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Investors have lost interest in special-purpose acquisition companies (SPACs) just when SPACs need them most.
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 ready to go public.
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 are banned from doing.
If a SPAC fails to merge with a company within two years of going public, it must return its capital to its investors.
A failed SPAC also is out the costs—sometimes as much as $10 million—of creating the SPAC to begin with.
For about 280 SPACs that raised money last year and are still hunting for a merger partner, that two-year window is closing rapidly; their time is up in the first quarter of 2023.
Those unmarried SPACs stand to lose an estimated $1 billion in start-up costs.
In recent weeks, investors have fled from risk, dumping tech stocks and cryptocurrencies—and few investments are more risky than SPACs.
We called attention to SPACs’ plight as long ago as our 8 June, 2021 issue in “SPACs: Here Today, Gone Tomorrow,” among other articles, and most recently in “Goldman Backs Out of SPACs” (17 May 2022).
Popular SPACs such as DraftKings, a betting shop, and personal finance website SoFi have lost more than half their value this year. An exchange-traded fund that holds companies gone public via SPAC is off 30 percent since December.
About 90 percent of companies that have gone public via SPAC now trade below their initial listing price, according to data service SPAC Research.
SPACs’ tailspin also has prompted companies, such as financial services firm Acorns Grow, to call off their SPAC deals and seek backing elsewhere.
The SPAC market has become “a ticking time bomb,” managing partner Matt Simpson at Wellspring Capital told The Wall Street Journal.
TREND FORECAST: As we correctly predicted in “SPACs: Danger Ahead” (29 Jun 2021), SPACs were among the earliest and hardest hit by the current market downturn.
SPACs will now revert to their pre-COVID state: a rare and exceptional use of an obscure provision in the securities law.