Welcome to the Age of the SPAC

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More companies are choosing to reverse-merger their way into being public

What the hell is a SPAC? A SPAC is a special purpose acquisition company, and SPACs have become popular for bringing ever-larger companies into the public markets. If you have been reading up on investing news, you’ve probably seen this term, but many people still don’t understand what a SPAC is and how it affects markets. 2019 and 2020 saw a big uptick in these sorts of deals. The first half of 2021 saw even more deals, but as we plow through the end of 2021, SPACs are coming under fire from investors and regulators. 

Merging to Go Public 

These companies form themselves and go public and use the money from public markets to buy other companies who instantly, through the merger, become public companies themselves. Recently, a large mortgage house, United Wholesale Mortgage, was the largest company to go public through this process. SPACs are convenient for investors and companies. Rather than go through all the work of going public under their own name, companies can merge with a shell company that is already public and instantly become a public company. 

This is not a new form of investment. Chinese companies have listed themselves in American stock markets in a similar fashion. Chinese investors would buy companies already on public markets and then merge their operations with this dummy company and instantly become a public company. Called a reverse merger, where the subordinate company takes over the parent company, a SPAC works similarly. There are fewer regulatory issues and less paperwork to file. The company merging with the SPAC doesn’t have to file an S1 or other regulatory paperwork because the merging company is already public. They skip right to the part where they report earnings. This opportunity is becoming common in the US, and the UK recently relaxed rules to draw more investment to the City of London. Regulating these deals and ensuring that investors have all the information needed to make their decisions is already a challenge for regulators. SPACs have raised even more concerns on both sides of the Atlantic. 

Regulations

There is already a regulatory concern; a new international organization called the International Organization of Securities Commissions (IOSCO), which is an inter-governmental organization for sharing information between countries that allow these sorts of listings. It includes the US, UK, EU, and several other countries. The organization is focused on making sure that markets remain free and fair and that investors are protected. The SEC is already taking a hard look at SPAC companies. Momentus, a space SPAC, was fined $8 million in July for misrepresenting their rocket technology to investors. 

While it is unfair to describe SPACs as shady deals, investors are already beginning to cool on the idea. Many of the companies that have been taken public in this way have not performed as expected, and this has generated 14 lawsuits this year, more than 2019 and 2020 combined. Many investors are becoming wary of these deals, and some favor traditional IPOs with all that associated paperwork required to trade on public markets. The SEC is already cracking down on these deals and over the summer, deals ground to a halt under regulatory pressure. 

The Rise of the SPAC

Despite the SEC crackdown, SPAC deals will likely continue. Major players like Billionaire investor William Ackerman and Intel Chairman Omar Ishrak are raising billions to create new SPAC deals, which could mean that while 2020 was the year of the SPAC, 2021 will see an increase in these sorts of deals. It seems like no company is too big to be “SPACed.” Investors in a variety of industries are looking to create SPACs that create deals within select industries. Former CBS executives led by Joe Ianniello have formed a media industry SPAC as well. However, as Conor Moore told CNBC in a July interview, “those trying to take companies public are realizing that it’s harder than it looks and will need patience. He also sees potential regulatory roadblocks and said valuations in some parts of the capital markets are becoming stretched.”

What It Means for Your Money

Regardless of how a company ends up in the public market, they can only stay there with a good stock price as long as they have revenue and healthy growth. Regardless of their method of going public, the best companies with the healthiest revenues and growth will rise to the top, and those without, will not. When evaluating equities/stocks, it is important to look at the fundamentals. What are the earnings reports? What are the projected revenues? Ultimately, value investing will win long-term over short-term gains on specific stocks. Companies that grow over time and continue to provide value to investors will be here long after the hype stocks have burnt through investor money.