SPACs are warning they may go bust
wsj.com
wsj.com
Also I think at some point we need to reconsider the bail out approach of lending companies because they are too big to fail. Also separating institutions and trimming through their lending money practices makes better sense than bailing them out, because "too big too fail."
When I borrow money I am assigned an interest plus collateral rate based on the inflation/cost of money at the time+projected and my risk of defaulting. On average the "bank" has zero risk (and I have liquidity). If the bank gets greedy and like some institutions that we are all well aware of in the recent years, forgets to do basic risk planning and hedge appropriately flounders that, then if most people default it is their fault -- people paid them for that event. Start bankruptcy proceedings, liquidate/fire the executive team, absorb valuable teams/assets, renegotiate with company's lenders and move on. This happens constantly B2B. Business bankruptcy is different than individual one (at least in the U.S. and some other E.U. countries I am familiar with) -- due to liability plus other measures. Somehow politicians came into the story of systemic risk and allowed certain parts of the economy to become immune to such issues... (Which lead to the Wall Street/Big Bank cockiness.)
Any investors remaining after the deal closes implicitly agreed to the closing price.
I don't think there were any cases of a SPAC not returning deposit money if someone asked, and the institutional investors generally preferred the "guaranteed return" over gambling so the redemption percentage was quite high(I think 50%+).
https://nypost.com/2021/12/02/buzzfeed-investors-pull-funds-...
(Not saying you're implying otherwise here, just building on the fact that a closed SPAC is not more guaranteed to be a stable business any more than a private business).
I'm no SPAC expert. When I first heard about them I wrote them off almost immediately and never had an interest to dig in any further. It seemed like the business equivalent of a subprime mortgage and it was only a matter of time before it caught up with them.
I think I saw in another comment that it may be due to investors looking to get their money out, so maybe there is pressure there. I understand investors not wanting to take 10 years to see returns, but not if it comes at the expense of the business. I don't know all the ethics around startup investing, but if we start seeing a lot of these business go south (significantly more than traditional IPOs), a line may have been crossed. This could be a means to shift what used to be pre-IPO investment risk over to public investors if things start to look shaky internally. Again, I'm not expert, just spitballing.
I see the similarity to sub-prime mortgages, but the differences are: 1) this is the stock market so I don't think anyone doesn't understand the risks, 2) SPACs are no where big enough to drag down the rest of the market.
Before SPACs, companies would do reverse mergers. A basically bankrupt public company "buys" a private company and merges. Swap the private equity for public and now you're a public company with far less hassle than an IPO.
(I have no idea how these space companies are faring now, and what side of the statistic they represent.)
So have governments. The entire US space industry has to be viewed in terms of budget reductions for federal aerospace, in terms of privatization.
If I gave you $1 billion and said:
1. buy a company within 2 years and keep 20% of the equity of that company for yourself. You do not need to hold that equity for the long term. You can sell that 20% equity immediately and pocket the proceeds.
2. do not buy a company within 2 years and return the $1 billion to me with interest.
If you had to choose between buying a trashy company and pocketing $200 million or returning me the $1 billion and pocketing nothing, which would you choose?
Its sad as their business has surprisingly tremendous potential with good execution.
But I guess a lot of patterns hold.
They seem to be a straightforward attempt to circumvent regulations. The justification I see from basic googling is that the IPO process is biased in favor of big players somehow, and that SPACs are more open to retail investors... but if that is the case -- Why are IPOs apparently so hard for the little guy to get in on? Is it possible that IPOs are actually high risk investments and regulators are trying to shield retail investors from them? Or something else? It is possible I'm missing the point completely, I'm admittedly not sophisticated on this front.
Yea that’s the best I can come up with. Not super believable.
It's not fair, but it's more about the systemic bias for the wealthy rather than a decision to exclude people.
In a traditional IPO, there is a set number of shares to sell. The bank suggests a price range, then gets orders from investors for how many shares they'll buy at different prices, adjusting the range as they go, if necessary. Then the bank picks a price that will sell all of the shares. The business doesn't really have a lot of say in the amount of money they end up raising.
Additionally, there is some theory that a SPAC merger can offer projections of future business without opening themselves to liability if the projections don't come true. Whereas that's very clearly not the case with an IPO. Pre-revenue business in particular like that about SPACs. The SEC seems to be against that interpretation of the law, though.
The other thing about a SPAC is that it brings in additional management that, presumably, have more experience with public markets. Some businesses see that as a benefit.
The major downside of a SPAC, from the busines's perspective, is that the SPAC sponsor takes a huge cut of the proceeds. That is, of course, a big upside for the sponsor, and probably the main reason we've seen so many SPACs crop up recently.
This answers the question of why a company might want to use a SPAC for something other than, basically, evasion of regulations/reporting (which seems to be the main theory here). Is there any reason to think they might be good for the market in general (other than, sort of, 'what is good for businesses is good for the market' type thinking? (this is why I brought up the HFT example)).
SPACs typically trade at around $10 per share before the merger is announced, and most PIPE deals get the same price. So everyone is on equal footing at the start.
After the merger is announced, the share price tends to rise, so little guys that get in late pay more. But they at least had the opportunity to go in at the same price as the big investors.
So, from that perspective, it is more egalitarian.
A much better example would be tech startups where founders sell equity in subsequent rounds and get rich while employees are locked up. Adam Neumann is a billionaire, even though Jared Leto is playing him in a biopic about how it all went so terribly wrong.
The companies that all seemed to be trying to SPAC were companies that quacked and waddled like real companies, hoping to profit off of the speculative fervor that was gripping real but overhyped companies. In other words, it actively incentivized a ponzi system where the public markets were a cushion for speculators.
* Lower fees
* Less regulatory filings
It seems that one reason big investment banks (e.g. Goldman Sachs) are exiting the SPAC market is due to increased regulatory pressure, which may erase that advantage [1]
[1] https://seekingalpha.com/news/3844055-sen-warren-plans-to-bi...
That is an honest question - I can’t think of any but I’m also no expert.
QuantumScape is another that has potential
With a SPAC, all the negotiations take place privately, and when they're done, the company knows exactly what they're selling and at what price.
everyone is just posting copypasta they already had made about SPACs because they got burned on the share price direction, which for decently managed companies the share price has nothing to do with health or treasury balance. this article is bait for this sentiment.
*can
The scam goes like this:
Smart money gets in privately at NAV ($10) -> Managers search for something plausible to merge with ("financials" and "profits" don't matter here at all) -> Merger rumors get "leaked" -> SPAC pops 20-30% above NAV -> Smart money gets out -> Merger happens -> Price falls below NAV as smart retail heads for the doors -> Dumb retail is left holding the bag
it's all a speculative bet.
The huge liquidity injection carried out to bribe us all to accept being locked in our homes caused a rally and boom that was never justified economically, at all levels, from VC to my brother in law's benefits funded wide screen TV purchase. This, as always, always brought inflation.
But to add the real kicker, that will doom a large portion of the world population, was the Economic Social Governance elites who have through their actions ensured we do not have an adequate energy supply to grow our way out of this problem the only way is down now.
But don't worry next time they wont need to bribe you to keep you locked up, the WHO will give it to them for free.
So, that inflation is already crashing back into deflation, as seen in a range of asset price declines and the corp behavior just mentioned. The central banks have been trying to reflate since almost a decade and a half ago, and it still isn't working. Anti inflation-measures now will make it worse.
I made more money from a lucky gamble in a crypto coin than I did in 3 years of work.
I can’t be the only one in this boat. I suspect a part of the labor shortage problem can be attributed to people finding out how cheap money really is, and that “working hard” for money seems like a scam.
You're not, and the phenomenon has been known for a century.
"Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.
Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
> the Economic Social Governance elites
Who are these people? I just think it's totally unproductive to post a rant about some shadowy un-named group.
I think you're also missing the larger economic situation whcih is not just that a liquidity injection caused inflation but that also a huge supply crunch has caused a supply-demand imbalance, which you don't even mention, but which has been obvious to everyone for a while.
In addition to a partisan supreme court and SEC and PCAOB being unable or unwilling to curb market excesses, many of my peers in accounting have done time at accounting firms and the SEC. These same firms are paid by the very same companies where these people end up working that the SEC oversees. I wonder where the conflict of interest is in this revolving door policy.
I don't have a WSJ subscription so I'm unsure if its in the article itself.
The time to do that was 10 months ago. [0] Example Nikola Motors (NKLA).
Now they are trading below $2. So my entire equity grant for a Software Architect role over 4 years would have been worth $50,000 had I stayed.
What a horrible company and emblematic of the types of scams you saw going public via SPACs.
it depends on the company. But in a lot of cases, the early stage employees get fucked over when new money comes in.
Job offers will not even mention total number of shares outstanding.
Startups were barely worth it financially in the mid 2010's, anyone joining one the past few years has gotten majorly scammed.
Still chuckle when I think about Postman reaching out for a job at a 5B valuation with something like 100 employees and less than 50m revenue. Good life lessons for many though
if you do not contribute capital, i dont think you can realistically become _this_ "important".
Wait, mine told me. You may have to ask. I think it's okay to ask questions about it, if they're offering it as part of the pitch to get you to join.
or, ensure that there's SEC protection for pre-public companies' employees when/if they're issued stock. After all, issuance of stock is in lieu of compensation, so it is effectively an investment.
Since these employees are not "sophisticated or accredited" investors, there needs to be enough disclosure, and protection for them.
The best, and simplest, way to protect the employees is to grant stock with the same set of properties as founder's stocks. If there's dilution, the founders get diluted the same.
Note: this doesn't apply if you are a founder obviously