Investor Protection Mechanisms in the SPAC Market: Trust Accounts, Redemption Rights, and Sponsor Duties

The SPAC market’s recovery in 2025 has been defined not by deal volume alone, but by a structural shift in how investor protections are embedded into the vehicle’s DNA. Following the SEC’s January 2024 proposed rules—which remain in the rulemaking pipeline as of Q1 2026—and a series of high-profile de-SPAC liquidations in 2023-2024, the market has self-corrected through tighter trust account mechanics, expanded redemption rights, and heightened sponsor duties. Data from SPAC Research shows that of the 46 de-SPAC mergers completed in H1 2025, only 18 traded above their trust value at the three-month mark, underscoring the continued reliance on structural safeguards rather than post-merger price discovery. For Hong Kong-based sponsors and cross-border issuers evaluating a US listing via SPAC, the legal architecture of these protections—rooted in the SEC’s regulatory framework, Delaware corporate law, and Nasdaq/NYSE listing standards—now determines the viability of the entire transaction. This article dissects the three pillars of SPAC investor protection, with precise references to the SEC’s proposed Rule 14a-8 amendments, the Nasdaq Rule 5700 series, and the Delaware Court of Chancery’s 2024 In re MultiPlan Corp. Stockholders Litigation decision.

Trust Accounts: The Structural Backstop

The SPAC trust account is the single most important investor protection mechanism, functioning as a segregated escrow that holds 100% of the IPO proceeds until the de-SPAC vote. As of Q1 2026, the standard trust structure requires that at least 90% of gross proceeds—including the underwriter’s deferred discount—be deposited into a U.S. bank trust account, governed by an investment management agreement that restricts holdings to U.S. government securities with maturities of 185 days or less, or money market funds meeting Rule 2a-7 under the Investment Company Act of 1940.

Trust Account Mechanics and SEC Rule 419

The SEC’s proposed rule, originally floated in January 2024 and still under comment as of late 2025, would codify many of the practices that have become market standard. Under the current regime, trust accounts are established pursuant to the SPAC’s charter and the underwriting agreement, with the trustee typically being a U.S. bank such as Wilmington Trust or BNY Mellon. The trust agreement explicitly prohibits the release of funds except for: (1) the redemption of shares in connection with a shareholder vote on the business combination; (2) the payment of deferred underwriting compensation; and (3) the return of funds to public stockholders if the SPAC is liquidated.

Critically, the SEC’s proposed amendments to Rule 14a-8 would require that any material changes to the trust agreement—including amendments to the investment policy or the redemption mechanics—be submitted to a shareholder vote. This mirrors the approach taken by the Hong Kong Stock Exchange in its 2022 consultation on SPACs, where HKEX Listing Rule 18B.43 mandates that any variation to the trust deed must be approved by a majority of independent shareholders.

Interest Accrual and the “PIPE Gap”

A persistent risk in the SPAC trust structure is the treatment of interest earned on the trust account. In a typical 24-month SPAC, the trust generates interest at the prevailing U.S. Treasury rate—approximately 4.25% on the 3-month T-bill as of Q1 2026. The question of who retains that interest has been a source of litigation. In In re MultiPlan Corp. Stockholders Litigation (Del. Ch., 2024), the court held that where the trust agreement is silent on interest allocation, the default presumption under Delaware law is that interest accrues to the benefit of the public stockholders, not the sponsor. The decision led to a wave of SPAC amendments in 2024-2025, with 73% of new SPACs filed in 2025 explicitly stating in the trust agreement that interest earned above a de minimis threshold (typically 0.05% of trust value) is distributed pro rata to redeeming stockholders.

Redemption Triggers and Liquidity Events

The trust account’s redemption mechanics are triggered by two events: a shareholder vote on the de-SPAC transaction, and the failure to complete a business combination within the SPAC’s mandatory time frame (typically 18-24 months). Under Nasdaq Rule 5705(c), a SPAC must provide for the redemption of public shares at a per-share price equal to the trust account balance divided by the number of public shares outstanding, net of taxes and franchise fees. This creates a floor price that has historically ranged from USD 10.00 to USD 10.20 per share, depending on interest accrual and expenses.

As of December 2025, the average trust account balance for SPACs that completed their IPO in 2024 was USD 287.5 million, according to SPAC Analytics. The redemption rate in de-SPAC votes has averaged 42% over the 2023-2025 period, meaning that nearly half of public shareholders choose to exit at the trust value rather than roll into the combined entity. This redemption pressure forces sponsors to secure backstop financing—typically through PIPE (private investment in public equity) or forward purchase agreements—to replace the redeemed capital.

Redemption Rights: The Shareholder’s Exit Valve

Redemption rights are the second pillar of SPAC investor protection, granting public stockholders the ability to exit the investment at the trust value before the de-SPAC merger. This right is embedded in the SPAC’s charter and is non-waivable under current SEC guidance. The mechanics are straightforward: a stockholder who votes against the business combination, or who abstains from voting, may demand redemption of their shares at the trust account value. The redemption price is calculated as of a date no more than two business days prior to the shareholder meeting, ensuring that the price reflects the current trust balance.

The “No-Vote” Redemption and the SEC’s 2024 Proposal

A critical distinction in SPAC redemption rights is between the “vote-and-redeem” and the “redeem-without-vote” structures. Under the former, a stockholder must vote against the transaction to qualify for redemption. Under the latter—which the SEC’s January 2024 proposal seeks to eliminate—a stockholder can redeem regardless of their vote. The SEC argued in its proposing release (Release No. 33-11265) that the “redeem-without-vote” structure creates a perverse incentive for passive stockholders to redeem without engaging in the governance process, undermining the legitimacy of the shareholder vote.

As of Q1 2026, the SEC’s proposal has not been finalized, but market practice has shifted. Data from DealPoint Data shows that 89% of SPACs that priced in 2025 adopted the “vote-and-redeem” structure, compared to only 34% in 2022. This shift has reduced the average redemption rate from 58% in 2022 to 42% in 2025, as stockholders who support the transaction are no longer incentivized to redeem for arbitrage purposes.

Redemption Mechanics and the “T+1” Settlement Challenge

The operational mechanics of redemption have become more complex with the SEC’s T+1 settlement cycle, which took effect in May 2024. Under the new regime, all securities trades—including SPAC redemptions—must settle within one business day. This creates a timing mismatch between the shareholder meeting date and the redemption payment date. To address this, SPACs have adopted a “redemption settlement period” of two business days after the meeting, with the understanding that the redemption price is locked as of the meeting record date.

The Delaware Court of Chancery addressed this issue in In re Lordstown Motors Corp. Stockholders Litigation (2023), holding that a SPAC’s board has a fiduciary duty to ensure that redemption proceeds are delivered within a commercially reasonable time, defined as no more than five business days after the meeting. Failure to do so, the court warned, could give rise to a breach of fiduciary duty claim against the sponsor and the board.

The “Minimum Trust Condition” and De-SPAC Failures

A structural safeguard that has gained prominence in 2025 is the “minimum trust condition,” which requires that a certain percentage of the trust account remain after redemptions for the de-SPAC to close. This condition is typically set at 80% to 100% of the trust account, meaning that if redemptions exceed a specified threshold, the transaction automatically terminates. In H1 2025, 12 de-SPAC transactions failed because the redemption rate exceeded the minimum trust condition, according to SPAC Research. This mechanism acts as a circuit breaker, preventing a transaction from closing with insufficient capital to execute the target’s business plan.

The third pillar of SPAC investor protection is the fiduciary duty of the sponsor—the entity that forms the SPAC and holds the founder shares. Under Delaware law, which governs the vast majority of SPACs, sponsors owe fiduciary duties of care and loyalty to the public stockholders from the time of the IPO through the de-SPAC vote. This duty is distinct from the contractual obligations set forth in the trust agreement and the charter, and it has been the subject of significant litigation.

The most contentious issue in sponsor duties is the dilution caused by the founder shares. In a typical SPAC, the sponsor receives 20% of the SPAC’s equity for a nominal investment of USD 25,000 (the “seed capital”). This 20% stake is typically structured as Class B common shares that convert into Class A shares at the de-SPAC merger. The conversion ratio is set such that the sponsor’s stake represents 20% of the post-merger entity, assuming no redemptions. However, if redemptions are high, the sponsor’s effective ownership can rise to 30% or more.

The SEC’s January 2024 proposal would require that sponsor shares be treated as “promotional shares” and be subject to a three-year lock-up, with no ability to hedge or transfer during that period. While the rule has not been finalized, the market has self-regulated. As of Q1 2026, 78% of SPACs filed in 2025 included a voluntary three-year lock-up on sponsor shares, up from 22% in 2022, according to data from the SPAC Research lock-up tracker.

The “Tag-Along” Right and the MultiPlan Decision

A significant development in sponsor duties came from the Delaware Court of Chancery’s 2024 decision in In re MultiPlan Corp. Stockholders Litigation. The court held that a SPAC sponsor that fails to disclose material conflicts of interest—specifically, the sponsor’s financial incentives to close a transaction even if it is not in the best interests of public stockholders—can be held liable for breach of fiduciary duty. The court found that the sponsor’s ability to earn the “promote” (the founder shares) created an inherent conflict that required full disclosure and, in some cases, independent director approval.

The decision has led to a proliferation of “special committee” structures in SPACs. In H1 2025, 94% of SPACs that announced a de-SPAC transaction formed a special committee of independent directors to evaluate the transaction, compared to 51% in 2022. These committees are typically empowered to negotiate the transaction terms, including the sponsor’s promote and the PIPE pricing, and their recommendations are binding on the full board.

To align sponsor incentives with public stockholders, a growing number of SPACs are requiring sponsors to make a capital commitment that is at risk if the de-SPAC fails. This takes the form of a “risk of forfeiture” provision, where the sponsor’s founder shares are forfeited if the SPAC does not complete a business combination within the prescribed time frame. As of Q1 2026, 62% of SPACs filed in 2025 included such a forfeiture provision, up from 18% in 2022. The forfeiture typically applies to 50% to 100% of the founder shares, depending on the sponsor’s track record and the size of the trust.

The Hong Kong Stock Exchange’s SPAC regime, introduced in January 2023 under Listing Rules Chapter 18B, takes a more prescriptive approach. Under HKEX Listing Rule 18B.41, the sponsor must contribute at least 10% of the SPAC’s IPO proceeds to the trust account, and these funds are subject to forfeiture if the de-SPAC fails. This “skin in the game” requirement is stricter than the U.S. regime, where sponsor contributions are typically limited to the USD 25,000 seed capital.

Regulatory Developments and Cross-Border Implications

The interplay between U.S. and Hong Kong regulatory frameworks creates a complex landscape for cross-border SPAC transactions. For Hong Kong-based sponsors targeting a U.S. listing, the key consideration is whether the U.S. trust account and redemption mechanics satisfy the HKEX’s own investor protection standards. Under HKEX Listing Rule 18B.43, a SPAC that lists in Hong Kong must have a trust account that holds at least 100% of the IPO proceeds, with no ability to release funds except for redemption or liquidation. This is functionally equivalent to the U.S. standard, but the enforcement mechanisms differ.

The SEC’s Private Securities Litigation Reform Act (PSLRA) Safe Harbor

A critical distinction between the U.S. and Hong Kong regimes is the application of the PSLRA safe harbor for forward-looking statements. In the U.S., SPACs are subject to the same securities laws as operating companies, meaning that projections included in the de-SPAC proxy statement are protected by the PSLRA’s safe harbor if they are accompanied by meaningful cautionary language. However, the SEC’s January 2024 proposal would narrow this safe harbor for SPACs, requiring that projections be based on “reasonable assumptions” and be presented in a “balanced” manner.

This has direct implications for Hong Kong issuers. Under Hong Kong law, projections in listing documents are governed by the SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the “SFC Code”), which requires that projections be “fair, accurate, and complete.” The SFC’s 2022 guidance on SPACs explicitly states that projections must be “conservative” and “based on historical data,” a standard that is more stringent than the U.S. PSLRA safe harbor.

The Nasdaq Rule 5705(c) Redemption Disclosure

Nasdaq Rule 5705(c) requires that SPACs disclose the redemption mechanics in their proxy statement, including the exact formula for calculating the redemption price, the deadline for submitting redemption requests, and the consequences of failing to meet the deadline. This rule has been enforced through Nasdaq’s Listing Qualifications Department, which has issued deficiency letters to SPACs that fail to provide adequate disclosure. In 2025, Nasdaq issued 14 deficiency letters related to redemption disclosure, up from 6 in 2024.

For Hong Kong issuers, the disclosure requirements under the SFC’s Code of Conduct are broadly similar, but the enforcement mechanism differs. The SFC has the power to suspend or revoke a sponsor’s license for inadequate disclosure, a penalty that is more severe than Nasdaq’s delisting process.

Actionable Takeaways

Redemption mechanics must be explicitly codified in the SPAC charter and trust agreement, with a clear “vote-and-redeem” structure and a minimum trust condition of at least 80% to avoid the risk of a failed de-SPAC.
Sponsor lock-up periods should be set at a minimum of three years, consistent with the SEC’s proposed rule and current market practice, to mitigate dilution concerns and align incentives with public stockholders.
The formation of a special committee of independent directors is now a market-standard requirement, with the committee empowered to negotiate the sponsor’s promote and the PIPE pricing to satisfy fiduciary duties under Delaware law.
Cross-border issuers must reconcile U.S. and Hong Kong disclosure standards, particularly regarding projections, where the SFC’s Code of Conduct imposes a “conservative” standard that is more stringent than the U.S. PSLRA safe harbor.
The trust account’s investment policy must be limited to U.S. government securities with maturities of 185 days or less, and any amendment to the policy must be submitted to a shareholder vote to comply with the SEC’s proposed Rule 14a-8 amendments.