By Zane Roberge
Special Purpose Acquisition Companies, or SPACs, have been gaining lots of traction lately in the business world. SPACs initially go public through an initial public offering (IPO), in turn, becoming a blank check company. In this case, there is no real business behind the company. It stays like this until a firm looking to go public, but not through the process of becoming an IPO, offers a deal to merge with the SPAC, and becomes public through the merger. Becoming a public company through an IPO is long and tedious because of the sheer number of companies. The Securities and Exchange Commission (SEC) has to review thousands of companies each year. There are also financial burdens, like a fee of $15,000-50,000 per year for the SEC to review a company’s claim to become public.
There are lots of benefits when a firm goes public: its shares can be publicly traded, giving the company more attention, and it can gain funding as a result of selling shares, which helps further advance its operations as a firm. When a SPAC raises the required funds through an IPO, the money is held in a trust until a predetermined period elapses or the desired acquisition is made. If the planned acquisition is not made, or if legal formalities are not settled, the SPAC is required to return funds to the investors, only after paying bank and broker fees. As you can imagine, these bank and broker fees are steep. Most of the reports on the prices are fraudulent and inflated to make the time spent on acquisition proposals worth it.
Since 2015, 107 firms have executed deals with SPACs to go public, and of those 107 firms, the average common stock price has gone down 1.4%. A decrease by 1.4% may not seem like an issue, but the market has gone up 62.3% since 2015. Being a shareholder of a company that went public through a SPAC is a tiring process. Further, SPACs are always being commented upon in the news, whether their common stock is performing inconsistently or just failing altogether.
Many people dislike SPACs because they view them as “backdoor entries” into the market. Others, however, especially celebrities such as Serena Williams, Shaquille O’Neal, A-Rod and Jay-z, heavily endorse them. All of these celebrities have significant influences in the media world. Because of these influences, many who are not aware of the grey area behind SPACs blindly follow their media idol’s financial journey. Due to this celebrity endorsement, people are gravitating towards SPACs and investing in them. Nonetheless, the SEC is actively attempting to warn investors about SPACs, propelling the notion that endorsement by celebrities does not mean you should buy them.
John Coates, Acting Director of the SEC Division of Corporation Finance, put out a statement on the recent rise of SPACs, declaring:
“The rapid increase in the volume of SPACs represents a significant change, and we are taking a hard look at the disclosures and other structural issues surrounding SPACs.”
SPACs are not all bad; the people on the boards of the companies, or those who hold ownership in the company, are in for a great chance of positive returns. These celebrities endorse their SPACs because it helps them raise capital. The typical investor who cannot acquire a seat on the board in the SPAC, but has to purchase common stock, will likely be met with diminishing returns. Celebrities also endorse their SPACs to attract more attention. The more attention their SPACs get, the more the common stock rises, giving the shareholders a bonus to the monetary gain made upon the merger.