How Are New Excise Taxes Levied Under the Inflation Reduction Act Likely to Impact SPACs?

19 October 2022 Foley Ignite Blog
Author(s): Louis Lehot

As if we were not in a deep winter already in market conditions, Special Purpose Acquisition Companies (SPACs) are now facing a significant new hurdle.  This is because the recently enacted Inflation Reduction Act (IRA) included a 1% excise tax that could be levied on stock repurchases or buybacks.  This applies to publicly traded companies who repurchase their stock from shareholders and goes into effect after December 31, 2022.

So, how will this excise tax included in the IRA impact SPACs? Redemption rights are ubiquitous to nearly all SPACs.  Shareholders have the ability require the SPAC to repurchase their shares prior to the merger in what is known as a redemption right, essentially getting their money back.  There are two possible scenarios in which redemption rights come into play.  First, they can be exercised by the shareholders themselves because they are pulling out of the transaction, or second, they can be triggered because the SPAC did not find a target with which to merge.

Redemption rights are an attractive feature of SPACs as they reduce risk for investors, basically giving them something close to a money-back guarantee if they aren’t satisfied with the acquisition target or if a deal falls through. They are also exercised at a high rate.  According to a study published in the Yale Journal on Regulation, the mean redemption rate among the SPAC deals in their study was 58% and the median rate was 73%.  In some recent de-SPAC shareholder votes, we have seen SPAC shareholders redeeming greater than 90% of their holdings.

While these redemption rights are different from a typical buyback situation, it might be wise to prepare now as if this Inflation Reduction Act provision will apply to SPACs.  There are still many unknowns, but there is speculation that it could be more of an issue for SPACs that do not complete a merger and redemption rights are triggered. The tax could possibly also apply to foreign SPACs who merge with US-based companies in order to domesticate.

There will certainly need to be more clarity from the Internal Revenue Service on the application of the excise tax to SPAC redemptions. So, until there is relief from the IRS and the high level of redemption rates, SPAC promoters should be prepared to face this excise tax in the new year.

This blog is made available by Foley & Lardner LLP (“Foley” or “the Firm”) for informational purposes only. It is not meant to convey the Firm’s legal position on behalf of any client, nor is it intended to convey specific legal advice. Any opinions expressed in this article do not necessarily reflect the views of Foley & Lardner LLP, its partners, or its clients. Accordingly, do not act upon this information without seeking counsel from a licensed attorney. This blog is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Communicating with Foley through this website by email, blog post, or otherwise, does not create an attorney-client relationship for any legal matter. Therefore, any communication or material you transmit to Foley through this blog, whether by email, blog post or any other manner, will not be treated as confidential or proprietary. The information on this blog is published “AS IS” and is not guaranteed to be complete, accurate, and or up-to-date. Foley makes no representations or warranties of any kind, express or implied, as to the operation or content of the site. Foley expressly disclaims all other guarantees, warranties, conditions and representations of any kind, either express or implied, whether arising under any statute, law, commercial use or otherwise, including implied warranties of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Foley or any of its partners, officers, employees, agents or affiliates be liable, directly or indirectly, under any theory of law (contract, tort, negligence or otherwise), to you or anyone else, for any claims, losses or damages, direct, indirect special, incidental, punitive or consequential, resulting from or occasioned by the creation, use of or reliance on this site (including information and other content) or any third party websites or the information, resources or material accessed through any such websites. In some jurisdictions, the contents of this blog may be considered Attorney Advertising. If applicable, please note that prior results do not guarantee a similar outcome. Photographs are for dramatization purposes only and may include models. Likenesses do not necessarily imply current client, partnership or employee status.

Related Services