Wall Street’s favorite new gimmick, which we noted in last week’s Trends Journal and this one – special-purpose acquisition companies (SPACs) – is drawing interest from regulators, which sent SPAC index prices tumbling last week. (See last week’s “U.S. MARKETS OVERVIEW” for more on SPACs.)
A SPAC is a company that makes no product, performs no service, nor markets anything other than itself. Investors buy shares, often priced at $10 each, and the money is put into a trust. When the SPAC’s wallet is fat enough, it looks for a company to buy.
When the SPAC buys a company, the SPAC itself disappears and the shares become shares in the company the SPAC bought.
More than 700 SPACs have flooded onto New York stock exchanges in the past 12 months, seeking to raise $227 billion, Bloomberg reported. In 2020, 248 SPACs raised $83 billion, according to the Harvard Business Review; in January this year, SPACs took in $26 billion, the magazine said in a February article titled, “The SPAC Bubble is About to Burst.”
The frenzy has lured major Wall Street firms as well as celebrities including Shaquille O’Neal and Alex Rodriguez, which has prompted regulators to take a look.
News of regulators’ interest pushed the value of Pershing Square Tontine Holdings, a SPAC hothouse, down more than 6 percent; Social Capital Hedosophia sank 8 percent on 25 March. The IPOX SPAC Index slid into a multi-day selloff, although the index remains up 45 percent since last August, compared to the S&P’s 20-percent lift since then.
Regulators are about to send letters to major SPAC players asking them to detail any possible dangers that could arise from underwriting the wave of SPACs, Bloomberg reported, citing two people familiar with the agency’s plan.
The agency is fact-finding, Bloomberg said, but could open an investigation if concerns warrant.
