SPACS text overlayed with skyline and electric charge

Merging with a special-purpose acquisition company (SPAC) was a speedy route to the stock market for hundreds of eager start-ups in 2021 and 2022.

Now many are speeding to bankruptcy court.

Richard Branson’s Virgin Orbit Holdings, a space-travel venture, went public via SPAC in late 2021, drawing Boeing Inc. as an investor and lifting its market value as high as $3 billion. Virgin projected sales above $300 million by the beginning of this year.

Instead, a failed launch sent investors fleeing.

Early this month, the company filed bankruptcy.

It has joined Core Scientific, which mined Bitcoin; Boxed Inc., which delivered groceries; and sensor company Quanergy Systems, all of which preceded Virgin to bankruptcy court.

Twelve SPAC-based firms have already gone belly up and more than 100 are running out of cash, according to The Wall Street Journal’s analysis of the latest regulatory filings.

The WSJ analyzed 342 companies that merged with SPACs from 2016 through 2022 and filed required quarterly reports with the U.S. Securities and Exchange Commission.

Of them, 101 are likely to run out of cash within five months, based on their past rate of spending, the WSJ found.

SPAC-based companies swirling the bowl include Bird Global, an electric scooter business, once valued in the stock market at $2 billion; Owlet, which makes baby monitors; and electric car start-up Faraday Future Intelligent Electric, the WSJ said.

Stock prices of many of these companies have fallen below $1, a 90-percent plunge from their typical listing price, and risk being delisted from stock exchanges. 

A SPAC or “blank-check company” is a special category of company that goes public, typically at $10 a share, even though it has no assets. When it has stockpiled enough capital, the SPAC buys and merges with a promising company that is not prepared to go public through the usual regulatory channels.

After the merger, the SPAC disappears, and its shareholders then own shares in the company the SPAC bought.

Because SPACs’ takeover targets are private companies that have not filed papers to make a stock offering, they can make unsupported, blue-sky financial projections about their future, which companies planning to go public by the usual route are banned from doing.

During their meteoric trajectory, SPACs raised more than $95 billion and drew celebrity endorsements from Shaquille O’Neal, pop star Clara, and Lawrence Kudlow, once chair of president Donald Trump’s National Economic Council, among others.

Baseball hero Alex Rodriguez’s SPAC raised $500 million.

Now the rash of companies that SPAC’d their way to wealth a year or two ago have collectively lost more than $100 billion in market value, the WSJ reported.

The idea of a SPAC is to give promising young businesses access to market capital.

In practice, while SPACs did that, many of those businesses were not ready for prime time and were battered by suddenly rising interest rates and a stock market that developed an aversion to risk.

Faraday Future promised to grow faster than Google, once it began making cars. It now is scrounging for new investors and has around $30 million in cash, the WSJ said.

Only about 15 percent of SPACs that merged in 2021 are profitable, compared with 30 percent that did their deals from 2013 through 2020, according to the WSJ’s analysis.

To skirt bankruptcy, some of the companies are putting themselves up for sale. Shell has bought electric charging company Volta for $.86 a share, less than a tenth of its market price when it debuted. 

We documented the rocket-like rise, and corpse-like fall, of SPACs in articles including:

● “SPACs Beware!” (13 Apr 2021)

● “SPACs’ Value Shrinks Under Regulators’ Scrutiny” (20 Apr 2021)

● “SPACS: Here Today, Gone Tomorrow?” (8 Jun 2021)

● “SPACs: Danger Ahead” (29 Jun 2021)

● “Knives Are Out For SPACs” (24 Aug 2021) 

● “Investors Turn Their Backs on SPACs” (24 May 2022)

● “SPACs: What Goes Up…” (23 Aug 2022)

● “SPAC This, Pal” (7 Mar 2023)

 “Post-SPAC Merged Companies Write Off $11.57 Billion” (18 Apr 2023)

TREND FORECAST: SPACs will still be used in special cases as a way for companies to become listed in equity markets while skirting the usual clearance process required by the U.S. Securities and Exchange Commission.

However, as we have said before, SPACs will not again experience a similar dramatic rise in the lifetimes of anyone who can remember their spectacular crash in the past two years.

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