It’s worth paying attention to this debacle now, because it won’t be the last time Wall Street hustlers cut unsuspecting investors out of their savings. It’s just the latest one.
If you just started paying attention to SPACs a few years ago, you could be forgiven for thinking that they are the new financial panacea. Nearly 200 companies completed SPAC transactions in 2021, more than tripling the number from the previous year. The value of these deals reached nearly $500 billion, a five-fold increase.
But SPACs have been around for decades. But until a few years ago, only disreputable and little-known companies tried to use this device to enter the public market. The deal involves financial parties raising money from public investors to later merge with an unidentified company. SPACs have long been a backdoor route to initial public offerings, pursued only by companies unable to do so in a sane manner.
Perhaps that’s why the SPAC boom of the early 2020s attracted a new crop of unlikely startups in capital-intensive industries like electric cars and flying taxis. A speculative frenzy ensued, engulfing all kinds of prominent, even shaky, companies. Today, many people walk with a limp or worse.
Late last year, Bloomberg counted more than 20 companies that went public through SPACs, only to be declared bankrupt relatively soon afterward. One of those was his WeWork, a shared workspace real estate company. WeWork’s backdoor IPO comes well after founder Adam Neumann resigned amid scandal. (Mr. Neumann is reportedly trying to regain control of WeWork, but those efforts appear to be unsuccessful.)
Arrival, the British electric car maker that entered the capital markets with the backing of South Korean automaker Hyundai, attempted a SPAC deal twice, but the second one fell apart before it could materialize. The startup was valued at $15 billion when it first went public, even though it hasn’t produced any cars yet. Arrival has already departed. The company’s stock was delisted from the Nasdaq stock market and the company was declared bankrupt.
The list of SPAC opponents continues: Blade Air Mobility, the company that flies Ferragamo’s beloved airmail reading kits by helicopter from Manhattan to the Hamptons and beyond, has seen its post-SPAC stock price fall from $15 in 2021. Today it’s $3. Shares of BuzzFeed, once the darling of the media world, are trading at 20 cents. This is even worse than saliva testing DNA startup 23andMe, whose stock price hovers just below $1.
It should come as no surprise to anyone that Donald Trump is also trying to cash in on the SPAC game. The company that owns his Truth social media platform has been trying to go public for more than two years by merging with a SPAC named Digital World Acquisition Corp. (SPAC creators love anodyne names like this) . Hampered by various Securities and Exchange Commission investigations, Digital World Acquisition returned $1 billion last year to investors who had planned to acquire Truth Social. But just last week, the SEC approved the merger to proceed.
What caused all these SPACs to fail? Think of the SPAC fiasco as the last gasp of the low interest rate era. When money was nearly free, Wall Streeters were able to compete with each other and come up with novel ways to raise and deploy capital. As interest rates rose, it became harder for cheap money to chase bad ideas, forcing companies to have actually profitable business models in order to attract loans. Last year, there were only 98 SPAC deals on Wall Street, about half the 2021 level.
It’s important to tell this story now because another crazy funding option is coming soon. The ease with which immature and loss-making companies were able to raise large sums of money was both predictable and tragic for investors who got on the wrong side of the deal. There was no difference from “previous income”. Companies that went through traditional IPOs during the dot-com boom of the late 1990s. Everyone knew that a collapse would occur. But I didn’t know when that was.
As expected, the SEC recently promulgated new rules that tighten listing requirements for SPACs. This is a good example of closing the barn door after the horse has escaped. Among other things, regulators will make it more difficult for SPACs to make rosy predictions, a marketing strategy that has long denied traditional IPOs. “Just because a company chooses a different method to go public does not make its investors any less entitled to proven investor protections,” SEC Chairman Gary Gensler said in a statement. .
A better idea for the SEC is: Start thinking now about your next plan, not your last-ditch get-rich-quick scheme to scam investors that the SEC is supposed to protect.