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> SPACs, in theory, democratized access to late-stage private markets

Working in finance made me extremely cynical about anything that claims to “democratize” finance. It’s a great idea, as you say, in theory; but in practice what gets branded as “democratization” is really selling retail investors on the table scraps that professionals have already picked over.

One of the things I've learned watching the cryptocurrency saga is this:

It's hard to get money to be productive. It's hard to get a financial system to do anything other than gamble, pump and dump, scam, and make bubbles.

"Money" is as productive as the underlying system of production it sits on. You and I can invent foo and bar, with some creative financing sell it to each other for a million dollars, and have a million dollar net worth starting from zero while not producing anything of value. A lot of modern day financial "inventions" seem to be of this kind of "money productivity" with zero net value added to the world.

True. In general, we need maximal amount of investment and new credit/money creation going into innovation and productivity rather than financial asset speculation or consumption. If it mainly goes into consumption, we get inflation without growth. If it mainly goes into financial asset speculation, we get bubbles and crises. But if it mainly goes into innovation and productivity, we get steady and sustained economic growth without crises or inflation.

The problem with cryptocurrency is that it is inherently separate from the real economy, and difficult to use for direct investment into real world innovation or productivity. Right now, new money creation in cryptocurrency goes mainly into digital asset speculation, resulting in periodic bubbles, and then failures of centralized crypto businesses like FTX, Celsius, etc.

It’s pretty easy. You need rules and regulators with teeth.

Crypto is the ultimate example of financial anarchy. A sector born from online fraud, metastasizing in its peak off of fad investors setting government transfer payments on fire.

It's their job. The finance bros aren't engineers, technicians, doctors, writers, etc. They cook up this crap all day and sell it. But this stuff isn't real, because that's not what they do, they don't know how.

Real businesses,, business that have value and add value to the world are not built by bros in suits yelling at eachother on Wallstreet. Businesses are built by the Hank Hill types wearing Levi's and showing up to work in snowstorms and summer heat to load trucks and weld iron. Value isn't created by a stock ticker, it's created with the blood sweat and tears of the common person. Finance bros do not know how to bleed, sweat or cry - so they can't make things of real value.

Case and point, Warren Buffet.

You are correct...and yet, between work and finance, which pays better?

Finance of course. If you're born into that class, then go for it. If you're not, you gotta work first, then if you're lucky and diligent you have a shot at moving up into it later in life. Most average folks of average background can't just decide to be a big finance person on Wall Street. You gotta know people, you know, cronies, cronie capitalism, but it's not just limited to political ties, it's nepotism, etc.

False. It's hard to get cryptocurrency to do anything productive, it's hard to get cryptocurrency do anything other than gamble, pump, and dump, scam and make bubbles.

But the rest of the economy has been making people's lives better for thousands of years. Would you rather live now, or a hundred years ago? a hundred years ago or 200 years ago? repeat till you're satisfied with my argument. If you hit any snags, just repeat a few times more.

The “economy” you attribute these increases in QoL to is pretty mercurial - are we talking about mercantilism during the 1700s, robber baron capitalism of the 1910’s, Chinese state capitalism of today, or Western neoliberalism of the 1990’s?

The real economy certainly makes things, but it does also evolve frauds; the difference is that they get banned and you have to think up a new type of fraud.

There's also the issue of the "business cycle". Why do we have recessions? What can be done about them? Can we mitigate the damage of crashes? Not a solved problem.

Same. Money people don’t give a shit about democracy. If the deals weren’t garbage, their sacred duty to shareholders would take them to a more profitable place.

The last few years "democratize finance" is often synonymous with "fraud"

The funny thing is that this was actually the third SPAC boom. I cut my teeth on Wall Street in 2008 and they were all the rage then too:

"SPACs have a distasteful reputation due to a number of scandals associated with them in the 1980s. But like Frankenstein arisen from the dead, they are back. Initially, when they first reappeared on the scene the major banks and M&A law firms refused to represent them. Morgan Joseph and Ladenburg Thalmann did the hard work of establishing a market." [1]

Also, I don't think anyone launching a SPAC believes they are about democratizing access to certain deals. They're just another structure for raising funds for acquisitions. If the status quo is doing it through private equity firms, an alternative structure is search funds for the small deals and SPACs for the large deals.

[1] https://archive.nytimes.com/dealbook.nytimes.com/2008/01/06/...

> SPACs, in theory, democratized access to late-stage private markets, aiming to give retail investors an early seat at the table. but like many financial innovations, they're tools that can be wielded wisely or poorly.

This is highly misleading IMO. The democratization narrative is a complete marketing ploy — anyone that understands how the SPAC structure works would not call it “democratic” in any sense of the term. Participants in the SPAC fund and buyers of the public market equity are two completely different parties. For one the funders of the SPAC get their capital back (plus interest) if the SPAC fails to find a target. But even when they find one, the funders get many sweeteners over and above the resulting equity shares. In some cases there are minimum payouts and all kinds of other things that create a two tiered system.

The SPAC “craze” can be boiled down to a few causes — overheated stock speculation that caused retail investors to put their money all over the board, and low interest rates that made this kind of risk free betting possible (the opportunity cost was very low when T-bills paid nothing). It was a way for companies to specifically and intentionally avoid public market regulations to sell to a perceived “dumb money” retail pool. There’s absolutely nothing democratic about it. Also why many of the companies using SPACs were “retail friendly” businesses like electric car companies that were perceived to be “exciting businesses” for retail buyers.

I think you’re conflating the SPAC sponsors and the owners of the public equity. The owners of the equity get their money back (plus interest) if the SPAC doesn’t find a target. The sponsors are out whatever money they put up to form the SPAC, take it public and search unsuccessfully for a target. The sponsors do typically have very rich upside if they find a deal - like, 20% of the post-merger company - but it’s not a risk-free thing for them.

Don’t get me wrong, I think SPACs are fucking stupid and bad for retail investors and I would never want to be involved in one, but the pre-deal owners of shares of the SPAC are actually fairly decently protected (opt-out rights, money held in trust, not liable for SPAC expenses).

I agree with your overall point, but I would note that US security regulation focuses heavily on disclosure as a mechanism to protect investors, and the owners of pre-deal SPAC shares are not well protected in that regard.

It's good that they get to decide if they want their money back; it's bad they they're required to make that decision with so little information.

Misalignment of incentives is such an understatement.

> But looking back, he felt that the rigorous scrutiny of the traditional path might have forced his team to address underlying business challenges they'd later face.

This is such a politically correct way of saying “we didn’t want to be scrutinized so we took the quick cash and ran instead.”

I think there’s a pretty good chance that’s not a very fair statement. OP’s friend was management, not the SPAC sponsor. He would have been subject to a lock-up on his stock following the de-SPAC transaction. There’s a very good chance that the stock price would have declined substantially during that period, so I’m not sure what cash there was for him to grab in the context of the de-SPAC transaction. To briefly be an executive of a failing public company doesn’t sound very enticing to me. At all.

It sounds to me like OP’s friend’s company was overly eager to go public but with the benefit of hindsight realized that it wasn’t the right choice for the business.

There also may be some timing bias. The SPAC craze coincided with the apex of late stage money losing “startups”. Anecdotal evidence indicates that the private markets have done a major repricing of private firms in the last 2 years.

It’s intrinsically difficult to value money losing firms. Apple was famously 90 days from bankruptcy, and Uber is now suddenly profitable. Sears is bankrupt, and GE is on the same path.

There was certainly exuberance in 2021, and that likely lead to a number of bad deals.

I don’t think a SPAC craze coinciding with exits for a bunch of overvalued startups is random

A more cynical take is that financial innovation is roughly the task of figuring out how to leave retail investors holding the bag while insiders/financial service providers make off with a kings' ransom in commissions.

In that sense a "matured understanding" is just regulation. And it seems a tall stretch to imagine SPACs reaching that when their sole existence is a loophole in regulation designed to protect retail investors from exactly these kinds of losses.

> SPACs, in theory, democratized access to late-stage private markets, aiming to give retail investors an early seat at the table.

I question how that's even true in theory. A SPAC is an elaborate (and expensive) mechanism to bring a private company public with less disclosure; even if it works as designed, you're not letting retail investors invest in early stage companies.

> He mentioned that the allure wasn't just the capital but the perceived simplicity of the process, compared to a traditional IPO.

There's very little simple about a SPAC, which suggests the founder may not have understood them as much as he thought he did. Perhaps he meant easier?

Also, I mean, there is a simple process for going public that does at least partially democratize the process: Direct listings. I've always found it fascinating how unpopular they are.

Whenever I see the term "democratizing access," my spidey-sense starts to tingle and I get a strong suspicion that I'm about to encounter something kinda-to-very skeezy that _really_ needs a good "power to the people" cover story in order to be accepted.

SPACs, it would seem, are not an exception.

https://en.m.wikipedia.org/wiki/The_Market_for_Lemons

If there exist two pathways:

   1. Regulated, standardized
   2. Less regulated alternative

Which sort of companies are going to dominate in #2?

It's not going to be the ones that could have gone with #1, but decided not to for reasons. It's going to be a lot of companies that couldn't go with #1.

Which will drag down the median of #2, which will increase the cost of using it (because everyone will assume you're a scam by default), which will decrease its attractiveness and cause even more companies who can to pursue #1, GOTO 10.

um, lemon markets don't get fixed by simple regulation.

A seller has a motivation to sell which the buyer doesn't have direct access to: "I'm moving, need to sell my car"; "I get a new car every year, sell my old one"; "this car has tons of problems". The buyer's motivation is clear, "I want a good car for the price".

Since the market is a mix of lemon cars and good cars, the prices are somewhere in between. If the prices for good cars reflect lemons, the guy selling will say "I can't get enough for my car, I'll buy a new car every two years." The guys with the lemons still want to sell their cars. Now there are fewer good cars in the pool, and prices drop even more.

Now the guy who is moving will try to find somebody in his family he can sell it too, but the lemon guys still want to sell theirs.

This is why a brand new car loses so much value the minute you drive it off the lot. It's not a problem that can be completely solved with regulation; although some of the large players, like rental car companies, can be more easily regulated to not roll their odometers back, keep repair records, etc. However, they still get caught cheating.

Lemon markets can be fixed by regulation, because regulation effectively sets a floor to cheating.

And it's cheating (or buyer perception of cheating) that increases the discount the lemon market takes to true value, which leads to lemons dominating non-lemons in that market.

The more you can do to keep lemons out of a market via regulation, the less of a discount the buyer will demand relative to true value.

I would like to not that you didn't suggest any regulations, you just professed faith in them.

you can't have a law that people can't sell property, it's what property is, that which's ownership can be transferred. People with lemons always want to sell them, they are always in the market, always bringing prices down. You cannot create a perfect information marketplace through regulation, though you can improve it, for example major insurance incidents.

Democratized access is quite the silver lining. Retail investors got taken to the cleaners.

It democratized access to losing money. Not only the VCs and PE could do it, now retail could.

> With any financial innovation, there's often a cycle: initial excitement, over-extension, contraction, and then matured understanding

I'm a little more cynical, I think the cycle is: a new financial invention comes out, greed causes people to people to pump money into it, eventually the bubble pops or regulators step in. We've seen it time and time again: the dot com bubble, the subprime mortgage bubble, SPACs, and now/soon (IMO) with PE. My question is how many times this has to happen before we stop viewing it as an isolated with specific product and start to see it as a system issue with our financial system.

I'm curious what your reasoning on PE is. I know the space is struggling, (I'm not exactly rooting for them), but could you give a little context on what bubble and potential regulation is called for?

SPACs also suffer from an adverse selection problem. The people who self select to do a SPAC because they have low tolerance for rigorous scrutiny are more likely to fail when the tides go out.

Same issue with IPOs. The sponsoring banks can earn nice fees even if the stock does poorly.

SPACs really are hacky legal loophole right?