{"id":4748,"date":"2021-03-11T23:07:32","date_gmt":"2021-03-12T04:07:32","guid":{"rendered":"https:\/\/navesinkinternational.com\/?p=4748"},"modified":"2023-12-20T02:53:23","modified_gmt":"2023-12-20T07:53:23","slug":"spac-off-the-shelf-dream","status":"publish","type":"post","link":"https:\/\/navesinkinternational.com\/2021\/03\/11\/spac-off-the-shelf-dream\/","title":{"rendered":"SPAC, off-the-shelf dream?"},"content":{"rendered":"<p><img fetchpriority=\"high\" decoding=\"async\" class=\"wp-image-4793 alignright size-medium\" src=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/Unicorn-meat-2-257x300.jpeg\" alt=\"Unicorn meat v2\" width=\"257\" height=\"300\" srcset=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/Unicorn-meat-2-257x300.jpeg 257w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/Unicorn-meat-2.jpeg 429w\" sizes=\"(max-width: 257px) 100vw, 257px\" \/>Here is the <span style=\"text-decoration: underline;\">SPAC 101 manual<\/span>: their nature, their popularity, the coming regulations, the end of the party, and where it could really hurt.<\/p>\n<p>&nbsp;<\/p>\n<h3>\u200bWhat\u2019s a SPAC?<\/h3>\n<p>The Securities and Exchange Commission\u00a0has an excellent <a href=\"https:\/\/www.sec.gov\/oiea\/investor-alerts-and-bulletins\/what-you-need-know-about-spacs-investor-bulletin\" target=\"_blank\" rel=\"noopener\">investor bulletin<\/a>, which explains the nature of SPACs:<\/p>\n<ul>\n<li>A \u201cSPAC\u201d, or <em><strong>special purpose acquisition company<\/strong>,<\/em> is a <a href=\"https:\/\/www.investor.gov\/introduction-investing\/investing-basics\/glossary\/blank-check-company\" target=\"_blank\" rel=\"noopener\">blank check company<\/a>.\u00a0 This structure is used essentially for private equity investments.<\/li>\n<li>A PM may <span style=\"text-decoration: underline;\">raise cash for future private equity acquisitions<\/span> through a SPAC, even if he doesn&#8217;t know quite yet which firm(s) he will be buying.\n<ul>\n<li>He can either ask money from institutional investors, or list the SPAC in the public market.<\/li>\n<li>In both cases, the cash is generally held in a third party trust account and invested into risk-free assets, until the money can be used for an acquisition.<\/li>\n<\/ul>\n<\/li>\n<li>When a SPAC raises cash before it has acquired assets<span style=\"text-decoration: underline;\">, it is simply a shell with no operating activity.<\/span> investors are then relying on the management team, called a <strong><em>sponsor<\/em> <\/strong>to find appropriate investment targets.\u00a0Needless to say, if you invest into such a SPAC, you should be very careful about its content or intended content.<\/li>\n<li>Once the SPAC acquires a company in an <strong><em>initial business combination<\/em><\/strong>, <span style=\"text-decoration: underline;\">the SPAC and that acquired company can merge<\/span>, and you end-up with a listed company with regular operations and activities.<\/li>\n<li>If the SPAC does not make an acquisition, the shareholders get the cash back (minus costs), pro rata of their ownership. In such a cash redemption, <span style=\"text-decoration: underline;\">you may receive less than the price you paid for!<\/span> For instance, if the SPAC has an IPO at $10, but you buy your SPAC at $12, at a cash liquidation, you will only receive $10, not the $12 you have paid for the share.<\/li>\n<li><span style=\"text-decoration: underline;\">The market price of the SPAC may fluctuates away from the IPO price<\/span>, usually $10. That market price may bear no resemblance to the future value of the merged company.<\/li>\n<li>SPACs typically have <span style=\"text-decoration: underline;\">2 years<\/span> to complete their acquisition. They may have 18 months, or an extension clause. SPACs listed through an IPO must complete their acquisition within 3 years.<\/li>\n<li>In a SPAC IPO, <span style=\"text-decoration: underline;\">shareholders often receive also a <strong><em>warrant<\/em><\/strong><\/span>, allowing the warrant holder to get more share at a pre-agreed price in the future. The warrant may trade separately from the IPO stock after the listing. Investors buying in the open market, should also verify if they buy the stock, the warrant, or the combination of the two.<\/li>\n<li>The SPAC usually offers its investors the <span style=\"text-decoration: underline;\">right to redeem their IPO shares instead of becoming investors into the merged companies<\/span>.\n<ul>\n<li>They may be able to vote into the acquisition of the target company itself. There is then a standard vote through proxies.<\/li>\n<li>If there is already a quorum of investors in favor of the acquisition (the sponsors may have a majority stake), other investors may only be informed of the acquisition.<\/li>\n<li>If the SPAC doesn&#8217;t require a shareholder vote for the acquisition, they will receive a <strong><em>tender offer<\/em><\/strong> &#8211; information on the acquisition or your option to redeem beforehand.<\/li>\n<\/ul>\n<\/li>\n<li><span style=\"text-decoration: underline;\">Sponsors often have a better acquisition price into the SPAC than the general public<\/span>. It means that they will receive a bigger share of the acquired company than regular investors.<\/li>\n<li>Also, <span style=\"text-decoration: underline;\">the SPAC may eventually require financing, which is executed with those sponsors<\/span>. Because the form could include dilution or preferable terms, general shareholders may further lose value in the future acquired company.<\/li>\n<\/ul>\n<h3>The SPAC popularity<\/h3>\n<p>Morvillo, Abramowitz, Grand Lason &amp; Anello PC have a good piece <a href=\"https:\/\/www.lexology.com\/library\/detail.aspx?g=6f734979-d180-453a-9ba6-45580b909d80&amp;utm_source=lexology+daily+newsfeed&amp;utm_medium=html+email+-+body+-+general+section&amp;utm_campaign=lexology+subscriber+daily+feed&amp;utm_content=lexology+daily+newsfeed+2021-02-26&amp;utm_term=\" target=\"_blank\" rel=\"noopener\">on the popularity and regulatory attention <\/a>of SPACs.<\/p>\n<ul>\n<li><span style=\"text-decoration: underline;\">Blank check companies a chequered past in the 80&#8217;s and 90&#8217;s<\/span>. SPACs are a their recent re-invention. They have existed only since the mid-2000s.<\/li>\n<li><span style=\"text-decoration: underline;\">In 2020, SPACs raised more capital in initial IPOs than at any time in the preceding decade.<\/span><\/li>\n<\/ul>\n<p><img decoding=\"async\" class=\"wp-image-4765 aligncenter size-full\" src=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/SPAC-issuance-by-year.jpg\" alt=\"SPAC $ issuance by year\" width=\"561\" height=\"394\" srcset=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/SPAC-issuance-by-year.jpg 561w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/SPAC-issuance-by-year-300x211.jpg 300w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/SPAC-issuance-by-year-480x337.jpg 480w\" sizes=\"(max-width: 561px) 100vw, 561px\" \/><\/p>\n<ul>\n<li>That year, <span style=\"text-decoration: underline;\">~20% of the IPOs reviewed by the SEC were actually SPACs<\/span>.<\/li>\n<\/ul>\n<p><img decoding=\"async\" class=\"wp-image-4766 aligncenter size-full\" src=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/SPAC-issuance-by-year-percentage-of-IPOs.jpg\" alt=\"SPAC issuance by year - percentage of IPOs\" width=\"553\" height=\"401\" srcset=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/SPAC-issuance-by-year-percentage-of-IPOs.jpg 553w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/SPAC-issuance-by-year-percentage-of-IPOs-300x218.jpg 300w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/SPAC-issuance-by-year-percentage-of-IPOs-480x348.jpg 480w\" sizes=\"(max-width: 553px) 100vw, 553px\" \/><\/p>\n<ul>\n<li>They are attracting <span style=\"text-decoration: underline;\">big sponsor names<\/span>, like <a class=\"logclick ct_cont\" href=\"https:\/\/www.reuters.com\/article\/us-global-finance-breakingviews\/breakingviews-capital-calls-bill-ackmans-spac-surges-idUSKBN2AI283\" target=\"_blank\" rel=\"noopener\">Bill Ackman<\/a>, former Yankee\u00a0<a class=\"logclick ct_cont\" href=\"https:\/\/www.bloomberg.com\/news\/articles\/2021-02-24\/a-rod-joins-blank-check-derby-to-build-the-yankees-of-spacs\" target=\"_blank\" rel=\"noopener\">Alex Rodriguez<\/a>, and\u00a0<a class=\"logclick ct_cont\" href=\"https:\/\/sports.yahoo.com\/shaq-spac-ii-o-neal-152624330.html?guccounter=1&amp;guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&amp;guce_referrer_sig=AQAAAJlxZ-_1p3mrITpMeabQ8O-hdJrRsPhJRcb_7N3Z8rB0tlUSnjunG4yzvF_Bu-QUM_kbE9qucpXmgjvq-yADtJWVsweDzfhE9WhTS-YOp9iIfcLRoOAEf0cAOU8OJsiNsie2AzSpEiF7Ok5CEDu87FiI9kkTrLCpSptGQoQ3SzvA\" target=\"_blank\" rel=\"noopener\">Shaquille O\u2019Neal<\/a>.<\/li>\n<li><a href=\"https:\/\/www.ft.com\/content\/1681c57d-e64d-4f58-b099-8885e85a708e\" target=\"_blank\" rel=\"noopener\">Investment banks also have issued SPACs<\/a>. <span style=\"text-decoration: underline;\">It is a lucrative business for them.<\/span> They collect 2% at issuance and up to 3.5% when the SPAC acquires a target. It is less than the typical 7% of a regular IPO, but the bank may collect also on the funding and other operations of the SPAC.<\/li>\n<li><span style=\"text-decoration: underline;\">There is also a benefit for the acquired company<\/span>, as they can negotiate their acquisition price from the onset of negotiations (behind closed doors) instead of waiting for the share pricing at the end of a standard IPO. Companies such as\u00a0<a class=\"logclick ct_cont\" href=\"https:\/\/www.wsj.com\/articles\/BL-CFOB-2229\" target=\"_blank\" rel=\"noopener\">Burger King\u00a0<\/a>and Richard Branson\u2019s\u00a0<a class=\"logclick ct_cont\" href=\"https:\/\/www.wsj.com\/articles\/richard-bransons-virgin-raises-480-million-with-spac-11601642288\" target=\"_blank\" rel=\"noopener\">Virgin Galactic<\/a>\u00a0have gone public using a SPAC.<\/li>\n<\/ul>\n<h3><strong>Regulatory scrutiny on the horizon<\/strong><\/h3>\n<ul>\n<li><span style=\"text-decoration: underline;\">In December 2020, the SEC released <a class=\"logclick ct_cont\" href=\"https:\/\/www.sec.gov\/corpfin\/disclosure-special-purpose-acquisition-companies\" target=\"_blank\" rel=\"noopener\">guidance<\/a><\/span> regarding SPACs\u2019 disclosures. <span style=\"text-decoration: underline;\">Enforcement is sure to follow<\/span>.<\/li>\n<li>Recent SEC enforcement actions make clear that <span style=\"text-decoration: underline;\">the Agency\u2019s principal concern is opening the flow of information<\/span> to SPACs\u2019 investors and avoiding conflicts of interest. In 2019, the <a href=\"https:\/\/www.sec.gov\/enforce\/33-10651-s\" target=\"_blank\" rel=\"noopener\">SEC notably went after a SPAC called Cambridge Capital Acquisition Corporation<\/a> for insufficient disclosures.<\/li>\n<li>The SEC is not against SPACs. In September 2020, then-SEC Chairman Jay Clayton <a class=\"logclick ct_cont\" href=\"https:\/\/businesslawtoday.org\/2020\/10\/sec-sharpening-focus-spacs\/\" target=\"_blank\" rel=\"noopener\">stated<\/a> that SPACs \u201ccreate competition around the way we distribute shares to the public market,\u201d and affirmed that \u201ccompetition to the IPO process is probably a good thing.\u201d But <span style=\"text-decoration: underline;\">SPACs are not a way to get around regulatory procedures or avoid scrutiny<\/span>.<\/li>\n<li>The SEC will notably pay attention to:<\/li>\n<\/ul>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li>the SPACs\u2019 sponsors, directors, and officers disclosure of any potential conflicts of interest,<\/li>\n<li>the deadline for the acquisition, or the incentives to avoid liquidations,<\/li>\n<li>the SPAC&#8217;s future financing need and agreements,<\/li>\n<li>the SPAC&#8217;s methodology to value the target company, the terms of acquisition, and the special treatment of the sponsors of directors,<\/li>\n<li>and if the underwriter of the IPO will provide further service to the SPAC.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h3>Is the SPAC party over yet?<\/h3>\n<p>While everybody remains generally bull on the future of SPACs, <a href=\"https:\/\/www.bloomberg.com\/opinion\/articles\/2021-03-08\/spac-party-over-cciv-dive-and-chamath-palihapitiya-spce-sale-say-so?utm_campaign=opinion&amp;utm_medium=bd&amp;utm_source=applenews\" target=\"_blank\" rel=\"noopener\">there are clouds on the horizon<\/a>.<\/p>\n<ul>\n<li>To start with, <span style=\"text-decoration: underline;\">there&#8217;s probably too much money floating around<\/span> &#8211; an estimated $70 for the start of 2021 already. A recent SPAC was listed under the name <a href=\"https:\/\/seekingalpha.com\/news\/3662865-spac-called-just-another-acquisition-corp-launches-ipo\" target=\"_blank\" rel=\"noopener\">Just Another Acquisition Corp<\/a> (JAAC). A touch of arrogance, maybe?<\/li>\n<\/ul>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-4779 aligncenter size-full\" src=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/SPAC-issuance-into-2021.jpg\" alt=\"SPAC issuance into 2021\" width=\"783\" height=\"368\" srcset=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/SPAC-issuance-into-2021.jpg 783w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/SPAC-issuance-into-2021-300x141.jpg 300w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/SPAC-issuance-into-2021-768x361.jpg 768w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/SPAC-issuance-into-2021-480x226.jpg 480w\" sizes=\"(max-width: 783px) 100vw, 783px\" \/><\/p>\n<ul>\n<li><span style=\"text-decoration: underline;\">The rising rates have been particularly unkind to growth stocks, as well as SPACs<\/span>. And with all bubbles, there are some aftershocks. The SPOX index of SPAC stocks is down 20% this year:<\/li>\n<\/ul>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-4775 aligncenter size-full\" src=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/IPOX-SPAC-price-index.jpg\" alt=\"IPOX  SPAC price index\" width=\"802\" height=\"437\" srcset=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/IPOX-SPAC-price-index.jpg 802w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/IPOX-SPAC-price-index-300x163.jpg 300w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/IPOX-SPAC-price-index-768x418.jpg 768w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/IPOX-SPAC-price-index-480x262.jpg 480w\" sizes=\"(max-width: 802px) 100vw, 802px\" \/><\/p>\n<ul>\n<li><span style=\"text-decoration: underline;\">Dozens of SPACs are now trading below the $10 price at which they were sold<\/span>. There are still at a 7% premium on average.\u00a0Churchill Capital traded as high as $65 <a title=\"Lucid Provides a Sobering Look Under the SPAC Hood\" href=\"https:\/\/www.bloomberg.com\/opinion\/articles\/2021-02-23\/lucid-and-cciv-provide-an-unflattering-look-under-the-spac-hood\" target=\"_blank\" rel=\"noopener\">before it revealed the terms\u00a0<\/a>of its deal with Lucid Motors Inc. Its shares have since fallen more than 60%.<\/li>\n<\/ul>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-4778 aligncenter size-full\" src=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/SPAC-premium.jpg\" alt=\"SPAC premium\" width=\"743\" height=\"495\" srcset=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/SPAC-premium.jpg 743w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/SPAC-premium-300x200.jpg 300w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/SPAC-premium-480x320.jpg 480w\" sizes=\"(max-width: 743px) 100vw, 743px\" \/><\/p>\n<ul>\n<li>Despite the market crash, <span style=\"text-decoration: underline;\">SPACs are still able to raise capital, however, their IPOs are no longer massively oversubscribed<\/span>. Other hedge funds have begun shorting them.<\/li>\n<li><span style=\"text-decoration: underline;\">Former SPACs have also announced disappointing financial results<\/span>: Nikola Corp., which Hindenburg targeted last year, said it would produce\u00a0<a title=\"Nikola Falls After Lowering Electric Truck Production Goal\" href=\"https:\/\/www.bloomberg.com\/news\/articles\/2021-02-25\/nikola-posts-narrower-than-expected-loss-no-fuel-network-update\" target=\"_blank\" rel=\"noopener\">fewer than 20%\u00a0<\/a>of the electric trucks it had planned to build this year. I\u2019ve warned before about how the optimistic forecasts SPACs make\u00a0<a title=\"Why Chamath Palihapitiya Loves SPACs So Much\" href=\"https:\/\/www.bloomberg.com\/opinion\/articles\/2021-01-28\/why-chamath-palihapitiya-loves-spacs-so-much\" target=\"_blank\" rel=\"noopener\">may lead to disappointment<\/a>.<\/li>\n<li>Also, with so much money at hand, <span style=\"text-decoration: underline;\">SPAC sponsors have <a title=\"SPAC Bosses Flip to More Aggressive Terms as Buyer Mania Builds\" href=\"https:\/\/www.bloomberg.com\/news\/articles\/2021-03-03\/spac-bosses-flip-to-more-aggressive-terms-as-buyer-mania-builds\" target=\"_blank\" rel=\"noopener\">become less generous<\/a><\/span>.<\/li>\n<\/ul>\n<h3>The last touch &#8211; options and Reddit<\/h3>\n<p><span style=\"text-decoration: underline;\">There are now options on SPACs<\/span>. out of the ~600 SPACs listed on exchanges, <span style=\"text-decoration: underline;\">~45 have option chains<\/span>, allowing retail investors to gain leveraged investments into blank check companies.<\/p>\n<p>Considering how well the public at large understood <a href=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/01\/Dont-touch-the-VIX-Oops.pdf\" target=\"_blank\" rel=\"noopener\">leveraged ETFs<\/a> and <a href=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/01\/Options-on-leveraged-VIX-ETFs-Legal-issues.pdf\" target=\"_blank\" rel=\"noopener\">options on leveraged ETFs<\/a>, there&#8217;s no doubt some traders will receive some unpleasant phone calls at some point&#8230; Cash that turns into tech companies. Nobody will ever get that trade wrong, right?<\/p>\n<p>And even better, there&#8217;s not only <span style=\"text-decoration: underline;\">a lot of chatter on Reddit on SPACs, there are even reddit activity on SPAC options<\/span>. What could go wrong there?<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-4786 aligncenter size-full\" src=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/Reddit-chat-on-options.jpg\" alt=\"Reddit chat on options\" width=\"744\" height=\"515\" srcset=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/Reddit-chat-on-options.jpg 744w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/Reddit-chat-on-options-300x208.jpg 300w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2021\/03\/Reddit-chat-on-options-480x332.jpg 480w\" sizes=\"(max-width: 744px) 100vw, 744px\" \/><\/p>\n<p>&nbsp;<\/p>\n<p>Does it smell like a bubble, or at least too much hope invested in unicorn promises?<\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The blank check companies are raising billions in IPOs&#8230; but for how long? Here is the SPAC 101 manual: nature, popularity, ego crisis&#8230; and even options!<\/p>\n","protected":false},"author":1,"featured_media":4793,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[12,11],"tags":[36,35,104,103,102],"acf":[],"_links":{"self":[{"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/posts\/4748"}],"collection":[{"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/comments?post=4748"}],"version-history":[{"count":2,"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/posts\/4748\/revisions"}],"predecessor-version":[{"id":13181,"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/posts\/4748\/revisions\/13181"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/media\/4793"}],"wp:attachment":[{"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/media?parent=4748"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/categories?post=4748"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/tags?post=4748"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}