Who’s going to be the sucker? Even the SEC, which has been asleep through all this, warns retail investors. But in the current mega-bubble craze, no one gives a hoot about anything anymore.
By Wolf Richter for WOLF STREET.
SPACs – Special Purpose Acquisition Companies, or more descriptively, “blank check companies” that have no operations – have accomplished a huge feat that fits seamlessly into the current mega-bubble craze.
So far this year, as of today, 260 SPACs went public and raised $84 billion with their IPOs, according to data provided by SPACInsider. This is a big moment because it exceeded the total amount raised during the entire year 2020 of $83 billion, which itself had been six times as large as the prior full-year record in 2019. At this pace, SPACs are forming the next WTF chart of the year:
In the IPO, a SPAC sells shares and warrants that then trade separately. SPACs have no operations at that point. They’re an entity stuffed with the funds they raised in the IPO, looking to acquire a company, such as a startup, within two years normally. After the acquisition, if approved by investors, the SPAC changes its name to the startup’s name and changes its ticker. In this manner, the startup can go public while avoiding the arduous disclosures and scrutiny a traditional IPO filing entails.
This arduous scrutiny was put in place to protect IPO investors. However, investors don’t give a hoot about protections anymore in the current mega-bubble craze. No one gives a hoot about anything anymore as long as this stuff goes up. See cryptos and NFTs, and well SPACs.
Dozens of SPACs that went public this year and late last year have either been created by, or used as figure heads star athletes, Hollywood celebrities, celebrities of all kinds, the former Speaker of the House Paul Ryan, former Commerce Secretary Wilbur Ross and, of course, Larry Kudlow, rapper Jay-Z, Gary Cohen, who was also President Trump’s chief economic advisor for a while, and Chamath Palihapitiya, former Facebook executive and current god of the traders hanging out on Reddit and Twitter, who has listed six SPACs so far.
In order to be someone, you have to create a SPAC and sell the shares and warrants, and get it listed, and ride the SPAC bubble and draw in retail investors.
The SEC warned retail investors about SPACs last week, yes, the SEC that has been asleep through all this and that is still asleep.
“SPAC transactions differ from traditional IPOs and have distinct risks associated with them,” it said. “For example, sponsors” – celebrities, ex-politicians, or other backers – “may have conflicts of interest so their economic interests in the SPAC may differ from shareholders.”
“SPAC sponsors generally acquire equity in the SPAC at more favorable terms than investors in the IPO or subsequent investors on the open market,” it said. “As a result, the sponsors will benefit more than investors from the SPAC’s completion of a business combination and may have an incentive to complete a transaction on terms that may be less favorable to you.”
“Even if a celebrity is involved in a SPAC, investing in one may not be a good idea for you,” it said.
The SEC also sent a series of Tweets into the wild yonder at the Investor Advisory Committee Meeting on March 11 that included further morsels:
“As the volume of SPACs transactions reaches unprecedented levels, staff is taking a close look at the structural and disclosure issues surrounding these business combinations.”
“We’re seeing more evidence on the risk side of the SPACs equation as we see studies showing that their performance for most investors doesn’t match the hype.”
“Many investors and commentators significantly misunderstand SPACs and their costs, particularly the role of warrants and redemptions in increasing SPAC costs, and how merger agreements can leave investors bearing SPAC costs.”
“The SPAC panel is considering implications of the current market trends in valuation, acquisition targets, alignment in versus conflicts of interest, quality of disclosure, and litigation.”
One of the issues is the special treatment that investors get: If a SPAC that has gone public at $10 a share six months ago announces an acquisition, and its shares tank upon the announcement, investors have the option to withdraw their initial investment at $10 a share. This insulates them from losses. But retail investors that bought their shares in the stock market at over $10 a share lose the amount they paid over $10 a share.
So a hedge fund got shares and warrants in the IPO. Months later when an acquisition is announced and the shares jump, the hedge fund can sell the shares and pocket the profit. But when the shares tank upon the announcement, the hedge fund has the right to withdraw the cash of their initial investment before the redemption date. In other words, they sit on a risk-free investment with the potential of a high return. Retail investors that bought the shares in the market for over $10 can redeem them at $10 before the redemption date, but will lose the amount they paid over $10.
And SPACs haven’t done all that well. Despite the mega-bubble, the Defiance Next Gen SPAC Derived ETF [SPAK] has dropped 14.5% over the past four weeks.
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