The share prices for special-purpose acquisition companies (SPACs) retreated in recent days as federal regulators have taken a closer interest in the companies’ free-wheeling operations.
The SPAK.NV SPAC exchange-traded fund peaked at $34.87 on 16 February; on 14 April, it closed below $26. The Indxx SPAC & NextGen IPO Index edged above 2,000 on 22 February but ended 16 April at 1,457.
Virgin Galactic Holdings and Skillz, an online gaming business, both entered the equity markets through SPACS recently; both lost at least 12 percent in value last week.
A SPAC, sometimes called a “blank-check company,” is a publicly traded entity that has no assets and typically prices shares at $10 each. When a SPAC amasses enough capital, it buys a promising company, which merges with the SPAC. In the merger, the SPAC disappears and shareholders then own the company the SPAC bought.
SPACs have offered a way for ambitious young companies to go public and raise large amounts of capital that otherwise might not be able to meet standards required to be listed on a stock market.
SPACs have raised more than $100 billion so far this year, more than the $83 billion they garnered in all of 2020, which was an amount more than SPACs previously made in all of their 30-year histories.
The SPAC craze dazzled anew last week when Grab, a Singapore food-delivery service, merged with the SPAC Altimeter Growth Corp. in a $40-billion deal that will see Grab listed on NASDAQ this summer.
- Rowe Price and Singapore investment firm Temasek were among the venture’s backers.
Recently, however, regulators’ newfound interest has been shooing investors away.
In January and February this year, five new SPACs popped onto the market every business day, according to the Wall Street Journal; in April so far, only 12 have listed.
Now, the U.S. Securities and Exchange Commission (SEC) has warned that some SPACs may need to restate their financial results, a red flag that has investors backing away.
Specifically, the SEC is questioning how some SPACs account for warrants, which give investors the right to buy more shares in the future, and has articulated guidelines around the practice.
As a result, hundreds of SPACs are busy reviewing their past operations in light of the SEC’s new guidelines.
TREND FORECAST: The warning from the SEC are pro-active measures to deflate the SPAC bubble before it bursts.
If a SPAC fails to buy a company within two years of going public, it has to return investors’ money.
Minus regulatory action, as long as equity markets keep rising, interest rates stay low, and money cheap, there will be more SPAC action.