SPACs, A Bubble-Driven Invention

Sebastien Callebaut -

Regulation Is Coming

According to the U.S. Congress, companies that raise money from the public should offer full and fair information to investors when they are making critical investment decisions. To deal with such information, the SEC wants SPACs and related stakeholders to:

  • Add specialized disclosure requirements regarding, among other things, SPAC sponsors, conflicts of interest, SPAC target IPOs, and dilution
  • Require additional non-financial disclosures about the target private operating company during the SPAC target IPO
  • Require that disclosure documents in SPAC target IPOs generally be disseminated to investors at least 20 calendar days before shareholders would have to vote to approve the transaction

This would significantly raise the bar for SPACs and better inform investors about a potential deal. At the same time, it would greatly limit the allegations and statements promoters can make when advertising the SPAC.

Interest Is Waning

Of course, new regulation isn't going to stop SPACs all by itself. The technique has been around for decades and comes in different formats such as reverse mergers and blank check companies.

  • Yet, investors' appetite for more risky ventures is waning as the risk-free rate is rising
  • At the same time, targets are also increasingly shunning SPACs in order to avoid the potential stock market melt up that has accompanied most SPACs in the last months

“A lot of SPACs will liquidate over the next two years, [...] I think shareholders are just looking at [the performance of companies taken public via SPACs] and saying, ‘Why would I hold this if I have a four out of five chance of losing money?'” Matthew Kennedy, senior IPO strategist at Renaissance Capital

Most recently, Forbes terminated its business combination with Magnum Opus after the deal has been placed on hold for 9 months.

BENCHMARK'S TAKE

  • SPACs and other riskier investment vehicles resurface at times of excess liquidity or unbridled optimism
  • During these times, investors lay down their guard, shun hard data and chase new trends in the pursuit of even larger returns
  • As always, this risk-on behaviour often acts as the canary in the coal mine and suggests that cautious investors should take their chips of the table

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by Melinda Gimpel on Unsplash.