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welcome back to squat box this morning we have some breaking news right now that could have a massive impact on the spak world it's a lawsuit that was just filed this morning against bill hackman's back and it will be argued by former sec commissioner robert jackson the suit says that the spak bill lackmanspack is an investment company and should be regulated as such similar to the way any company that's an investment company per the investment company act of 1940 would be it would be a substantial lawsuit insofar as any uh could have an implication if they were to win against effectively any investment manager that effectively has a spac part of the argument being made in this case um is that this spac was buying securities in the context of buying universal music group but more just as importantly makes the argument that effectively the back end services of this spac were being run by pershing square that's how a lot of these spacks are operated a lot of investment managers whether they be private equity executives venture capital uh executives uh that typically are regulated as investment companies are starting specs which typically have been considered operating companies if in fact these operating companies were to be uh considered investment companies the regulation of them and yes the compensation that they would receive and how that compensation would work and the governance and structure of the boards would come under this investment act and would make the spac world a lot more difficult bill ackman just gave us a statement this morning about this lawsuit he said that yesterday evening a plaintiff filed a lawsuit against pershing square tanteen holdings and its directors alleging that it is an illegal investment company under the investment company act of 1940.
the complaint bases its allegations among other things on the fact that psth owns or has owned u.s treasuries and money market funds that own u.s treasuries as do other specs while they are in the process of seeking an initial business combination pst has never held investment securities that would require it to be registered under the act and does not intend to do so in the future we believe this litigation is totally without merit but becky uh i think the spac world is going to raise some eyebrows this morning about what this kind of lawsuit means the fact that it's being uh brought and effectively argued by a former commissioner of the sec at a time when the sec itself is raising questions about spax uh is going to create some real questions and i don't know we'll see if this uh has any kind of chill uh on the spac market uh but uh i know a lot of people uh emailing this lawsuit around literally uh in the past hour uh as as people try to make heads or tails of it one of the great ironies one of the great ironies i will say of this whole thing is that of all of the spacks out there i would have argued to you that the bill ackman pershing square version was more investor friendly than many of the others because from a performance pay for performance perspective there were warrants and the warrants only got paid off if the company was successful in the case of the um universal music group deal they weren't even getting warrants so there's a lot of there's a lot of spacks out there where there's no paper performance it's i call it pay before performance so it's a little odd that they're going after this deal but of course the sec also uh tried to block the deal with uh with universal news group which could make the whole thing moot too so it's very complicated look the spac industry has already chilled to a huge extent we're not seeing anything near what we were a year ago at this time it's not necessarily the investment vehicle of choice or the operating company of choice depending on how you want to look at this what i think is interesting andrew is what you brought up about how it affects compensation if it's an operating company versus an investment company is that tax implications as well as well as as as how this all goes down i think it's less about the taxes i think it's more about the way these things are governed and what would be considered an arms length uh deal on governor from a governance perspective on how some of this compensation is organized and how the regulators will look at effectively these compensation schemes part of the argument effectively that robert jackson appears to be making against pershing square is that these boards are not independent boards uh by the way most boards of spax have historically not been independent um and um now but with full disclosure that there's no claim here that it's being that they've misled the public or that it's a fraudulent conveyance or anything like that just that this unto itself is effectively illegal because the investment act of 1940 would make it such yeah if that were to happen it would it would it would it would chill this environment and specifically for investment professionals make it less attractive for for as a business proposition for them
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