SPACs: Is It Still the Place to Be?

This has now become a sort of Main Street investors’ hype, and virtually it means a simplified scheme for bringing companies to an IPO in order to make them public without lengthy red tape and regulatory procedures, through the purchase of public companies that have already passed these procedures, which for one reason or another do not conduct active business and would like to at the expense of such a "donor" to get a "second breath".

In this respect, U.S. lawmakers yesterday actively discussed the "SPAC mania" and how it is capable of hurting ordinary investors. One congressman said the markets should ease barriers to going public, while a securities law professor argued that the SPACs were essentially a quick Vegas wedding-style deal between companies and potential investors, which is not a good thing.

The Subcommittee on Investor Protection, Entrepreneurship and Capital Markets of the Financial Services Committee of the US House of Representatives heard the opinion of expert witnesses in the context of whether current laws sufficiently protect the interests of ordinary investors.

The Committee chairwoman Maxine Waters (Democratic Party, California) noted that funds raised in 2020 by US special purpose companies through IPOs jumped an "astounding" 462% from the previous year. “I have deep concerns about the lack of transparency and accountability that is a hallmark of the SPAC process,” she said. "The SPAC mergers appear to be structured so that Wall Street insiders make huge profits and retail investors pay the costs."

Usha Rodriguez, a University of Georgia law school securities-law professor, argued that the comparison with a "quick wedding in Vegas" is valid, and that, like standard weddings, traditional IPOs "start months ahead of schedule" when companies who want to go public, hone their plans, working with investment banks and the US Securities and Exchange Commission, which is very important for the correctness of their future interaction with investors.

Rodriguez and others took the position that Congress should amend the 1995 law that protects public companies and boards of directors from excessive securities lawsuits, clarifying that such provisions should not apply to SPAC. The law already exempts traditional IPOs from such protection.

Andrew Park of the think tank Americans for Financial Reform argued that the lack of confidence as to whether SPACs can count on solid legal protection has led to public deals involving "highly speculative industries such as electric vehicles, cryptocurrency, and space exploration. [who] use what we might call rainbow predictions to bait.

For example, he said that the nine electric vehicle companies that went public through SPAC deals last year reported combined revenues of just $139 million in 2020 as opposed to their own projections to reach total sales of $26 billion by 2024.

Our takeaway: Let’s be precautious. At this stage, investments in global equities – especially in the buzzword innovative industries – luckily are no longer as overheated as they were last year. On the one hand, this is a good news as the risks of bubble formation have apparently eased. But on the other hand, this means that the IPO market – especially alternative schemes like SPAC – is unlikely to bring the expected benefits while substantially elevating non-quantifiable risks. Hence, it will be prudent to stay within the boundaries of traditional venues and “clean” investment instruments.