned on the trust account to fund their working capital, but the point being that this is interest, not investor money and investors know this ahead of time at IPO.  Rose Hill, on the other hand, wanted to change the rules after the Trust had been liquidated.  That’s not how legal agreements work.

Nonetheless, the Rose Hill team went so far as to bring on a liquidator to try and pierce the trust. Continental, which is the Trustee for approximately 95% of the SPAC market and has been working with SPACs since the beginning of SPAC-time, effectively shut that process down by instructing DTC to return money to shareholders last week.  Again, the Trust is for the benefit of shareholders, not creditors. Frankly, it was a pretty strong move on Continental’s part since it could invite some form of litigation against themselves for doing that.

However, what is the real takeaway from this for SPAC investors?  In the long term, this should actually improve the quality of SPACs.

Keep in mind that SPAC investors are betting on a sponsor team and if a sponsor team is not willing to truly subject their at-risk capital to being fully at-risk, investors will not participate in their SPACs anymore. In the short term, seasoned SPAC investors may only want to invest in serial SPAC issuers who understand the product and have a stake in SPACs as an investment vehicle. Meaning, a sponsor team would never try to break their trust for their own benefit if they plan on IPO’ing successive SPACs. Investors would never “trust” them again.

Additionally, perhaps investors start to only favor institutionally-backed sponsor teams and forgo smaller teams made up of individuals.  Meaning, institutions have the ability to absorb a liquidation and loss of their at-risk capital, whereas if an individual team can’t afford $600K in bills, they probably shouldn’t be doing a SPAC to begin with. This would eliminate the types of SPAC teams that entered the field in 2021 because it seemed “easy”. They didn’t truly understand SPACs.

And finally, while the language around the Trust Agreement is already very tight, perhaps investors will demand even more protections around the Trust, which would, in theory, only allow for the most serious of SPAC sponsors to participate in the SPAC vehicle. To-be-determined, but going forward there are sure to be questions about this on IPO roadshows.

The bottom-line, SPACs have been around for over 25 years and not once has the Trust account been broken. Sponsors may try, but the end result will most likely be an additional run-up in legal bills. In Rose Hill’s case, their legal bills could easily exceed the $3 million they are trying to claw back.  But ultimately, a SPAC IPO is about the sponsor team. There is no operating company to evaluate, just the individuals running the SPAC.  Deeper due diligence in this area can only improve the SPAC product going forward.