Special Purpose Acquisition Companies (SPACs)
A Bloody History about companies with "nothing" - Then vs. Now
History always teaches us a valuable lesson; however, we are wired to forget history and what it taught us. To understand the SPAC, we need to understand our history with blank check companies.
The Invention of the 1980s:
Blank-check companies were created in the 1980s and were associated with fraudulent activity and penny stocks, which (rightfully) gave them a bad reputation.
In the late 1990s and early 2000s, over 150 Chinese companies got instant U.S. listing by merging into a U.S. SPAC Company. The fad saw some $50 billion worth of these deals launch before investors learned that many of the China reverse-takeover firms were frauds. Their factories are fake. Their books cooked. The problem of a reverse takeover is that the apparent information asymmetry gives private companies a vast space to commit mischief, deceive themselves, or defraud the public. There was no 3rd party due diligence – period. That's right; $50 billion was lost – fleeced from investors in SPAC transactions.
Around 2015, SPACs began to offer IPO investors 100% money-back guarantees, with interest; the holder would also be entitled to keep any warrants or special rights, even if they voted against the merger and tendered their shares. Even more significantly, they could vote yes to the union and still redeem their shares. In effect, this gave sponsors the green light on any merger partner they chose. It also made SPAC IPOs a no-lose proposition, effectively giving buyers a free call option on rising equity prices. As the Fed's low-rate, easy-money policy propelled the stock market higher for over a decade, it was just a matter of time before SPACs came back into vogue. And so they have, with unprecedented force.
The average size of a SPAC raised in 2020 is more than $230 million, compared with about $180 million in 2016, the data showed. To be sure, SPAC listings come with risks. Target companies often give up more control and economics when they sell to a SPAC, which has its operating team in place. They're also subject to a vote by the SPAC shareholders. Sometimes this can lead to deals being scrapped before they can close. The SPACs have two years before they find a viable target. From William Ackman to rap artists were all in on the game assuring the institutional as well retail investors that this time, it is different.
Since the start of 2018, more than 300 companies that have gone public via SPAC have averaged a loss of about 33% from the IPO price of the SPAC, versus an average loss of 2 percent for the 1,000 other companies that chose to go public through a traditional IPO as of mid-April, according to Renaissance Capital.
From 2017 to Now - A Perfected Scam?
Several companies that have announced they’re going public since 2018 via a SPAC merger are related to electric vehicle technology (EV). The “Invest in the future” pitch did not age well with many EV companies that became public via SPACs.
The EV market is/was the new gold rush. Investors are chasing anything labeled “green.” The race is on to find the next Tesla. Every legacy automaker and many start-ups are trying to get in on the action. We separate the winners from the “fool’s gold.”
We have analyzed EVs that became public via SPAC and the companies we have recommended as a short have issued a “going concern warning” after losing nearly 90% of their value.
Unicus Research recommended companies like GOEV (our latest report, A Road to Zero), FSR, FFIE, OPEN, and QS (please refer to the below file for the drop in the value of those companies since they became public via SPACs). Most companies that became public via SPAC are either down nearly 90% since their IPO debut or on their way to chapter 11 (GOEV issued a going concern warning to its investors. You can view Unicus Research’s report on GOEV: A Road to Zero).
Institutional investors purchased a net $9.0 million shares of EV during the quarter ended April 2019 and by the end of 2020 own 76.90% of the total shares outstanding.
Here is a list of EV companies that went public via SPAC.
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SPAC Regulation?
“Spacs shouldn’t ‘overpromise future results’“ - Gary Gensler, The S.E.C. Chair.
There should be no SPACs, and regulators are proposing reforms to do just that. The regulators are proposing reforms that would limit Spacs’ ability to make far rosier performance projections than those permitted in a traditional I.P.O. Under the plans from the S.E.C., which are out for public comment, the banks underwriting and advising on deals would potentially be liable for misstatements concerning blank-cheque companies.
The retreat by banks, which do everything from helping Spacs raise cash to generate a list of targets and advising on the mergers, is the latest blow to a market that bruised investors began to desert last year. Spacs have raised $12.7bn this year, a fraction of the $166bn they did in 2021, according to data from the London Stock Exchange Group. Just over 50 deals have been completed, down from 226 in 2021.
SPAC is a failed Wall Street innovation. Guess who is holding the “bag”?
The SPAC party is over. Guess who is holding the bag? The retail investors.
According to Vanda Research, retail investors lost $4.8 billion, or 23%, of the aggregate $21.3 billion they plowed into SPACs from the beginning of 2020 to the first week of April 2022. Yet the deals that brought those shares to market have yielded a bonanza for investment banks. Industry tracker Coalition Greenwich estimates that banks booked about $8 billion in SPAC-related fees in 2020 and 2021. That represents roughly 6.5% of total U.S. investment banking fees that major banks collected in that period, according to Coalition Greenwich.
Out of 199 companies that used a so-called SPAC to go public in 2021, only 11% or less are now trading above their offering price, meaning that investors who have held on to the stocks have been left with huge losses, according to a recent report from Renaissance Capital. On average, SPAC shares have lost 43%. Top SPACs like Virgin Galactic Holdings and DraftKings have dropped 84% and 78%, respectively, from their 2021 highs.
Why do banks (always) have to be the culprit? and why do we keep “bailing” them out?
Here is why: Banks can’t help themselves. SPACs are a pile of money that the banks can’t resist. SPACs are a good deal for banks but bad for the shareholders. In a recent lawsuit against a leading SPAC sponsor Michael Klein, plaintiffs argued that the structure of these blank-check firms was “conflict-laden and practically invites fiduciary misconduct.
The S.E.C. is on a mission:
The S.E.C.’s proposal followed a rush of investigations last year into companies that chose to list on stock markets via Spacs. In December, Digital World Acquisition Corp — a Spac that is merging with Donald Trump’s entertainment start-up, Trump Media and Technology Group — said the S.E.C. was seeking information on dealings between the entities before they revealed their plans in October.
Lucid Motors, an electric car group that listed in a blockbuster Spac deal, said last year that the regulator had requested information on its projections.
The examinations division also listed E.S.G., retail investor protection, information security, and crypto assets among its priorities.
About the author:
Laks Ganapathi is a researcher in clean energy – focusing on climate change, sustainability, E.V.s, and E.S.G. Laks is also the Founder and C.E.O. of Unicus Research. Unicus is a long/short investment research firm dedicated to asset managers, wealth managers, and investors. A key differentiator for Unicus is that they strive to be the voice of reason to the investment community in the ocean of disinformation. They are here to gain their investors’ trust.