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Yet another Wall Street investment fad has crumbled, this time a dodgy technique for taking companies public called SPACs, or special purpose acquisition companies. As is often the case, regular investors and rank-and-file employees are the losers; hedge fund managers and investment bankers are the winners. Not for the last time, regulators are stepping in to quash snake-oil schemes they didn’t do enough to stop when it might have made a difference.
It's worth taking note of this debacle now because it won’t be the last time Wall Street hustlers separate unsuspecting investors from their savings. It’s just the latest.
If you only started paying attention to SPACs a few years ago, you’d be forgiven for thinking they were a new financial elixir. In 2021, nearly 200 companies completed SPAC deals, up more than threefold from the year before. These deals were worth close to $500 billion, a fivefold increase.
But SPACs have been around for decades. Before a few years ago, however, only unsavory, little-known companies attempted to enter the public markets using this device. The transaction involves a financial player raising money from a pool of public investors to merge with a not-yet-identified company at a later date. SPACs had long been a back-door path to an initial public offering that only a company that couldn’t do it the respectable way would pursue.
Perhaps that’s why the SPAC craze of the early 2020s was such a magnet for a new crop of unlikely start-ups in capital-intensive industries such as electric cars and flying taxis. A speculative frenzy ensued that sucked in all sorts of prominent if shaky companies. Today, many are limping along — or worse.
Late last year, Bloomberg counted more than 20 companies that had gone public by SPAC only to declare bankruptcy relatively shortly afterward. One of these was WeWork, the shared workspace real estate company. WeWork’s backdoor IPO occurred well after company founder Adam Neumann had departed in a cloud of scandal. (Neumann reportedly is trying to take back control of WeWork, an effort that doesn’t seem to be going anywhere.)
The British electric-vehicle maker Arrival, which hit the capital markets with backing from South Korean carmaker Hyundai, even tried doing a SPAC deal twice, the second time falling apart before it could happen. The fledgling company was worth $15 billion when it first went public, despite not yet having produced a vehicle. Arrival already has departed: Its shares have been delisted from the Nasdaq stock market, and the company declared bankruptcy.
The SPAC-splat list goes on: Blade Air Mobility, a firm that flies the Ferragamo-favoring, Air Mail-reading set on helicopters from Manhattan to the Hamptons and other locations, has seen its post-SPAC share price fall from $15 in 2021 to $3 today. Shares in BuzzFeed, a onetime media darling, trade for 20 cents. That’s even worse than the spit-test DNA start-up 23andMe, whose shares hover just below a dollar.
It will likely surprise no one that Donald Trump has been working to cash in on the SPAC game, too. The company that owns his Truth Social media platform has been trying for more than two years to go public by merging with a SPAC named Digital World Acquisition Corp. (SPAC creators love anodyne names like this.) Stymied by various Securities and Exchange Commission investigations, Digital World Acquisition last year returned $1 billion to investors that had been earmarked to buy Truth Social. Yet just last week, the SEC granted its approval for the merger to move forward.
What happened to make all these SPACs go bust? Think of the SPAC debacle as the last gasp of the low-interest-rate era. When money was nearly free, Wall Streeters could compete with each other to conjure novel ways to raise and deploy capital. As rates rose, it became harder for cheap money to chase bad ideas, forcing companies to actually have profitable business models to attract financing. Last year, there were just 98 SPAC deals on Wall Street, about half the level in 2021.
It is important to tell this story now because another crazy financing vehicle will come along soon. That immature or money-losing companies were able to raise big bucks so easily was as predictable as it was tragic for investors who got caught on the wrong side of the trade. It was no different from the “pre-revenue” companies that did traditional IPOs during the dot-com boom of the late 1990s. Everyone knew there’d be a bust. They just didn’t know when.
Just as predictably, the SEC recently promulgated new rules tightening listing requirements for SPACs, a good example of closing the barn door after the horses have fled. Among other measures, regulators will make it more difficult for SPACs to make rosy projections, a marketing ploy long denied traditional IPOs. “Just because a company uses an alternative method to go public does not mean that its investors are any less deserving of time-tested investor protections,” SEC Chair Gary Gensler wrote in a statement.
Here’s a better idea for the SEC: Start thinking now about the next, rather than the last, get-rich-quick scheme that’s likely to snooker the investors your agency is supposed to be protecting.
SPACS go splat and the SEC is a bit late to the party
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20.02.2024
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Yet another Wall Street investment fad has crumbled, this time a dodgy technique for taking companies public called SPACs, or special purpose acquisition companies. As is often the case, regular investors and rank-and-file employees are the losers; hedge fund managers and investment bankers are the winners. Not for the last time, regulators are stepping in to quash snake-oil schemes they didn’t do enough to stop when it might have made a difference.
It's worth taking note of this debacle now because it won’t be the last time Wall Street hustlers separate unsuspecting investors from their savings. It’s just the latest.
If you only started paying attention to SPACs a few years ago, you’d be forgiven for thinking they were a new financial elixir. In 2021, nearly 200 companies completed SPAC deals, up more than threefold from the year before. These deals were worth close to $500 billion, a fivefold increase.
But SPACs have been around for decades. Before a few years ago, however, only unsavory, little-known companies attempted to enter the public markets using this device. The transaction involves a financial player raising money from a pool of public investors to merge with a not-yet-identified company at a later date. SPACs had long been a back-door path........
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