It has been a record year for SPACs or special purpose acquisition companies — sometimes called “blank-check companies” — that go public as cash shells, with sponsors later identifying an operating business to merge with.
More than 115 initial SPAC public offerings have raised nearly $44 billion — more than the past five years combined, according to data from SPAC Insider, Barons reported.
The Defiance NextGen SPAC Derived exchange-traded fund made its debut Oct. 1 on the New York Stock Exchange under the ticker SPAK. The launch is a new way for investors to play the booming market, Barrons reported.
Some of the best-performing stocks of 2020 were the result of SPAC mergers. Those include Virgin Galactic and DraftKings. Electric vehicle SPAC Nikola was kicked off the Indxx SPAC & NextGen in late September.
The boom in special purpose acquisition companies isn’t just a passing fad, according to private equity investor Joshua Harris, co-founder of Apollo Global Management.
SPACs are filling a needed role for companies that are closing in on going public, Harris said at the Delivering Alpha conference presented by CNBC and Institutional Investor.
Apollo has raised its own SPACs and exited its position in companies through the blank check vehicles, Harris said.
A rush of SPACs outpaced traditional IPOs in money raised in July and August, pushing SPACs from 3 percent of the market to 20 percent during the recent surge, Harris said.
Here’s how SPACs work, according to CNBC: The investment vehicles go public through their own IPOs, then use their cash to do a reverse merger with a private firm. The publicly traded shares of the SPAC then become the shares of the formerly private company.
“Since time immemorial cash shell listing booms have heralded fraud and collapse,” Financial Times reported. This one is different.
Famous bubble companies throughout history were set up for people to invest in “an undertaking of great advantage, but nobody to know what it is,” Merryn Somerset Webb wrote for Financial Times.
“My personal favorites include undertakings for ‘paving the streets of London’, ‘importing walnut trees from Virginia, and ‘extracting silver from lead,'” Webb wrote.
Nothing says bubble collapse coming quite like a cash shell boom. Which brings us to today’s SPACs … listed shells that hold no operating businesses but intend to acquire them. There were seven U.S. SPAC listings in 2010; there have been more than 100 in 2020, including a $4 billion launch from hedge fund billionaire Bill Ackman.”
Merryn Somerset Webb, editor-in-chief of Moneyweek
There is good reason to worry we may be in a bubble again, Webb wrote. She lists these reasons:
Electric vehicle startups such as Nikola are turning to blank-check-firm SPACs as a way to go public and raise fast cash, CNBC reported.
After Nikola went public in June, at least three other aspiring automakers – none that had actually produced a product for sale – announced similar deals.
Nikola went public on June 4 by merging with former GM chairman Steve Girsky’s VectoIQ. VectoIQ had 24 months to make an acquisition or Girsky was going to have to give investors their money back, according to SEC documents from 2018, The Verge reported.
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VectoIQ effectively made Nikola a public company by buying it. At first, everything looked good. The share price spiked to $93.99, more than double its value. “At one point Nikola had a market capitalization above Ford’s, despite the fact that the electric vehicle maker said it would not generate revenue until 2021,” CNBC reported.
On Sept. 10, short-seller Hindenburg Capital released a report entitled “Nikola: How to Parlay An Ocean of Lies Into a Partnership With the Largest Auto OEM in America.” The report echoed a June Bloomberg article suggesting that Nikola founder, Trevor Milton, exaggerated the company’s capabilities in a video demo of a Nikola semi-truck. Milton stepped down on Sept. 21.
The SEC is investigating, The Verge reported.
The American Bar Association predicts an uptick in SPAC-related lawsuits — “not what I would call a good sign,” Elizabeth Lopatto wrote for The Verge.
