At least eight companies that went public through “special-purpose acquisition companies” (SPACs) in the last year have now filed bankruptcy, Bloomberg reported.
The list includes Quanergy Systems, which makes sensors and software; 3D print company Fast Radius; and Enjoy Technology, a provider of services to online retailers.
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.
SPACs were a Wall Street fad in 2021 and 2022, drawing attention—and investments—from celebrities including Shaquille O’Neal and Jay-Z as well as individual investors hoping to cash in on the next undiscovered Apple or Tesla.
Then the fever cooled as inflation sped up and caution replaced reckless abandon among individual investors. Many start-ups brought forth by SPACs failed to meet their promises.
Nearly 100 companies borne of SPACs now lack the cash to continue their current spending through this year, Bloomberg reported.
Another 73 companies that came public via SPACs were trading below $1 a share last week, less than a tenth of the baseline SPAC share price.
“The value destruction has been spectacular,” says Dan Zwirn, co-founder of Arena Investors, told Bloomberg.
The slew of sinking SPACs will either be sold off one by one for cheap or put out of their misery in bankruptcy court, he predicted.
As of last week, at least 12 companies that merged into SPACs have sold for less than they were worth when their shares began trading, according to Bloomberg data.
“A lot of the problems with the de-SPAC’d companies is that they’re relatively early-stage, capital-intensive companies that are more risky in general,” University of Georgia law professor and SPAC expert Usha Rodrigues said to Bloomberg.
“There was nowhere near that number of viable private companies ready for the public markets,” she noted.
Many investors sell their shares once a merger is planned but before it happens. The announcement of the deal typically raises share prices, allowing a SPAC’s shareholders to clear a profit while avoiding the risk of owning a piece of an untested company.
That often has left the newly minted corporations with too little cash to operate.
For example, Starry Group had its sights on $450 million in capital when it merged with FirstMark Horizon Acquisition Co. in March 2022. News of the deal raised the SPAC’s share price.
As soon as they voted to approve the merger, shareholders dumped 90 percent of their shares for a quick profit, leaving the new company with around $155 million. The entity languished for 11 months and is now working its way through bankruptcy.
In 2022, as the post-COVID economic surge began to recede, the typical SPAC saw more than 80 percent of its shares cashed in, Bloomberg reported. In 2021, the rate was below 10 percent.
“When something is too good to be true, it’s too good to be true,” Greg Martin, co-founder of Rainmaker Securities LLC, said in a Bloomberg interview. “It’s so obvious when you look at the valuations some of these companies were getting from SPAC sponsors that it wasn’t sustainable,” he added.
PUBLISHER’S NOTE: We tracked SPACs’ meteoric rise and bumpy fall and warned of their risks in a series of 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)
TREND FORECAST: SPACs will not experience a similar rise in the lifetimes of anyone who can remember their spectacular crash in the past two years.