Who’s going to be the piston? Even the SEC, which has slept through all this, warns retail investors. But in the current mega-bubble craze, no one is giving a horn anymore.
By Wolf Richter for WOLFSTRAAT.
SPACs – special purpose procurement firms, or more descriptively, “blankcheck firms” that have no operations, have achieved a great performance that fits seamlessly into the current mega-bubble craze.
So far this year, 260 SPACs have gone public and raised $ 84 billion with their IPOs, according to information provided by SPACInsider. This is a great moment because it is the total amount raised over the entire year 2020 of $ 83 billion, which itself was six times as large as the previous full annual record in 2019. At this rate, SPACs form the following WTF chart of the year:
In the IPO, a SPAC sells shares and warrants which are then traded separately. SPACs did not have any operations at that time. It is an entity filled with the funds they have raised in the IPO, which normally wants to buy a business within two years, such as a startup. After the acquisition, if the investor approves it, the SPAC changes its name to the name of the startup and changes the check mark. In this way, the initiation of the case can be made public while avoiding the difficult disclosure and investigation that a traditional IPO filing entails.
This laborious investigation has been instituted to protect IPO investors. However, investors are no longer giving a speech on protection in the current mega-bubble craze. No one gives a speech anymore as long as these things go up. Look at cryptos and NFTs, as well as SPACs.
Dozens of SPACs that became famous this year and late last year were either created by or used as figurative athletes, Hollywood celebrities, celebrities of all kinds, former House Speaker Paul Ryan, former Commerce Secretary Wilbur Ross, and of course, Larry Kudlow, rapper Jay-Z, Gary Cohen, who was also President Trump’s chief economic adviser for a while, and Chamath Palihapitiya, former Facebook CEO and current god of the traders who hung out on Reddit and Twitter, which has listed six SPACs so far.
To become someone, you need to create a SPAC and sell the stocks and warrants, get them listed and drive the SPAC bubble and attract retail investors.
The SEC last week warned retail investors about SPACs, yes, the SEC that has slept through all this and is still sleeping.
“SPAC transactions differ from traditional IPOs and have clear risks associated with them,” he said. “For example, sponsors” – celebrities, former politicians or other supporters – “may have conflicting interests, so that their economic interests in the SPAC may differ from shareholders.”
“SPAC sponsors usually acquire equity in the SPAC on more favorable terms than investors in the IPO or subsequent investors in the open market,” he said. “As a result, the sponsors will benefit more than investors by the SPAC’s completion of a business combination, and they may have an incentive to complete a transaction on terms that may be less favorable to you.”
“Even if a celebrity is involved with a SPAC, it might not be a good idea to invest in one,” he said.
The SEC also has’ to series of tweets nature at the meeting of investor advisory committees on March 11, which included further pieces:
“As the number of SPACs transactions reaches unprecedented levels, staff are investigating the structural and disclosure issues surrounding these mergers.
“We see more evidence on the risk side of the SPACs comparison, as we see that performance for most investors does not match the hype.”
“Many investors and commentators understand SPACs and their costs significantly, especially the role of warrants and redemptions in raising SPAC costs, and how merger agreements can make investors’ SPAC costs bear.”
“The SPAC panel considers the implications of current market trends in terms of valuation, acquisition targets, adjustment to conflicts of interest, quality of disclosure and litigation.”
One of the issues is the special treatment that investors get that retail investors do not get: when they buy shares of the SPAC shares and thus fund the SPAC, they get the right to withdraw their funds before the eventual acquisition closes. In other words, they can choose to get their entire money back. This isolates them from losses.
If a SPAC that became $ 10 a share six months ago announces an acquisition, and tanks its shares, the hedge fund that bought the shares during the IPO has the option to withdraw their initial investment.
Small investors can sell their shares in the market and eat up the losses because they have no loss protection.
A hedge fund therefore buys the shares in the stock market, and months later when an acquisition is announced and the shares jump, the hedge fund can sell the shares in the market and pocket the profits. However, when the shares are redeemed upon announcement of the transaction, the hedge fund has the right to withdraw their cash from their initial investment before the transaction closes. In other words, they are sitting on a risk-free investment with the potential for a high return.
However, retail investors who bought the shares in the market will incur the losses. And spaces did not do everything so well. Despite the mega-bubble, the Defiance Next Gen SPAC derived ETF [SPAK] has fallen by 14.5% over the past four weeks.
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