Perceptive Advisors — The pitfalls of manager sponsored SPACs

Summary:

• Perceptive Advisors LLC (“Perceptive”) is a healthcare and biotech manager focused on crossover investments and advises multiple private funds, including Perceptive Life Sciences Master Fund, Ltd. (the “PLSM Fund”).
• On September 6, 2022, the Securities and Exchange Commission (“SEC”) settled an administrative proceeding with Perceptive for violating Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder and Section 13(d) of the Exchange Act and Rule 13d-1 thereunder.
• As part of this settlement, Perceptive paid a civil penalty of $1.5 million.

Allegations and Conduct:

1. Special Purpose Acquisition Company (“SPAC”) Transactions –

• ARYA Sciences Acquisition Corp II (“ARYA II”) and ARYA Sciences Acquisition Corp III (“ARYA III”) were SPACs sponsored 80% by the PLSM Fund and 20% by five Perceptive supervised persons (“Perceptive SPAC Owners”). ARYA Sciences Acquisition Corp IV (“ARYA IV”) was a SPAC sponsored 70% by the PLSM Fund and 30% by the Perceptive SPAC Owners.
• The sponsors of SPACs often receive compensation, in the form of promote/carried interest, if the SPACs are successful in consummating acquisitions. Therefore, the Perceptive SPAC Owners, who controlled the investments made by PLSM Fund, were incentivized to help finance the ARYA entities in completing their transactions.
• Without disclosing the above conflict of interest to investors, Perceptive caused the PLSM Fund to participate in the PIPE transactions of the ARYA II and ARYA IV De-SPAC transactions. In addition, Perceptive caused the PLSM Fund to purchase, on the open market, common stock of ARYA II and ARYA III prior to the closing of their respective business combinations.
  • Analysis:
    • There are significant conflicts of interest for management company-sponsored SPACs, so many firms avoid this structure. Had this SPAC been 100% sponsored by Perceptive Funds, this law violation would not have occurred.
    • While it is possible to disclose this type of conflict, it is often challenging because disclosures for private equity style funds must be made at formation. Any ADV disclosure or updated PPM disclosure could have been considered post-hoc. Therefore, if a private equity style fund is sponsoring the SPAC, cross-sponsorship would not be advisable.

2. Section 13(d) errors –

• Perceptive failed to consider the totality of its investment program across and within the Firm when negotiating with target companies.
  • Analysis:
    • This is a common error. Compliance departments often rely on portfolio management teams or portfolio management accounting systems to ascertain when filing triggers are met. They should also be engaged in investment committee meetings or other oversight committees to best understand the combinations and intentions behind investment strategies on a periodic basis.