The Real Problem With SPACs

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I’ve never hidden my disdain of special purpose acquisition companies (SPACs). As a refresher, SPACs are shell companies that attract investors and then go public in order to merge with a specific startup, thereby taking the startup public. I laid into them back in January in this article and again in February in this article. On Monday, Congress took its turn. 

The House of Representatives heard how SPACs are allowed to make overly optimistic statements on their growth prospects without penalty. Companies launching traditional IPOs enter a quiet period, during which time they’re severely constrained from making forward-looking statements of any kind. These constraints prevent companies from driving up interest — or their share prices — by promising things they may not actually deliver on. But SPACs don’t have to play by those rules.

The SEC also has SPACs in its crosshairs. In late March, it issued a statement expressing concerns over their governance and disclosures. The SEC added that it was tightening accounting standards.

But neither Congress nor the SEC called out the real problem with SPACs — preferential treatment toward institutional investors. They actually get a money-back guarantee. If an institutional investor doesn’t like the company the SPAC is acquiring, they can ask for their entire stake back, no questions asked. Everyday investors do not get this privilege. If the SEC is so concerned about protecting everyday investors, I think this is what they should be focusing on. 

Even with these big advantages, it’s telling that many institutional investors are unimpressed with the current SPACs market. The valuations of many of the companies set to merge with SPACs have soared in recent months. As a result, institutional investors are no longer rushing into SPACs at the rate they were earlier this year. And many are leaving them soon after the mergers are announced. About 60% of the 146 SPAC mergers announced since the start of the year are currently trading below their initial public offering price. 

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