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

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.