An investor in activist Bill Ackman’s giant SPAC has accused it of illegally operating as an investment company so he can extract “astronomical” compensation from it.
SPACs invest in securities but have been able to avoid being regulated as an investment company as long as their primary purpose is to acquire an operating business. Ackman’s Pershing Square Tontine Holdings has raised about $4 billion, making it the largest SPAC in history.
In a lawsuit filed on Tuesday, one of those investors, George Assad, alleges Ackman has been “telling the world that PSTH is not an ‘investment company’” when, in fact, it has been operating like one of his hedge funds.
“Investing in securities is basically the only thing that PSTH has ever done,” the suit says, and the decision to avoid registering the SPAC as an investment company has allowed Ackman’s Pershing Square Capital Management to “extract compensation from PSTH in forms and amounts that violate federal law.”
“Although PSCM has sometimes described itself and its affiliates as having charged the company less than other SPAC sponsors, in fact the compensation [it has] taken from the company is astronomical,” Assad claims.
The SPAC market has been booming, with about 600 SPACs going public over the past year. But as The New York Times reports, “Securities law experts have raised questions about whether SPACs are used as a means to avoid the more onerous rules that apply to investment funds” under the Investment Company Act and Investment Advisors Act.
“If [Assad’s] suit succeeds, it could make professional investors who have found SPACs attractive wary of potential legal challenges, chilling the market,” the Times said.
According to the complaint, PTSH has improperly compensated PSCM by, among other things, buying back PTSH stock warrants at thirteen times what the hedge fund had paid for them.
“Pershing Square operates the SPAC like an investment fund and causes it to invest in securities like an investment fund. Today’s lawsuit argues that it should be regulated like an investment fund as well,” one of Assad’s attorneys, John Morley, said.
Bryan Bedder via Getty Images for The New York Times