SPAC-y

SPAC popularity has grown, along with scrutiny of the IPO alternative

Monday, August 30, 2021 by Robinhood Snacks | Disclosures

SPAC at it again... Since last year, special purpose acquisition companies have dominated the public market. SPACs go public for the sole purpose of one day acquiring a real company and taking them public. DraftKings, Virgin Galactic, and Opendoor all went public by merging with SPACs. Wild stat: SPACs have accounted for ~70% of all IPOs in 2021. So far this year, SPACs have raised a record-breaking $129B — already more than they raised in 2020. But as SPAC popularity has grown, so has scrutiny:

  • SPAC lawsuits have tripled this year, including against billionaire Bill Ackman’s SPAC. Many cases involve allegations of misleading investors.
  • Short-selling firms have increasingly scrutinized companies that went public via SPAC. The CEOs of e-truck startups Nikola and Lordstown resigned after a short-selling firm alleged they exaggerated their tech and misled investors.
  • SPACs tend to lose a third of their value post-merger on average, according to a study spanning 2019 to 2020. The 50 biggest SPACs have lost 20% in value this year.

Not always SPAC-tacular… SPACs offer a faster, and sometimes cheaper, way for companies to go public. A SPAC merger usually happens in three to six months on average, while an IPO can take 3X to 4X longer. Companies that go public via SPAC are also allowed to make sales projections to prospective investors, while IPO companies can’t. Plus, SPACs can sometimes help companies avoid initial mispricing. But with increasing scrutiny of SPACs, we may see more regulation in the future.

THE TAKEAWAY

SPACs can be a double-edged sword… SPACs’ advantage — a faster, more frictionless path to going public — might also be their weakness. Companies that go public via SPAC sometimes face less oversight than those that IPO. Meanwhile, newly-public SPACs may not be able to provide as many disclosures to investors since their acquisition target has yet to be named, and financial diligence may be narrower. But all investments carry risk – and even the IPO review process, designed to help protect investors, isn’t a guarantee that companies' disclosures are completely accurate.