SEC Settles Charges with Adviser for Failure to Disclose Conflicts of Interest Related to SPACs

Who may be interested: Registered Investment Advisers.

Quick Take: The SEC settled charges against a registered investment adviser alleging that the adviser failed to timely disclose to its private fund clients its personnel’s ownership interests in the sponsors of special purpose acquisition companies (SPACs) in which the adviser invested client assets.

The SEC order stated that between July 2020 and January 2021, personnel of the adviser were involved in the formation of three SPACs, having ownership interests totaling approximately 50% in the sponsors of the SPACs. During the same period, the adviser caused two of its private fund clients to invest in the SPACs through private investment in public equity (PIPE) transactions (PIPE transactions are commonly used by SPACs to raise additional funds, above the amounts raised in the SPAC’s initial public offering, to acquire the SPAC’s acquisition target). As owners of the SPAC sponsors, the adviser’s personnel were entitled to share in the increase in value of the SPAC shares received by the SPAC sponsors if the SPACs completed their respective business combinations. 

The SEC order further stated that the adviser failed to timely disclose the conflicts created by its personnel’s ownership interests in the SPAC sponsors. The adviser first disclosed its SPAC-related conflicts of interest to the boards of directors of the private funds it advised in its Form ADV in April 2021. At the time of this disclosure, all three SPACs had consummated IPOs, and two of the SPACs had already announced business combination agreements and entered into subscription agreements for PIPE transactions with the adviser’s private funds. According to the SEC order, the adviser’s earlier Form ADV and offering memoranda for the private funds failed to fully disclose the conflicts related to the SPACs.

The SEC order also alleged that the private funds’ governing documents authorized the adviser to appoint an advisory committee of unaffiliated partners to consult on transactions involving conflicts of interest. No such committees were appointed for any of the SPAC investments.

As a result of the conduct described above, the SEC order stated that the adviser violated Section 206(2) of the Advisers Act, which prohibits an investment adviser from engaging in any transaction, practice or course of business that operates as a fraud or deceit upon a client. The SEC order further stated that the adviser violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder by failing to adopt and implement policies and procedures reasonably designed to provide appropriate disclosure about its personnel’s ownership interests in the SPAC sponsors and the associated conflicts of interest.

Without admitting or denying the findings in the SEC order, the adviser agreed to a cease-and-desist order and to pay a civil penalty totaling $1 million.

The SEC’s order can be found here.

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