Headline of the Day

The Special Purpose Acquisition Company Fallout Is Going to Be SPAC-Tacular

—Financial Times

SPACs were supposed to be the latest major financial innovation.

What they really were was regulatory arbitrage (Fraud) masquerading as innovation:

Last year may have been an annus horribilis for the IPO market, but it was an annus calamitosas for special purpose acquisition companies, or Spacs.

Spacs are blank-cheque vehicles designed as a backdoor way for a private company to list on the stock exchange without going through the expense and uncertainty of an initial public offering. But things have gone pear-shaped.

For one thing, investors have suffered bone-crushing losses, as companies merging with Spacs (inelegantly known as a “de-Spac transaction”) have vastly underperformed the stock market. The AXS De-Spac ETF fell almost 75 per cent in 2022. Several companies have missed their forecasts, restated their financials and even gone bankrupt. SPACs have in some cases incubated a unicorn-to-penny stock lifecycle — with companies having to launch reverse splits to avoid delisting.

………

And finally, as often happens when people lose a lot of money, lawsuits and investigations are in the offing. Aggrieved investors claim that Spac founders had a conflict of interest in pushing through a merger, and as a result skimped on due diligence, inflated forecasts and failed to disclose important business risks. Naturally, the SEC is revving its enforcement engines.

SPACs were always a scam.  They were created as a way of going public without doing proper disclosures.