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Comment by iav | Hacker News Reader

SPACs traditionally don’t have any guaranteed primary capital. 100% of their investors can redeem. So you are guaranteeing the sponsor their rake but they are not guaranteeing that you’ll get any money from the listing. Plus this article doesn’t mention the warrant coverage, which cannot be negotiated down, and IPO fees (when SPACs go public, the bankers defer their fees until the SPAC completes a transaction). I think this article researched the inefficiencies of the IPO process to the last detail, but somehow forgot to do the same on the SPAC process. Door #3 is just as rigged as door #1.

Source: invested in several SPACs transactions and PIPEs

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> Source: invested in several SPACs transactions and PIPEs

You sound very credible.

Would you have some time to elaborate more on your experience with SPACs? No need to name names; just more details on the critical aspects you highlighted.

Thanks. There is one aspect of SPACs that is completely unmentioned in this write up that’s actually the most important - valuation. While it reads like Bill believes the goal of a “SPAC-off” is to negotiate the sponsor take, that’s not the primary goal. Each SPAC completes an acquisition, with a PRICE. That price is not set as $/share - that’s fixed at $10.00 - but in the number of shares the “seller” gets. I was involved in one transaction where a SPAC was desperate to complete a deal before it expired, and it vastly “overpaid” for a crappy business. I put quotes around that because not a single investor except for the Sponsor rolled into the deal at $10.00. They ended up having to raise outside equity at $8.00 per PREFERRED share, and even that wasn’t enough. Then they went to the bankers and issued them more shares in lieu of their IPO fees and then the sellers ended up contributing more money with a complex security. So the problem in those situations is the company is put into a bind - if they pick the SPAC that’s paying the highest price, then most likely there won’t be any new capital raised at all while the sponsor will still get their rake. If they pick a low valuation, then they can assure capital and negotiate down the rake, but then you are giving a below market valuation and incurring a rake plus paying IPO fees so why not just do the IPO to begin with. And because the sponsor’s rake is in shares (with a lockup), even if the shares go from $10 to $3, they will still get paid. Think about this incentive - the sponsor can announce the crappiest deal - buy WeWork or whatever - wait 6 months, watch investors lose 70% of their capital, and still make a profit by selling their sponsor shares (which are issued for effectively ~$1/share as the sponsor contributes 1-3% of the initial capital at $10/sh but then gets 10-20% rake at $0/share).

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