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Am I the only one who thinks that's a massive hole in the rules? You IPO an empty shell, which passes easily because it does nothing, and then any old shop with
by lordnacho 6y ago
Am I the only one who thinks that's a massive hole in the rules? You IPO an empty shell, which passes easily because it does nothing, and then any old shop with a messy business can then be bought by it?
- vmception 6y agoThat’s why everyone is riding the gravy train as fast as possible
- thedudeabides5 6y agoYes, that's pretty much the idea. Back in markets, we would of called it 'regulatory arbitrage.'
- lordnacho 6y agoWhy doesn't every IPO happen this way? Once you want to go public, you make a SPAC, get that approved, then have it buy your business?
- anthuswilliams 6y agoThe sponsors of the SPAC set aside for themselves a big chunk of the shares of the newly combined entity. So in general, the company gets a worse price than it would if it had gone public via an IPO.
- buescher 6y agoSo if the principals involved in a startup set up their own SPAC to take the company public, they could screw minority shareholders in the original company like, say, employees?
- ls612 6y agoThe laws generally require that these things be “arms length transactions”, basically meaning that the two parties are legitimately at odds over the price. Your example would not be that.
- smallscientist 6y agoMost sponsors don't hold shares unless for the stock pops way beyond the $10. For the average company, you may end up as a public company with no cash raised. This can be mitigated by a concurrent PIPE, but otherwise you're SOL.
- tachyonbeam 6y agoRight now it kind of seems like every IPO does happen this way. There's kind of a SPAC mania going on. I can name at least 5 companies that are going public through SPACs, and two more that are rumored to be doing the same soon (Virgin Orbit and Lucid Motors).
- lordnacho 6y agoWhat I mean is why don't traditional businesses IPO in this way? If it's a pain to do due dilly with a real business, why isn't this a back door?
- lotsofpulp 6y agoTheoretically, you get a lower price with an SPAC. However, if so much money is looking for returns, then the price might not be so low as to discourage it compared to other traditional ways to IPO.
- gamblor956 6y agoSPAC acquisitions raise significantly less money for the target acquired company, so generally a target only goes the SPAC route if their financials aren't in good enough shape to go the traditional IPO route (offering, dutch auction, or otherwise). Most SPAC acquisitions involve high-risk companies, for recent examples: Lucid (10 years on and still no actual product for sale), Nikola (fraud), 23andMe (its financials are reportedly not in great shape), Opendoor (huge portfolio of risky real properties), EVgo (history of massive losses), Clover Health (accusations of fraud, under DOJ investigation). SoFi is the only company I can think of that is going the SPAC route that was potentially in the shape to IPO (their potential IPO was tenatively valued at $17 billion at the start of 2020, but the SPAC acquired them for around 8.65 billion). They apparently chose not to IPO because they wanted "deal certainty." However, leaving that much money on the table is a huge red flag for a financial company; it suggests that 2020 was a bad year for them and that they wanted to avoid disclosure, or that their financials are not in great shape.
- macinjosh 6y agoNo you're not the only one, it is a massive loophole that benefits corporations and the perfect example of why government regulation can never really work in the end. There will always be a way around found.
- tachyonbeam 6y agoOn top of this, SPACs usually have private PIPE investors who get shares at the "IPO" price, typically 10 dollars, while people who buy the public SPAC shares typically have to pay twice that, which feels super scammy. https://www.investopedia.com/terms/p/pipe.asp https://www.investopedia.com/terms/p/pipe.asp
- lupire 6y agoWhy? Earlier investors always get better prices before opening to the public, in exchange for helping the company go public.
- what_ever 6y agoPipe != Early https://www.investopedia.com/terms/p/pipe-deal.asp https://www.investopedia.com/terms/p/pipe-deal.asp
- jVinc 6y agoThat sounds a bit like claiming that it's scamy a company founder gets a higher salary than future employees. Of cause the company is allowed to raise money anyway it sees fit, including providing discount for individual investors for any given reason. If you don't like how they are carrying out their business you can just not invest. Which you might be leaning towards, which is why if you where a potential big investor they might offer you a discount to get you onboard as well.
- casefields 6y agoCheck out The China Hustle for a great documentary on this topic: https://www.rottentomatoes.com/m/the_china_hustle https://www.rottentomatoes.com/m/the_china_hustle It's currently streaming on Hulu and Amazon Prime Video.
- ericmay 6y agoI wouldn't consider it a hole in the rules, it's more of an alternative listing method. In my view, nothing materially changes. If 23andMe is a turd then an IPO through Goldman or JPMorgan isn't going to really change that, and neither will an SPAC. Although it's a little bit "gambling" because you don't know what the SPAC acquisition will be ahead of time, I think the SPAC vehicle is great for retail investors. If you take IPOE and SoFi for example, you could have bought Social Capital Hedosophia's IPOE SPAC at $13/share or something and watched it grow once the shares were slated to be turned into SoFi shares. But in the traditional IPO process, well, you get to buy the SoFi shares at the IPO price. If you have a high net worth, that's probably fine. But if you're a retail investor - well, look at AirBnB's IPO price at $68/share and what you could actually get it at on IPO which was closer to $140 or something. In other words, you get a little bit of exposure to the game, and of course a little bit of exposure to the risk as well which is "I don't know who they will merge with".
- sokoloff 6y agoSo in other words, a SPAC is “a company for carrying out an undertaking of great advantage, but nobody to know what it is”? https://en.m.wikipedia.org/wiki/South_Sea_Company#Top_reached https://en.m.wikipedia.org/wiki/South_Sea_Company#Top_reache... It was apocryphal during that bubble; it’s real now. I do not find that to be a good thing...
- kpommerenke 6y agoOnce the SPAC has identified a company to buy, investors in the SPAC get a choice to either stay invested or get their money back with interest. So it's only a blank check initially, but not once it matters. Source: https://www.bloomberg.com/opinion/articles/2021-01-08/spac-magic-isn-t-free https://www.bloomberg.com/opinion/articles/2021-01-08/spac-m...
- ethanbond 6y agoWhat? At least as described above, the material requirements for disclosures changes. Is the description above wrong or do you not find disclosures to public market investors to be material?
- lotsofpulp 6y agoIf you’re investing in an SPAC, you should know this already. Everything is transparent, so I don’t see what the loophole is, or who or how anyone is getting bamboozled? Company wants to go public with higher guarantee of price, they go with SPAC. Investor wants higher return, they invest in SPAC, but there is no higher return without higher risk.
- r00fus 6y agoNo you're not. It's entirely a loophole being regularly exploited. Now whether the existing IPO requirements could/should be streamlined is another question.