The DealBook newsletter covers a single topic or theme each weekend and provides reporting and analysis that provides a better understanding of an important issue in the news. If you have not yet received the daily newsletter, sign up here.
Special-purpose procurement firms, better known as SPACs, have single-handedly revived the initial public offering market, announcing dozens of small businesses. So far this year, there have been about twice as many listings of these blankcheck companies as traditional listings.
As these cash caps – which raise money in a stock market – with the promise of merging with a private company within a few years and making it public, often target emerging technology companies, the market is back in its glory years.
Why then do regulators try to kill it?
The assault was quick and focused. First, the head of corporate finance of the Securities and Exchange Commission said that the merger of a SPAC and its target company should be considered. the ‘real IPO’, which will remove the safe harbor protection that SPACS has for forward-looking statements. This means that SPAC mergers are not accompanied by financial forecasts or other projections, a significant difference from traditional stock market notations
Subsequently, SEC officials issued a bulletin questioning the accounting treatment of warrants, which according to them should be regarded as liabilities instead of equity. It can delays IPOs and mergers of a significant number of SPACs while changing their accounts.
The effect of these announcements, both in April, is easy to see in the numbers.
SPAC IPOs, total of four weeks
The regulatory scrutiny of SPACs has been caused by a handful of whether it is too risky for retail investors, a ask recently posed by Gary Gensler, the SEC chairman.
Heck, back in 2008 I wrote about the dangers of SPACs and their role in that year’s merger boom (which ended badly). While some companies that were recently launched via a SPAC have had great success, such as the betting group DraftKings, others have fallen out, such as the manufacturer of electric trucks, Lordstown Motors, which said this week that it may not have enough cash to to survive.
And with more than $ 130 billion in cash in SPACs now looking for takeover targets, competition for transactions will undoubtedly raise acquisition prices, making it harder to deliver returns for investors in particular.
But it all misses the point. The SPAC, which has been in existence for decades, has brought back the IPO market for innovative, smaller businesses. Despite the recent slowdown, there were more than 330 IPAs for SPAC this year, raising just over $ 100 billion.
11 June 2021, 13:46 ET
Flash back to the late 1990s. The so-called Four horse riders boutique banks – Alex. Brown, Hambrecht & Quist, Robertson Stephens and Montgomery Securities – at the time endorsed about 130 IPOs a year. It was a market where brokers could demand smaller shares from investors (think ‘Boiler room”).
After the dot-com bubble burst and the Sarbanes-Oxley Act introduced reforms to reduce conflict between brokers, the small IPO almost disappeared, the subject of a study of mine. Since then, there has been a much slower pace of IPOs, almost all larger companies.
Eventually, the idea that regulation became too strict became prominent, leading to WET AT WORK of 2012. It made it easier to become public, but the goal of giving public investors access to innovative businesses earlier proved elusive.
Annual IPO volume in the US
Enter SPACs, which bring many smaller businesses to market. SPACs found a way to raise tool capital through an IPO, long before approaching a business to obtain and transfer the funds. And during the merger, there are also regular extra investments from outside investors, which helps to ratify the transactions.
Hedge funds are established on the post-IPO, pre-acquisition phase of SPACs, because they earn interest on the amount they invest, receive warrants to get more upside down by buying more shares as soon as the company merges with a target and their shares can redeem IPO price if they do not like the acquisition.
It’s a decent investment. Where SPACs can get in trouble is during their second phase: when they make an acquisition. However, there is the above option to redeem shares during the acquisition if shareholders do not like it. A bigger problem is if shareholders who invest in SPACs get a particularly bad deal after acquisitions, which some research suggests.
Are they? SPACs bring more risky companies to market. Stock Market 101 suggests that more rewards and more failures come with more risk.
Should investors be exposed to such companies that are inherently riskier? Make your own judgment, but it was not long ago that people worried that businesses would stay private for too long, thus depriving public investors of potential profits. Now that the SPAC is resolving this issue, regulators are responding.
And just as many people become familiar with SPACs, they change. Bill Ackman’s recent agreement with Universal Music Group is, to say the least, complicated and the hedge fund manager’s SPAC will take a new look at SPACs, which he calls a SPARC (a special purpose acquisition company). . It addresses some shortcomings in how SPACs work now, and removes the time constraint of finding a takeover target and not tying up investors’ funds before making a transaction. In my opinion, this is the third generation of the evolution of the SPAC.
More disclosure should be required about the compensation SPAC sponsors receive. Some SPACs are too aggressive or make companies known too soon or with faulty (or even fraudulent) business plans. But it can also happen with traditional IPOs. This is not a reason to kill the only thing that has revived the market for IPOs of small and emerging growth companies in 20 years.
Steven Davidoff Solomon, or the Deal Professor, is a professor at the School of Law at the University of California, Berkeley, and the co-director of the faculty 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 should there be arrangements in place? Let us know: [email protected]