The SPAC Bubble
Special Purpose Acquisition Vehicles (a “SPAC” or “SPACs”) offer a valuable alternative to emerging companies considering going public via IPOs, especially amid times of crisis. A SPAC is essentially a shell company that exists for the sole purpose of raising capital through its own IPO, before acquiring (typically through reverse merger) the target company.[1] How, then, are SPACs different from investing directly into the target?
The simple answer, for the company, is that a SPAC greases the wheels. Because a SPAC can go public without identifying its target (if it even has one), it simplifies the IPO process.[2] Reducing required disclosures and scrutiny means SPACs provide a faster, cheaper route to market, and they provide access for those companies that might not otherwise qualify due to listing requirements.[3]
Of course, SPACs generate new risks. First, as with any acquisition, the acquirer (the SPAC) most likely overpaid for the target, by virtue of outbidding its competitors.[4] Buyers often recoup this loss due to the individualized reasons they chose to acquire the target, such as the unique synergies between the companies, but SPACs, which lack any operations, offer no possible operational synergies.[5] Moreover, the typical two-year time limit for SPACs incentivizes the founders to inflate the purchase price further, else collapse and allow their investments to languish for two, worthless years.[6]
Yet SPACs have grown in popularity exponentially since the advent of COVID-19.[7] Due to market volatility, venture capitalists began to stockpile cash, or “dry powder,” causing a sharp decline in operating company IPOs.[8] SPACs were the solution.[9] Market uncertainty has historically led to many downward swings in major sectors, and SPACs can offer refuge.[10] Because SPACs tend to go public well before disclosing their target, the target escapes the public eye—and thus volatility—which is a critical advantage when the typical IPO roadshow is more complicated than ever before.[11]
Despite the recent boom, SPACs had disappeared from common parlance for good reason. Recent, high profile success stories such as DraftKings Inc. and Nikola Corp. have excited the market, but, historically, most SPACs trade below their IPO prices..[12] Kevin Dowd explained how “the SPAC boom is also a reminder that financial markets are a free-flowing experiment in mass psychology.”[13] SPACs could merely be a craze, taking off as part of a far-reaching bandwagon effect.[14] Only time can tell for certain whether this widespread gambit will pay off for the parties involved, but, to the extent the SPACs can pursue opportunities while avoiding the current complications of a traditional IPO roadshow, discarding the strategy simply is not an option for many of the people and entities on the ground.[15]
[1] See Special Purpose Acquisition Company (SPAC), Corp. Fin. Inst., https://corporatefinanceinstitute.com/resources/knowledge/strategy/special-purpose-acquisition-company-spac/.
[2] See Julie Young, Special Purpose Acquisition Company (SPAC), Investopedia (Aug. 3, 2020), https://www.investopedia.com/terms/s/spac.asp.
[3] See Ramey Layne & Brenda Lenahan, Special Purpose Acquisition Companies: An Introduction, Harv. L. Sch. F. on Corp. Governance (July 6, 2018),
https://corpgov.law.harvard.edu/2018/07/06/special-purpose-acquisition-companies-an-introduction/;
Nate Nead, Advantages of a SPAC, Deal Capital Parnters, LLC, https://investmentbank.com/special-purpose-acquisition-company/ [hereinafter Advantages]; Nate Nead, NASDAQ Listing Requirements, Deal Capital Partners, LLC, https://investmentbank.com/nasdaq-listing-requirements/ [hereinafter NASDAQ].
[4] SPACs: The Most Ludicrous Bubble We’ll Ever See… Why Not $IAC?, Yet Another Value Blog (July 22, 2020), https://yetanothervalueblog.com/2020/07/spacs-the-most-ludicrous-bubble-well-ever-see-why-not-iac.html [hereinafter Ludicrous].
[5] See id.; Young, supra note 2.
[6] See Ludicrous, supra note 4.
[7] See Q2 2020 PitchBook-NVCA Venture Monitor, at 9 (2020).
[8] See Cameron Stanfill, SPACs Resurface in a Volatile Market, PitchBook (May 5, 2020), https://files.pitchbook.com/website/files/pdf/PitchBook_Q2_2020_Analyst_Note_SPACs_Resurface_in_a_Volatile_Market.pdf; The Evolution of US VC During the COVID-19 Crisis, PitchBook Blog (Aug. 5, 2020), https://pitchbook.com/blog/webinar-the-evolution-of-us-vc-during-the-covid-19-crisis.
[9] See Dan Caplinger, What Are SPACs, and Why Are They Back?, The Motley Fool (Apr. 12, 2019), https://www.fool.com/investing/2019/04/12/what-are-spacs-and-why-are-they-back.aspx.
[10] See C. Derek Liu, Buying Distressed Tech Startups, Baker McKenzie (Apr. 2020), https://www.bakermckenzie.com/-/media/files/insight/publications/2020/05/buyingdistressedtechstartupseco48212.pdf.
[11] See Byrne Hobart, Why SPACs Are the New IPO, Marker (July 28, 2020), https://marker.medium.com/why-spacs-are-the-new-ipo-dcefe54b4bdd.
[12] See Ortencia Aliaj, et. al., Can SPACs Shake Off Their Bad Reputation?, Financial Times (Aug. 13, 2020), https://www.ft.com/content/6eb655a2-21f5-4313-b287-964a63dd88b3; Anmol Suratkal, 4 SPACs to Keep On Your Radar, Stock News (Aug. 26, 2020), https://stocknews.com/news/dkng-nkla-spce-rpay-4-spacs-to-keep-on-your-radar/.
[13] Kevin Dowd, 9 Big Things: 2020’s SPAC-tacular Keeps Getting Crazier, PitchBook (Oct. 11, 2020), https://pitchbook.com/news/articles/2020-spacs-keeps-getting-crazier [hereinafter SPAC-tacular].
[14] See SPAC-tacular, supra note 13.
[15] Kevin Dowd, 10 Big Things: Inside a $500M Bet on SPACs and Sports, PitchBook (Aug. 16, 2020) [hereinafter SPACs and Sports].