In Defense of SPACs


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Special purpose acquisition companies, better known as SPACs, have single-handedly revitalized the market for initial public offerings, bringing dozens of smaller companies public. So far this year, these blank-check companies have seen almost double the listings compared to traditional offerings.

And since these cash shells — which raise money in an IPO on the promise of merging with a private company within a few years, taking it public — often target emerging tech companies, that market is back in its glory years. has gone.

Why, then, are regulators trying to kill it?

The attack has been swift and focused. First, the Securities and Exchange Commission’s head of corporate finance said the merger of SPAC and its target company should be considered “Real IPO” Which would remove the safe-harbor protection that SPACs have for forward-looking statements. This means that the SPAC merger will not come with a financial forecast or other projections, a key difference from traditional IPO

Subsequently, SEC officials issued a bulletin questioning accounting treatment of warrants, which he said should be considered liabilities rather than equity. it can Delay in IPO and merger As a significant number of SPACs they make changes to their accounts.

The impact of both these announcements in April can be easily seen in the numbers.

SPAC IPOs, Four-Week Rolling Total

The regulatory investigation of SPACs has been launched by raising its hands on whether they are too risky for retail investors, a recent questions Presented by SEC Chairman Gary Gensler.

cat, back in 2008 I was writing about the dangers of SPAC and their role in that year’s merger (which ended badly). While some companies that recently went public via SPAC have had major successes, such as betting group DraftKings, others have flared up, like power-truck maker Lordstown Motors, which said this week that it might don’t have enough cash to survive.

And with more than $130 billion in cash in SPAC now seeking acquisition targets, competition for deals will undoubtedly drive up acquisition prices, making it harder for investors to generate returns, especially for the latter. .

But all these things go wrong. SPAC, which has been around for decades, has brought back the IPO market for innovative, smaller companies. Despite the recent recession, there have been over 330 SPAC IPOs this year, raising just over $100 billion.

Flash back to the late 1990s. where did it go Four Horsemen Boutique Bank – Alex. Brown, Hambrecht & Quist, Robertson Stephens and Montgomery Securities — at that time cumulatively wrote about 130 IPOs a year. It was a market where brokers could pass short shares to investors (think “boiler room”).

After the dot-com bubble burst and Sarbanes-Oxley Act introduced reforms to reduce broker conflicts, small IPOs all but disappeared, a subject of my study. Since then, the pace of IPOs of almost all large companies has been very slow.

Eventually, the notion that regulation had become too strict gained prominence, leading to Jobs Act of 2012. This made it easier to go public, but the goal of giving public investors access to innovative start-ups previously has proved elusive.

Annual IPO Volume in the US

Enter SPAC, which is bringing many smaller companies to market. SPAC has found a way to raise ready capital through an IPO, long before it approached the company to acquire and transfer funds. And there is often additional investment from outside investors at the time of merger, which helps to validate deals.

Hedge funds are drawn to the post-SPAC IPO, the pre-acquisition phase because they earn interest on the amount they invest, buying more stock by purchasing more stock if the company merges with a goal. and can redeem their stock at the IPO price if they do not like the takeover.

This is a good investment. Where SPACs can run into trouble during their second phase: when they make acquisitions. However, there is the above option to redeem the stock at the time of acquisition if the shareholders do not like it. A major problem is that shareholders who have invested in SPAC are getting a particularly bad deal after the acquisition, what some research suggests.

Is that? SPACs are bringing risky companies to market. Stock Market 101 suggests that with more risk comes more reward and more failures.

Should investors be exposed to these types of companies, which are inherently risky? Make your own decisions, but it wasn’t long ago when people worried about start-ups staying private for too long, depriving public investors of the risk of potential gains. Now that SPAC has solved this problem, the regulators are back.

And that’s changing as many people become familiar with SPAC. Bill Ackman’s recent deal with Universal Music Group is confused, to say the least, and the hedge fund manager’s SPAC will create a new spin on SPAC, which he calls SPARC (Special Purpose Acquisition Rights Company). It addresses some of the shortcomings of how SPACs work, removes the deadline for finding an acquisition target and does not tie up investors’ funds before a deal is struck. According to me, this is the third generation of SPAC development.

more Disclosure must be required Regarding compensation to SPAC sponsors. And some SPACs are too aggressive or take companies too public too soon or with faulty (or even fraudulent) business plans. But the same can happen with traditional IPOs. That’s not the only thing hitting the ground that has revitalized the market for IPOs of small and emerging growth companies over 20 years.

Steven Davidoff Solomon, aka The Deal Professor, is a professor in the School of Law at the University of California, Berkeley, and faculty co-director at the Berkeley Center for Law, Business and the Economy.

what do you think Do SPACs serve a purpose or are they too risky and need to be curbed? tell us: dealbook@nytimes.com.



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