Weak companies that didn't want the public scrutiny of a traditional IPO but wanted big investor bucks used SPACs and are now failing because they're weak. Totally unsurprising. SPACs should require the same public disclosure that is required in an IPO.
Why? It’s not like these are pink sheet companies being sold out of boiler rooms to retirees. The people losing their shirts on these SPACs are greedy gamblers. I don’t think we need to waste regulation resources protecting them from themselves. There are polluters and things to spend time on instead.
After IPO, large index funds are picking up these de-SPAC companies. So, I think its not just "greedy gamblers" who are exposed to losses - conservatively invested retirees are taking losses too.
That's half the answer but still not enough information. What de-SPAC companies are part of that index? What percentage of the index do they represent?
Gamblers always have leverage and your attitude ignores the systemic risk when these gamblers leverage themselves 30x chasing capital for billionaires?
Given the terms -- funds are retained contingent on a deal and confirmation of the deal -- I wouldn't call that a gamble. Gamble would be keeping the stock after the fact or buying it post formation -- if it was a "less valuable company."
Also I think at some point we need to reconsider the bail out approach of lending companies because they are too big to fail. Also separating institutions and trimming through their lending money practices makes better sense than bailing them out, because "too big too fail."
When I borrow money I am assigned an interest plus collateral rate based on the inflation/cost of money at the time+projected and my risk of defaulting. On average the "bank" has zero risk (and I have liquidity). If the bank gets greedy and like some institutions that we are all well aware of in the recent years, forgets to do basic risk planning and hedge appropriately flounders that, then if most people default it is their fault -- people paid them for that event. Start bankruptcy proceedings, liquidate/fire the executive team, absorb valuable teams/assets, renegotiate with company's lenders and move on. This happens constantly B2B. Business bankruptcy is different than individual one (at least in the U.S. and some other E.U. countries I am familiar with) -- due to liability plus other measures. Somehow politicians came into the story of systemic risk and allowed certain parts of the economy to become immune to such issues... (Which lead to the Wall Street/Big Bank cockiness.)
If the system faces risk because it can't tell a good borrower from a gambler, it deserves to fail. The corpses of those lacking good judgement will serve double duty as object lesson and food for a new generation.
Well, the rules of a SPAC are that if it doesn't close then the investors get their money back, and the "leader" (I don't know the technical term) of the SPAC just loses out on any money, time, and effort spent trying to close a deal. Not sure what disclosure that would warrant for investors except "make sure you ask for interest when you get your money back".
And that's a possibility for any business... Private businesses are run into the ground all the time, including those that raise funds through friends & family or angel investors...
(Not saying you're implying otherwise here, just building on the fact that a closed SPAC is not more guaranteed to be a stable business any more than a private business).
No, because the investors can individually choose to decline the deal and get their money back with interest.
Any investors remaining after the deal closes implicitly agreed to the closing price.
I don't think there were any cases of a SPAC not returning deposit money if someone asked, and the institutional investors generally preferred the "guaranteed return" over gambling so the redemption percentage was quite high(I think 50%+).
1. buy a company within 2 years and keep 20% of the equity of that company for yourself. You do not need to hold that equity for the long term. You can sell that 20% equity immediately and pocket the proceeds.
2. do not buy a company within 2 years and return the $1 billion to me with interest.
If you had to choose between buying a trashy company and pocketing $200 million or returning me the $1 billion and pocketing nothing, which would you choose?
Also in case 1, of a sale, you can issue additional warrants to “friends” and key “investors” as an incentive. Which further dilutes the actual post merger equity pool that everyone is buying in to. SPACs are free money for early investors at the cost of everyone else whos too small to get sweetheart terms or actually sticks with the equities.
I'm no SPAC expert. When I first heard about them I wrote them off almost immediately and never had an interest to dig in any further. It seemed like the business equivalent of a subprime mortgage and it was only a matter of time before it caught up with them.
One reason that I've understood is if you're a smaller company that can't afford the whole IPO process, this is a way to get access to public markets in a simpler/faster/cheaper way.
Those justifications fit well with my subprime mortgage equivalency. Fast, easy, and cheep money for people who aren't ready and aren't willing to wait until they are ready. That throws up red flags for me and makes me wonder what else they may have cut corners on in the name of speed or cost cutting.
I think I saw in another comment that it may be due to investors looking to get their money out, so maybe there is pressure there. I understand investors not wanting to take 10 years to see returns, but not if it comes at the expense of the business. I don't know all the ethics around startup investing, but if we start seeing a lot of these business go south (significantly more than traditional IPOs), a line may have been crossed. This could be a means to shift what used to be pre-IPO investment risk over to public investors if things start to look shaky internally. Again, I'm not expert, just spitballing.
The IPO process is incredibly burdensome. You basically can't tap public equity markets without being a very large business. Otherwise you can't justify the time and expense.
I see the similarity to sub-prime mortgages, but the differences are: 1) this is the stock market so I don't think anyone doesn't understand the risks, 2) SPACs are no where big enough to drag down the rest of the market.
Before SPACs, companies would do reverse mergers. A basically bankrupt public company "buys" a private company and merges. Swap the private equity for public and now you're a public company with far less hassle than an IPO.
It does seem like the IPO process is a proxy for “are you mature enough to handle a large sum of money?”. Thus the SPAC ends up being a way to throw money at immature people who then piss it all away.
Hardware-heavy companies (e.g. a lot of the new space companies) need the level of investment that you can only really get from public markets, but are still quite small companies from the perspective of people here. For example, they might be less than 100 employees but still need half a billion dollars to procure satellite testing and launch services to scale up a constellation they're launching. SPACs have been useful for this purpose.
(I have no idea how these space companies are faring now, and what side of the statistic they represent.)
I think it's to early for all those SPACed aerospace companies to tell. It does seem so that a lot of the newer ones are to a large extend just benefiting from the hype SpaceX started and companies like Joby and Lilium carried forward. Whether any of those without a final product will actually fly, and if there is a market to serve, is the big unknown here.
Hardware-heavy companies (e.g. a lot of the new space companies) need the level of investment that you can only really get from public markets, but are still quite small companies from the perspective of people here. For example, they might be less than 100 employees but still need half a billion dollars to procure satellite testing and launch services to scale up a constellation they're launching. SPACs have been useful for this purpose.
So have governments. The entire US space industry has to be viewed in terms of budget reductions for federal aerospace, in terms of privatization.
The company I used to work for went public in a SPAC. Initially, the shares were worth about $35 or so. I sold immediately after my lockout period at about $26. The shares are worth below $9 now. I read in the documents for the SPAC "merger" the executives got a big bonus when the deal closed. I hope for my former associates' sake that the company doesn't go under.
A bunch of my coworkers from a previous company went to a startup that did a SPAC IPO in October. Went from $12 to $1 since then. Seems like these all went down at literally the worst time possible lol
They "went down" at the correct and absolute best time to cash out before interest rates rise and these companies go belly up. It's about grift not about making the company work well.
This makes me feel better about my $10 shares now being worth $4. Although I would never have joined this company in the first place if I knew they were going to IPO via SPAC last October.
Lazer huh? Not surprising. The CEO lied on his application to the thiel fellowship and sketch Russian investment money can only go so far. Parents were Florida real estate investors, so all the fawning press about self made child genius billionaire were eye-rollingly asinine. Iirc there was a major force reduction about a year before the SPAC.
Not really tho....most companies or high net worth people have most of their wealth in assets i.e. stocks, private companies, bonds...they will often just stay invested and watch the value of their assets go up. Only taking small profits here or there if they need the cash.
They're about to sink even further, stuck with a bunch of unsellable homes as interest rates are zooming up. Q2 will be a rough print. They're executing better than Zillow did, for certain, but it's still going to catch up with them.
That's why I treat all my (ex-)employer shares and RSUs as lottery tickets / monopoly money. For Amazon that worked out perfectly, for EADS a little less so but still very well. If I cannot live with my base salary, I'm not taking the job, as simple as that. If someone is giving me a potentially winning lottery ticket on top of a decent base pay, why would I refuse so?
That seems to be a pattern. VLTA recently had an executive shakeup that seems to stem from their overcompensation for closing a relatively mediocre spac offering.
Its sad as their business has surprisingly tremendous potential with good execution.
So, it appears that companies which wish to avoid the regulatory requirements accompanying a conventional IPO, may have "good" reasons for doing so. Also, that those requirements for a conventional IPO, may actually do something to reduce the rate of the such companies being non-starters.
Often these 'novel investment opportunities' at least have some pretense for what their purpose is (like my gut doesn't believe high frequency trading is good for society, but folks more educated in economics seem to think it adds liquidity and is actually useful, so whatever I'll defer to them). I'd be curious to know what the good-faith reason for SPACs is (even if it is a lampshading reason).
They seem to be a straightforward attempt to circumvent regulations. The justification I see from basic googling is that the IPO process is biased in favor of big players somehow, and that SPACs are more open to retail investors... but if that is the case -- Why are IPOs apparently so hard for the little guy to get in on? Is it possible that IPOs are actually high risk investments and regulators are trying to shield retail investors from them? Or something else? It is possible I'm missing the point completely, I'm admittedly not sophisticated on this front.
A SPAC (especially when combined with a PIPE [Private Investment in Public Equity], as they usually are), offers the business more certainty about the amount of money they're going to get. The business can negotiate ahead of time and then either accept or reject the deal. (The amount of money is more or less fixed, but the business can negotiate how much of itself it sells for that fixed amount of money.)
In a traditional IPO, there is a set number of shares to sell. The bank suggests a price range, then gets orders from investors for how many shares they'll buy at different prices, adjusting the range as they go, if necessary. Then the bank picks a price that will sell all of the shares. The business doesn't really have a lot of say in the amount of money they end up raising.
Additionally, there is some theory that a SPAC merger can offer projections of future business without opening themselves to liability if the projections don't come true. Whereas that's very clearly not the case with an IPO. Pre-revenue business in particular like that about SPACs. The SEC seems to be against that interpretation of the law, though.
The other thing about a SPAC is that it brings in additional management that, presumably, have more experience with public markets. Some businesses see that as a benefit.
The major downside of a SPAC, from the busines's perspective, is that the SPAC sponsor takes a huge cut of the proceeds. That is, of course, a big upside for the sponsor, and probably the main reason we've seen so many SPACs crop up recently.
I appreciate the comment, especially given that the general environment is pretty hostile to SPACs.
This answers the question of why a company might want to use a SPAC for something other than, basically, evasion of regulations/reporting (which seems to be the main theory here). Is there any reason to think they might be good for the market in general (other than, sort of, 'what is good for businesses is good for the market' type thinking? (this is why I brought up the HFT example)).
Oh, yeah. The "good for the little guy" argument is that essentially anyone can buy into a SPAC before the merger goes through, whereas with an IPO, the bank only takes orders from big investors. Little guys have to then buy from one of those big investors, usually at higher price.
SPACs typically trade at around $10 per share before the merger is announced, and most PIPE deals get the same price. So everyone is on equal footing at the start.
After the merger is announced, the share price tends to rise, so little guys that get in late pay more. But they at least had the opportunity to go in at the same price as the big investors.
So, from that perspective, it is more egalitarian.
SPACs bring new management and/or bundle together multiple existing companies into one large IPO, allowing you to sort of merge/index/change-manage/IPO all at the same time. This theoretically could allow three dying manufacturing firms to become one functioning public firm.
Yea that’s the best I can come up with. Not super believable.
It is definitely possible. I just think it is interesting to see the other side's argument for things that I'm instinctively averse to. A strong, automatic gut reaction can be a nice touch-off point for thinking about our biases.
IPOs are hard for the little guy to get in on because they don't have the full market apparatus behind them, so there's too much overhead. They would rather deal with a handful of larger players, who then turn around and play the market. They often get a discount because they're not playing in the IPO frenzy.
It's not fair, but it's more about the systemic bias for the wealthy rather than a decision to exclude people.
I think part of the “good-faith” SPAC pitch was that since there is so much VC money now and companies can close huge series D rounds that there is less need to IPO early. Later stage IPOs don’t give the public as much upside as IPOs used to, so SPACs were a way to give earlier stage investment opportunities to the public.
Here's a great video by Patrick Boyle on SPACs[1]. TL;DW SPACs favor promoters and early (usual institutional investors) at the cost of later investors.
It’s even worse that this. A SPAC is basically like an inverse bullshit detector. If a company can raise private capital then it would, given the lower scrutiny. If it was mature and low-risk, it would IPO to lock in major institutional capital. So SPACs are in a Goldilocks situation for scams.
The companies that all seemed to be trying to SPAC were companies that quacked and waddled like real companies, hoping to profit off of the speculative fervor that was gripping real but overhyped companies. In other words, it actively incentivized a ponzi system where the public markets were a cushion for speculators.
Nah, losing money on BitCoin has almost always been a straight-up asset bubble situation, like housing in 2007 or something.
A much better example would be tech startups where founders sell equity in subsequent rounds and get rich while employees are locked up. Adam Neumann is a billionaire, even though Jared Leto is playing him in a biopic about how it all went so terribly wrong.
Can anyone say anything good about companies using SPAC as a method of going public? All I hear is that it's a way for executives and VCs to exit faster without regulations and outcomes are generally bad.
I'm no expert, but two of the key advantages noted for SPACs has been:
* Lower fees
* Less regulatory filings
It seems that one reason big investment banks (e.g. Goldman Sachs) are exiting the SPAC market is due to increased regulatory pressure, which may erase that advantage [1]
I agree that your number 2 is an advantage for the SPAC and the company using it. Being quite a fan of, reasonable, regulation I see it as a potential red flag. Ultimately, the numbers have to be public. When they are, it is too late for early investors to do proper due diligence so.
I think a more interesting question is whether anyone can point to a company that used a SPAC that has been a clear success. Maybe not on the scale of Meta/Facebook, but even moderately successful.
That is an honest question - I can’t think of any but I’m also no expert.
In a traditional IPO, you go to the banks and they arrange a road show for you to talk to investors. Then everyone negotiates how much stock they want at what price. The company doesn't find out how much it will sell or its valuation until the night before the IPO! And if it fails, it is massively embarrassing and damaging to the company
With a SPAC, all the negotiations take place privately, and when they're done, the company knows exactly what they're selling and at what price.
I generally think Rocket Lab will be a successful SPAC story (eventually). They are so far ahead of the remaining small sat launch market that they while rise to meet SpaceX and Blue Origin in the reusable launcher market.
easy: only 10% of the SPAC target companies merged in 2020 and 2021 are writing this warning. this is double that of IPOs. thats it. thats the whole article. It means 210 companies are not writing that warning.
everyone is just posting copypasta they already had made about SPACs because they got burned on the share price direction, which for decently managed companies the share price has nothing to do with health or treasury balance. this article is bait for this sentiment.
Warren Buffett used to famously say that when the tide goes out, you can't see who's been swimming naked. People have been warning that SPACs have been swimming naked, and now we see they are indeed.
The entire point of SPACs was speculative gambling that you could offload your bags above NAV to some sucker that just read the merger news on Reddit before they realized the company was junk. And the company was always junk. Doesn't matter though, they are just vehicles for the gambling.
The scam goes like this:
Smart money gets in privately at NAV ($10) -> Managers search for something plausible to merge with ("financials" and "profits" don't matter here at all) -> Merger rumors get "leaked" -> SPAC pops 20-30% above NAV -> Smart money gets out -> Merger happens -> Price falls below NAV as smart retail heads for the doors -> Dumb retail is left holding the bag
The actions of the elites is going to cause the largest boom and bust we have ever seen and impact is going to very wide ranging in its impact.
The huge liquidity injection carried out to bribe us all to accept being locked in our homes caused a rally and boom that was never justified economically, at all levels, from VC to my brother in law's benefits funded wide screen TV purchase. This, as always, always brought inflation.
But to add the real kicker, that will doom a large portion of the world population, was the Economic Social Governance elites who have through their actions ensured we do not have an adequate energy supply to grow our way out of this problem the only way is down now.
But don't worry next time they wont need to bribe you to keep you locked up, the WHO will give it to them for free.
Who are these people? I just think it's totally unproductive to post a rant about some shadowy un-named group.
I think you're also missing the larger economic situation whcih is not just that a liquidity injection caused inflation but that also a huge supply crunch has caused a supply-demand imbalance, which you don't even mention, but which has been obvious to everyone for a while.
The deflation from massive destruction of the 2008 crash is still with us and the current apparent inflation is just a transient result of supply-chain disruptions and now Russia's aggression on Ukraine. Corporations are also taking advantage of the news cycle to exercise some of their newfound pricing power, which they are already finding is transient - see the largest retailers, Target and WalMart crashing because they'll need to be using deep discount sales for months to clear inventory.
So, that inflation is already crashing back into deflation, as seen in a range of asset price declines and the corp behavior just mentioned. The central banks have been trying to reflate since almost a decade and a half ago, and it still isn't working. Anti inflation-measures now will make it worse.
It's very easy to understand. The administration was a well known grifter and backroom dealer and he made sure friends in high places got free money. Simple as that.
Ever since 2008 our only answer to the problem of too much money seems to have been even more money. If that changes a lot things will be different, from companies to housing values, I believe this cleansing will be a net positive. it will be pretty ugly and do a lot of short term harm to people that cannot necessarily afford it.
As someone who had never really dabbled in the markets before 2020, and only parked his money in passive investments, the amount of money floating around was an eye opener. It was also terribly demoralizing - there’s literally billions and billions of virtually free money that it makes working hard at a job feel stupid, if not worthless.
I made more money from a lucky gamble in a crypto coin than I did in 3 years of work.
I can’t be the only one in this boat. I suspect a part of the labor shortage problem can be attributed to people finding out how cheap money really is, and that “working hard” for money seems like a scam.
You're not, and the phenomenon has been known for a century.
"Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.
Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
Recent accounting and liability rule changes have made banks more jointly liable and responsible for due diligence of scams, I mean, SPACs. Admittedly, not every SPAC has been an outright scam, but it appears the majority of them turn out to be so with their very optimistic forward projections and statements. Of course, these changes occur after billions upon billions of dollars have been poured into these companies. It doesn't help that the PCAOB and SEC don't have much in the way of fines that they can issue, historically and recently speaking. The supreme court being inclined to challenge or basically to legislate against the authority of federal agencies to do anything not explicitly spelled out by the constitution when it suits the philosophies of the supreme court justices.
In addition to a partisan supreme court and SEC and PCAOB being unable or unwilling to curb market excesses, many of my peers in accounting have done time at accounting firms and the SEC. These same firms are paid by the very same companies where these people end up working that the SEC oversees. I wonder where the conflict of interest is in this revolving door policy.
No, but the article mentions "Audit Analytics" as a source, and after bumping around their site [1] a bit, my assumption is this is essentially a marketing piece to get people to buy their research product
Bird is another big one, they've been trading below the $1 watermark for a week or two now, after 30 days of consecutively trading under $1 companies get delisted from the exchange.
My former employer granted me 0.1% of the company, which was 26,000 shares. 3 years later they went public via a SPAC at $10 a share, with 371,000,000 shares floated. Apparently, fundraising rounds significantly diluted common stock and the founders owned a separate type of convertible super preferred stock that was not diluted (the CEO himself still owns over 60% of equivalent common shares).
Now they are trading below $2. So my entire equity grant for a Software Architect role over 4 years would have been worth $50,000 had I stayed.
What a horrible company and emblematic of the types of scams you saw going public via SPACs.
or, ensure that there's SEC protection for pre-public companies' employees when/if they're issued stock. After all, issuance of stock is in lieu of compensation, so it is effectively an investment.
Since these employees are not "sophisticated or accredited" investors, there needs to be enough disclosure, and protection for them.
The best, and simplest, way to protect the employees is to grant stock with the same set of properties as founder's stocks. If there's dilution, the founders get diluted the same.
Be important enough to get explicit protections against dilution in your job offer.
Startups were barely worth it financially in the mid 2010's, anyone joining one the past few years has gotten majorly scammed.
Still chuckle when I think about Postman reaching out for a job at a 5B valuation with something like 100 employees and less than 50m revenue. Good life lessons for many though
Also require companies issuing equity to employees to tell them the exact ownership percentage, as well as any dilution and dollar impact on you as a shareholder as dilution events happen.
You didn’t believe in the company so you left. You also typically get new grants when fundraising occurs to help with dilution if the dilution is material. Overall I don’t see why you can say anything tangible from your experience, other than you didn’t like a company, left, and it went public and the price dropped as you anticipated.
I believe the issue is not with SPACs that haven't merged with another company (as the money would be safe in escrow as you point out), but with SPACs which have already done the merger and taken another company public. They mention Helbiz (a scooter company) that was taken public last year, but may not survive another 12 months.
Oh. Well at that point they're no longer a SPAC, right? This same scenario of almost being broke can apply to startups and recently IPO'd companies too. Really any small company in practice.
I feel like the title is a bit inaccurate. Once the acquisition has been completed, the company is no longer a SPAC. The title implies existing SPACs (companies that have not yet completed an acquisition) are somehow going bust.
At least to me, the intent is clear. Companies that recently went public via SPAC are at risk of failing due to the nature of SPACs and current market conditions.
Giving someone a bad deal isn't fraud if they willingly sign up for it and it doesn't violate securities laws. I wouldn't defend SPAC runners as good people but they aren't criminals (at least as it pertains directly to their SPACs)
