In a deSPAC transaction, the SPAC raises money through an initial public offering (IPO) with the intention of acquiring a company within a certain timeframe. When a suitable target is found, the SPAC and the target (could be a public company issuer) company merge, allowing the target company to go public without having to go through the traditional IPO process. You can learn more about this process and how public companies can utilize this pathway here.
Similar to a traditional stock acquisition, the shareholders of the target company must reveal their identity and provide proof of ownership in order to participate in the deSPAC transaction. This process can help identify counterfeit shares and prevent naked short selling.
One of the benefits of a stock acquisition is that it can help identify counterfeit shares in the market. Counterfeit shares are shares that are sold to investors but do not actually exist. This can happen when a short seller sells shares that they do not own, hoping to buy them back later at a lower price and pocket the difference. This practice, known as naked short selling, is illegal.
When a company acquires another, it needs to buy the shares from the shareholders of record, who are the people listed as the owners of the shares in the company’s records. This means that shareholders of record would have to reveal their identity in order to get the stock for the merger. This process can help identify counterfeit shares because the company can verify that the shareholders of record actually exist and that their shares are valid.
Furthermore, the company can also verify that the number of shares being sold matches the number of shares outstanding. This can help identify situations where the number of shares being sold exceeds the number of shares outstanding, which could be an indication of naked short selling.
By identifying counterfeit shares, a stock acquisition can potentially combat naked short selling. When a company acquires another, it can require that all shareholders of record provide proof of ownership of their shares. This can help prevent short sellers from selling shares they do not own, since they would need to provide proof of ownership to participate in the acquisition.
In addition, the company can use the information gathered during the acquisition process to report any suspected cases of naked short selling to the relevant regulatory authorities. This can help deter naked short selling by increasing the risk of getting caught and facing penalties.
Lately, we have been witnessing some very strange stock trading anomalies dealing with a few tickers we follow, especially $GTii and $MMLTP.
Some companies will issue dividends as a vehicle to try to get a true share count - but this practice does nothing to mitigate any potential counterfeit shares that exist other than getting a true share count. A deSPAC transaction cancels the current shares (including any counterfeit or naked shorted shares) as new shares of the SPAC are only issued to the record holders of the target.
A deSPAC can help identify counterfeit shares in the market by requiring shareholders of record to reveal their identity and provide proof of ownership. This can be an effective way to combat naked short selling, which can harm investors and undermine the integrity of the market. By taking steps to prevent and report naked short selling, companies can help ensure a fair and transparent market for all participants.
Eric Benzenberg is a partner at the Basile Law Firm, P.C. He specializes in corporate restructuring, complex commercial litigation, and mergers and acquisitions to achieve practical outcomes for clients. Eric is recognized for his work as a litigator to best counsel companies at all stages. Eric can be reached at 516.455.1500 x112 or by emailing him at Eric@thebasilelawfirm.com