11 ms·

A Sober Look at SPACs (2020)

135 points by cinntaile 6y ago

paulgb 6y ago
For a potentially more accessible version of this, Matt Levine wrote about the paper when it came out: https://www.bloomberg.com/news/newsletters/2021-01-08/money-stuff-spac-magic-isn-t-free https://www.bloomberg.com/news/newsletters/2021-01-08/money-... There's also a summary blog post here: https://corpgov.law.harvard.edu/2020/11/19/a-sober-look-at-spacs/ https://corpgov.law.harvard.edu/2020/11/19/a-sober-look-at-s...
- benkoller 6y ago
  The Matt Levine article is a great summary, thanks for sharing.
- bombastry 6y ago
  It's worth noting that Matt Levine has a lot of other good writing on SPACs. (And economics in general. To anyone reading this comment, I highly recommend his daily newsletter "Money Stuff", which is where these excerpts come from). On how SPACs can end up giving more money to banks than IPOs: "But for another thing, a lot of people are dissatisfied with the process for selling stock; they think that investment banks make too much money and do not have issuers’ interests at heart, and so they are looking for ways to sell stock more cheaply and to cut out the role of the investment banks. And the ways that they have discovered, the methods that they tout to cut out the middleman and free companies from the tyranny of Wall Street banks, all involve (1) hiring Wall Street banks and (2) paying them tons of money. It’s so good! [...] Venture capitalists and SPAC sponsors sometimes suggest that this is a way to cut out Wall Street and avoid expense, but that is not true. Not only is the SPAC expensive because its sponsor—the person who sets up the shell company and searches for a target to take public—charges for her efforts, but the SPAC also has to pay banks to do its own IPO. And maybe to search for the target, execute the merger, and otherwise be around to provide banking services. And so, unsurprisingly, banks love SPACs. [...] This is really the kind of business you want to be in, the kind where (1) it is so lucrative that your customers are constantly complaining that you make too much money, but (2) when they want to disrupt your business, they come to you to disrupt it and pay you even more money."[1] Another article mentions that companies sometimes prefer merging with SPACs than having an IPO in volatile markets due to the uncertainty involved in an IPO: "Compared to an IPO, the SPAC is much less risky for the company: You sign a deal with one person (the SPAC sponsor) for a fixed amount of money (what’s in the SPAC pool 2 ) at a negotiated price, and then you sign and announce the deal and it probably gets done. With an IPO, you announce the deal before negotiating the size or price, and you don’t know if anyone will go for it until after you’ve announced it and started marketing it. Things could go wrong in embarrassing public fashion. In volatile times, that certainty is worth a lot more, so companies are looking for it. [...] There is a problem, a risk: Companies want to go public, but they are worried about the risk of the market collapsing. There is a solution, a holder of the risk: A SPAC will take a company public in a fully sold deal with a fixed price and size, so they don’t have to worry about the market collapsing. There is a price: The SPAC doesn’t take this risk because it is nice, or foolish; it takes this risk because it expects to make much more money than a typical IPO investor. In normal times, the risk is low, the compensation is low, and the tool is not used that much. In volatile times, the risk is high, the compensation is high, and people talk about SPACs a lot." [2] He then goes on to note that SPACs have their risks too, including the same kind of public embarrassment that an IPO can bring. The share-holders of the SPAC can vote against an announced merger, which happened last year when the investors of the SPAC Far Point decided against merging with the company Global Blue. "Ordinarily, in a public-company merger, if a board of directors changes its mind like this it needs to pay the other side a big termination fee, but SPACs are just pots of money held in trust for public shareholders so its harder to do that; the Far Point merger agreement has no termination fees. Just as in an IPO, the deal isn’t really done until you get the cash, and while you’re more likely to get the cash in a SPAC merger than in an IPO, there’s still some risk." [2] [1] https://www.bloomberg.com/opinion/articles/2020-07-30/kodak-is-relevant-again https://www.bloomberg.com/opinion/articles/2020-07-30/kodak-... [2] https://www.bloomberg.com/opinion/articles/2020-07-14/everyone-wants-a-blank-check https://www.bloomberg.com/opinion/articles/2020-07-14/everyo...
cj 6y ago
Just one example of why SPACs need to be looked at from a regulatory perspective: https://www.cnbc.com/2021/02/05/chamath-palihapitiya-backed-clover-health-gets-notice-of-sec-investigation.html https://www.cnbc.com/2021/02/05/chamath-palihapitiya-backed-... In short, Clover Health is going public via a SPAC, but never disclosed it was under investigation by the DOJ. > Clover said it decided it did not need to disclose the DOJ inquiries after consultation with its lawyers. The company did not say what the DOJ’s inquiries were about. SPACs short-cut disclosure requirements, making it easier for companies to go public without the typical scrutiny that comes with the IPO process.
- optimiz3 6y ago
  Not long ago short sellers were claiming Tesla was in trouble with the DoJ over the Model 3. Ended up a big nothing; we don't know if there is any meat here. https://www.cnbc.com/amp/2018/11/02/tesla-says-doj-and-sec-are-investigating-model-3-production-targets.html https://www.cnbc.com/amp/2018/11/02/tesla-says-doj-and-sec-a...
  - cj 6y ago
    Yes, very possible there is zero meat to the actual investigation. And very possible it's just the short seller pushing a narrative to drive the price down. But how do we know the truth when there are no disclosures? As an investor, you should have a right to be informed of investment risks. An active/ongoing DOJ investigation (even if routine) seems like something investors would need to be aware of to make an informed investment decision.
- woah 6y ago
  Chamath first came to my attention last week when he introduced his run for California governor by promising to give everyone free money and cut taxes to zero. He then bought into GameStop stock, pumped it, and sold at the top while many gullible fools lost their life savings. What a shady dude.
  - optimiz3 6y ago
sradman 6y ago
> A special purpose acquisition company (SPAC) is a "blank check" shell corporation designed to take companies public without going through the traditional IPO process. https://en.wikipedia.org/wiki/Special-purpose_acquisition_company https://en.wikipedia.org/wiki/Special-purpose_acquisition_co...
abledon 6y ago
I know its high risk... but some of those space oriented SPACs are just so tantalizing, anything to get closer to investing in SpaceX...
- blackearl 6y ago
  Space industry will a money black hole for a while longer IMO. I suppose it didn't really matter to every other disruptive startup so maybe stocks only go up /s
- bartc 6y ago
  SPAC seems preferable for companies with an inexperienced board or who are trying to hide something from the public before listing their stock. I imagine SpaceX will eventually go public via more traditional means and there's a good chance it's the first trillion dollar IPO IMHO.
- Rebelgecko 6y ago
  If you want to invest in SpaceX, Fidelity has some funds that are basically S&P500+SpaceX. SpaceX is a small percent of the funds (like 0.5%), but if you were gonna invest in Apple/Facebook/Amazon/Visa anyways that's not the end of the world
- reducesuffering 6y ago
  None of those space companies are doing anything like SpaceX. You might as well just buy $GOOGL which had a 5-10% stake (probably some dilution now) in SpaceX. Although that value is probably only 1% of $GOOGL so you better hope SpaceX 100x’s for a 2x $GOOGL gain.
  - abledon 6y ago
    a few are being used currently by spaceX for last mile delivery.
paxys 6y ago
I cannot believe this game hasn't been shut down by the SEC yet.
- rantwasp 6y ago
  hahahah. yes, SEC needs to shut this down. it’s right on their list after punishing hedge funds for shortselling shares that don’t exist. /s
  - thefreeman 6y ago
    cmon man. it's been explained countless times how short interest could be over 100% without anyone short selling shares that don't exist. if you still don't understand it you are essentially hiding your head in the sand to try to deny reality.
    - jtdev 6y ago
      I'd love to see where this has been explained. I've not seen this anywhere.
      - mikeyouse 6y ago
        One such example: https://www.fool.com/investing/2021/01/28/yes-a-stock-can-have-short-interest-over-100-heres/ https://www.fool.com/investing/2021/01/28/yes-a-stock-can-ha... > As an example, take a situation involving four investors. Annie owns shares of GameStop, and Annie and her broker have an agreement that allows the broker to lend Annie's shares to short-sellers. It lends them to Bob, who subsequently sells those borrowed shares short in hopes that GameStop's share price will fall. > An investor named Chris ends up buying those borrowed shares from Bob. However, Chris has no way of knowing that those shares have been borrowed from Annie. To Chris, they're just like any other shares. > More importantly, if Chris has the same kind of agreement, then Chris's broker can lend out those shares to yet another investor. Diane, another GameStop bear, can borrow those shares and sell them short. > In this example, the same shares end up getting borrowed and sold twice. The short interest volume these transactions add to the total is twice the number of shares actually involved. You can therefore see that if this happened throughout the market, total short interest would eventually exceed the number of shares outstanding and approach 200%.
mrlonglong 6y ago
I'm definitely a geek at heart, I misread the title as a sober look at SPARCs!
nicholast 6y ago
I'm reading this to imply that as a general rule of thumb, in recent times SPACs have been a better deal for the company going public than for the SPAC investors. That outsized returns exist but are not the norm. There was a good resource linked in one of the footnotes that is a much more concise summary: "SPAC Attack: everything a founder or investor should know" https://luttig.substack.com/p/spac-attack-everything-a-founder https://luttig.substack.com/p/spac-attack-everything-a-found...
goat_whisperer 6y ago
I didn't know a great deal about SPACs, but it looks like the real winners are the initial Sponsors and IPO investors, while the losers are the suckers who pay shares after the SPAC merges with the target company. Let's examine how convoluted the SPAC process is. First, a SPAC raises money through an IPO that it will use to merge with a target company. Then, when the SPAC finds a target and proposes a merger, many of the initial IPO investors redeem their investment at a handsome guaranteed return....so then the SPAC has to go out and raise more money through private placements?!? What?! Isn't the whole point of the SPAC to raise funds to complete the merger? As a rule of thumb, the more convoluted things get in finance, the more nefarious the intentions
- DebtDeflation 6y ago
  >As a rule of thumb, the more convoluted things get in finance, the more nefarious the intentions Many years ago, the quote I heard went something like, "There are only 3 real asset classes: Equities, Fixed Income, and instruments designed to make money for Wall Street. Colloquially known as Stocks, Bonds, and Bullshit."
  - mnadkvlb 6y ago
    Such an underrated comment !! +1
  - nopzor 6y ago
    what’s the difference between equities and stocks?
    - mynegation 6y ago
      Equity is an asset class. It includes stocks for sure, but holdings in index funds, ETFs, private equity investments, venture capital are also examples of equities.
      - nopzor 6y ago
        index funds (of stock), private equity investments (generally stock), and vc equity investments (of private stock) are all also “stocks”.
foxhop 6y ago
Checkout UWMC for a long term SPAC play.
csours 6y ago
Has anyone seen a good explanation with graphics on how the money and dilution work for SPACs?
- Lazare 6y ago
  Some good info here, if you follow the links and read the footnotes: https://www.bloomberg.com/news/newsletters/2021-01-08/money-stuff-spac-magic-isn-t-free https://www.bloomberg.com/news/newsletters/2021-01-08/money-...
vtantia 6y ago
Whenever you have some instrument attacking Wall Street (in this case, the IPO itself), papers come out trying to protect them. This does not mention drawbacks of the IPO the SPAC is getting rid of - the 6-7% investment banking fee, the hassle of doing several roadshows, the near 100% IPO pop due to which the company raises half of what it would have (amounting to a 50% fee so to say which goes into the pockets of institutional investors) amid other things. It is sad that critical reasoning is dead on HN. Nothing is ever purely good or purely bad. An impartial cost-benefit analysis needs to be done which is sadly impossible for someone whose funding comes from the deep pockets of Wall Street and institutional investors. I have not even begun diving into the benefits of SPACs - some of which are the opportunity for audacious bets like Virgin Galactic holdings which Wall Street would assume to be a loss making company, benefits of PIPEs in SPACs (which would be the topic for a whole new post), the speed of going public.
- supercanuck 6y ago
  > It is sad that critical reasoning is dead on HN What? > An impartial cost-benefit analysis needs to be done >I have not even begun >… Wall Street would assume It would seem irony is not dead.
  - vtantia 6y ago
    Look at the comments below which mention 1 bullet point and do not look holistically at the problem and the solution. I have been finding this to be the case on a lot of HN comments recently I do not claim to be making an impartial analysis myself. Just putting out some points which have been omitted by the Wall Street-funded academic paper
    - andylei 6y ago
      > by the Wall Street-funded academic paper citation needed
      - vtantia 6y ago
        Good point. Unfortunately, I couldn't find where their funding comes from from a quick cursory search (and I don't just mean the funding for graduate students, or salaries). If anyone could provide details about this, I would much appreciate it
HNfriend234 6y ago
I invest in SPACs regularly and have made a killing off investing in them. Plain and simple, SPACs are all about hype in terms of how much hype the target company can garner. I only buy pre-LOI SPACs and then consider selling them on the merger announcement or right before the merger completes. This strategy works because of social media. People go around social media to hype up the company so to a certain extent it is a giant pump and dump scheme but the pumping is done by the collective internet communities on social media. Typical aspects of the company don't matter. What matters is being able to hype the company. That's why stuff like electric vehicle makers, fintech and clean energy is stuff that everyone focuses on. Right now the average joe strongly believes that electric cars and clean energy are the future so they're more likely to buy into these SPAC companies because they're sold as "the next big thing" even though the reality could be that they're very risky but no one cares about that long-term because we all dump the SPAC shares before the merger completes anyways.
- ashika 6y ago
  >but no one cares about that long-term indeed. and i congratulate you on your recent success in predicting the tastes of others who buy equities based on speculative price action. spac management likely makes their decisions largely focused on share price, which i suppose as an equity investor would feel like they have your back. but when you consider the role equity is meant to play in corporate finance, you would concede that in an ideal world management would not pay attention to share price at all, they would be working on making the most money possible using the assets and equity they already had, and then either returning or reinvesting those profits. the equity markets will always have a chaotic bent in the short term, so we should be careful of the ways we let them influence policy. its really a circular dependency if you think about it.
  - dasm 6y ago
    It seems you are implying that this sort of arrangement is fundamentally unhealthy for a market focused on accurate price discovery, and I think that's trivially true. Some investing incentives are aligned with accurate price discovery, some are not (warren buffet vs a pump and dump).
sriram_sun 6y ago
If a "promising startup" uses SPAC money to go from series B to public, that would be a good proposition for the public. Something like 23 and Me after seed round F has already been picked clean even before they enter the public markets!
mooreds 6y ago
Marketplace did an deep dive into SPACs a few days ago: https://www.marketplace.org/shows/make-me-smart-with-kai-and-molly/spacs-are-turning-wall-street-into-silicon-valley/ https://www.marketplace.org/shows/make-me-smart-with-kai-and... Seems like pure regulatory arbitrage to this guy. Edit: Bonus, it's also a pump and dump scheme!
snarkypixel 6y ago
My slightly different look on SPACs: SPACs are more like Handshake deals. When two people trust each others, you can save a lot of time and money with a handshake deal. You agree on something, and then (optionally) get lawyers do the paperwork. I find SPACs similar because investors and the SPAC owners have a mutual trust about smartly using that raised money to bring a great companies public. You can totally get burned, but personally I trust someone like Chamath to make great decisions. So, in my view, I've got a handshake deal with him where he smartly uses my capital to bring great companies public. It's a win win.
RhodoGSA 6y ago
Imagine if Elon made a SPAC. I'd invest every penny I had.
deleted 6y ago
[deleted]
littlemtman 6y ago
99% of SPACs are scam. They really are, because if they weren't going public via an IPO there must be something wrong and if not they had reasons why not to go public, smarter for companies working on government projects etc.

135 points by cinntaile 6y ago

For a potentially more accessible version of this, Matt Levine wrote about the paper when it came out: https://www.bloomberg.com/news/newsletters/2021-01-08/money-stuff-spac-magic-isn-t-free https://www.bloomberg.com/news/newsletters/2021-01-08/money-... There's also a summary blog post here: https://corpgov.law.harvard.edu/2020/11/19/a-sober-look-at-spacs/ https://corpgov.law.harvard.edu/2020/11/19/a-sober-look-at-s...

benkoller 6y ago
The Matt Levine article is a great summary, thanks for sharing.
bombastry 6y ago
It's worth noting that Matt Levine has a lot of other good writing on SPACs. (And economics in general. To anyone reading this comment, I highly recommend his daily newsletter "Money Stuff", which is where these excerpts come from). On how SPACs can end up giving more money to banks than IPOs: "But for another thing, a lot of people are dissatisfied with the process for selling stock; they think that investment banks make too much money and do not have issuers’ interests at heart, and so they are looking for ways to sell stock more cheaply and to cut out the role of the investment banks. And the ways that they have discovered, the methods that they tout to cut out the middleman and free companies from the tyranny of Wall Street banks, all involve (1) hiring Wall Street banks and (2) paying them tons of money. It’s so good! [...] Venture capitalists and SPAC sponsors sometimes suggest that this is a way to cut out Wall Street and avoid expense, but that is not true. Not only is the SPAC expensive because its sponsor—the person who sets up the shell company and searches for a target to take public—charges for her efforts, but the SPAC also has to pay banks to do its own IPO. And maybe to search for the target, execute the merger, and otherwise be around to provide banking services. And so, unsurprisingly, banks love SPACs. [...] This is really the kind of business you want to be in, the kind where (1) it is so lucrative that your customers are constantly complaining that you make too much money, but (2) when they want to disrupt your business, they come to you to disrupt it and pay you even more money."[1] Another article mentions that companies sometimes prefer merging with SPACs than having an IPO in volatile markets due to the uncertainty involved in an IPO: "Compared to an IPO, the SPAC is much less risky for the company: You sign a deal with one person (the SPAC sponsor) for a fixed amount of money (what’s in the SPAC pool 2 ) at a negotiated price, and then you sign and announce the deal and it probably gets done. With an IPO, you announce the deal before negotiating the size or price, and you don’t know if anyone will go for it until after you’ve announced it and started marketing it. Things could go wrong in embarrassing public fashion. In volatile times, that certainty is worth a lot more, so companies are looking for it. [...] There is a problem, a risk: Companies want to go public, but they are worried about the risk of the market collapsing. There is a solution, a holder of the risk: A SPAC will take a company public in a fully sold deal with a fixed price and size, so they don’t have to worry about the market collapsing. There is a price: The SPAC doesn’t take this risk because it is nice, or foolish; it takes this risk because it expects to make much more money than a typical IPO investor. In normal times, the risk is low, the compensation is low, and the tool is not used that much. In volatile times, the risk is high, the compensation is high, and people talk about SPACs a lot." [2] He then goes on to note that SPACs have their risks too, including the same kind of public embarrassment that an IPO can bring. The share-holders of the SPAC can vote against an announced merger, which happened last year when the investors of the SPAC Far Point decided against merging with the company Global Blue. "Ordinarily, in a public-company merger, if a board of directors changes its mind like this it needs to pay the other side a big termination fee, but SPACs are just pots of money held in trust for public shareholders so its harder to do that; the Far Point merger agreement has no termination fees. Just as in an IPO, the deal isn’t really done until you get the cash, and while you’re more likely to get the cash in a SPAC merger than in an IPO, there’s still some risk." [2] [1] https://www.bloomberg.com/opinion/articles/2020-07-30/kodak-is-relevant-again https://www.bloomberg.com/opinion/articles/2020-07-30/kodak-... [2] https://www.bloomberg.com/opinion/articles/2020-07-14/everyone-wants-a-blank-check https://www.bloomberg.com/opinion/articles/2020-07-14/everyo...

cj 6y ago

Just one example of why SPACs need to be looked at from a regulatory perspective: https://www.cnbc.com/2021/02/05/chamath-palihapitiya-backed-clover-health-gets-notice-of-sec-investigation.html https://www.cnbc.com/2021/02/05/chamath-palihapitiya-backed-... In short, Clover Health is going public via a SPAC, but never disclosed it was under investigation by the DOJ. > Clover said it decided it did not need to disclose the DOJ inquiries after consultation with its lawyers. The company did not say what the DOJ’s inquiries were about. SPACs short-cut disclosure requirements, making it easier for companies to go public without the typical scrutiny that comes with the IPO process.

optimiz3 6y ago
Not long ago short sellers were claiming Tesla was in trouble with the DoJ over the Model 3. Ended up a big nothing; we don't know if there is any meat here. https://www.cnbc.com/amp/2018/11/02/tesla-says-doj-and-sec-are-investigating-model-3-production-targets.html https://www.cnbc.com/amp/2018/11/02/tesla-says-doj-and-sec-a...
- cj 6y ago
  Yes, very possible there is zero meat to the actual investigation. And very possible it's just the short seller pushing a narrative to drive the price down. But how do we know the truth when there are no disclosures? As an investor, you should have a right to be informed of investment risks. An active/ongoing DOJ investigation (even if routine) seems like something investors would need to be aware of to make an informed investment decision.
woah 6y ago
Chamath first came to my attention last week when he introduced his run for California governor by promising to give everyone free money and cut taxes to zero. He then bought into GameStop stock, pumped it, and sold at the top while many gullible fools lost their life savings. What a shady dude.
- optimiz3 6y ago

sradman 6y ago

> A special purpose acquisition company (SPAC) is a "blank check" shell corporation designed to take companies public without going through the traditional IPO process. https://en.wikipedia.org/wiki/Special-purpose_acquisition_company https://en.wikipedia.org/wiki/Special-purpose_acquisition_co...

abledon 6y ago

I know its high risk... but some of those space oriented SPACs are just so tantalizing, anything to get closer to investing in SpaceX...

blackearl 6y ago
Space industry will a money black hole for a while longer IMO. I suppose it didn't really matter to every other disruptive startup so maybe stocks only go up /s
bartc 6y ago
SPAC seems preferable for companies with an inexperienced board or who are trying to hide something from the public before listing their stock. I imagine SpaceX will eventually go public via more traditional means and there's a good chance it's the first trillion dollar IPO IMHO.
Rebelgecko 6y ago
If you want to invest in SpaceX, Fidelity has some funds that are basically S&P500+SpaceX. SpaceX is a small percent of the funds (like 0.5%), but if you were gonna invest in Apple/Facebook/Amazon/Visa anyways that's not the end of the world
reducesuffering 6y ago
None of those space companies are doing anything like SpaceX. You might as well just buy $GOOGL which had a 5-10% stake (probably some dilution now) in SpaceX. Although that value is probably only 1% of $GOOGL so you better hope SpaceX 100x’s for a 2x $GOOGL gain.
- abledon 6y ago
  a few are being used currently by spaceX for last mile delivery.

paxys 6y ago

I cannot believe this game hasn't been shut down by the SEC yet.

rantwasp 6y ago
hahahah. yes, SEC needs to shut this down. it’s right on their list after punishing hedge funds for shortselling shares that don’t exist. /s
- thefreeman 6y ago
  cmon man. it's been explained countless times how short interest could be over 100% without anyone short selling shares that don't exist. if you still don't understand it you are essentially hiding your head in the sand to try to deny reality.
  - jtdev 6y ago
    I'd love to see where this has been explained. I've not seen this anywhere.
    - mikeyouse 6y ago
      One such example: https://www.fool.com/investing/2021/01/28/yes-a-stock-can-have-short-interest-over-100-heres/ https://www.fool.com/investing/2021/01/28/yes-a-stock-can-ha... > As an example, take a situation involving four investors. Annie owns shares of GameStop, and Annie and her broker have an agreement that allows the broker to lend Annie's shares to short-sellers. It lends them to Bob, who subsequently sells those borrowed shares short in hopes that GameStop's share price will fall. > An investor named Chris ends up buying those borrowed shares from Bob. However, Chris has no way of knowing that those shares have been borrowed from Annie. To Chris, they're just like any other shares. > More importantly, if Chris has the same kind of agreement, then Chris's broker can lend out those shares to yet another investor. Diane, another GameStop bear, can borrow those shares and sell them short. > In this example, the same shares end up getting borrowed and sold twice. The short interest volume these transactions add to the total is twice the number of shares actually involved. You can therefore see that if this happened throughout the market, total short interest would eventually exceed the number of shares outstanding and approach 200%.

mrlonglong 6y ago

I'm definitely a geek at heart, I misread the title as a sober look at SPARCs!

nicholast 6y ago

I'm reading this to imply that as a general rule of thumb, in recent times SPACs have been a better deal for the company going public than for the SPAC investors. That outsized returns exist but are not the norm. There was a good resource linked in one of the footnotes that is a much more concise summary: "SPAC Attack: everything a founder or investor should know" https://luttig.substack.com/p/spac-attack-everything-a-founder https://luttig.substack.com/p/spac-attack-everything-a-found...

goat_whisperer 6y ago

I didn't know a great deal about SPACs, but it looks like the real winners are the initial Sponsors and IPO investors, while the losers are the suckers who pay shares after the SPAC merges with the target company. Let's examine how convoluted the SPAC process is. First, a SPAC raises money through an IPO that it will use to merge with a target company. Then, when the SPAC finds a target and proposes a merger, many of the initial IPO investors redeem their investment at a handsome guaranteed return....so then the SPAC has to go out and raise more money through private placements?!? What?! Isn't the whole point of the SPAC to raise funds to complete the merger? As a rule of thumb, the more convoluted things get in finance, the more nefarious the intentions

DebtDeflation 6y ago
>As a rule of thumb, the more convoluted things get in finance, the more nefarious the intentions Many years ago, the quote I heard went something like, "There are only 3 real asset classes: Equities, Fixed Income, and instruments designed to make money for Wall Street. Colloquially known as Stocks, Bonds, and Bullshit."
- mnadkvlb 6y ago
  Such an underrated comment !! +1
- nopzor 6y ago
  what’s the difference between equities and stocks?
  - mynegation 6y ago
    Equity is an asset class. It includes stocks for sure, but holdings in index funds, ETFs, private equity investments, venture capital are also examples of equities.
    - nopzor 6y ago
      index funds (of stock), private equity investments (generally stock), and vc equity investments (of private stock) are all also “stocks”.

foxhop 6y ago

Checkout UWMC for a long term SPAC play.

csours 6y ago

Has anyone seen a good explanation with graphics on how the money and dilution work for SPACs?

Lazare 6y ago
Some good info here, if you follow the links and read the footnotes: https://www.bloomberg.com/news/newsletters/2021-01-08/money-stuff-spac-magic-isn-t-free https://www.bloomberg.com/news/newsletters/2021-01-08/money-...

vtantia 6y ago

Whenever you have some instrument attacking Wall Street (in this case, the IPO itself), papers come out trying to protect them. This does not mention drawbacks of the IPO the SPAC is getting rid of - the 6-7% investment banking fee, the hassle of doing several roadshows, the near 100% IPO pop due to which the company raises half of what it would have (amounting to a 50% fee so to say which goes into the pockets of institutional investors) amid other things. It is sad that critical reasoning is dead on HN. Nothing is ever purely good or purely bad. An impartial cost-benefit analysis needs to be done which is sadly impossible for someone whose funding comes from the deep pockets of Wall Street and institutional investors. I have not even begun diving into the benefits of SPACs - some of which are the opportunity for audacious bets like Virgin Galactic holdings which Wall Street would assume to be a loss making company, benefits of PIPEs in SPACs (which would be the topic for a whole new post), the speed of going public.

supercanuck 6y ago
> It is sad that critical reasoning is dead on HN What? > An impartial cost-benefit analysis needs to be done >I have not even begun >… Wall Street would assume It would seem irony is not dead.
- vtantia 6y ago
  Look at the comments below which mention 1 bullet point and do not look holistically at the problem and the solution. I have been finding this to be the case on a lot of HN comments recently I do not claim to be making an impartial analysis myself. Just putting out some points which have been omitted by the Wall Street-funded academic paper
  - andylei 6y ago
    > by the Wall Street-funded academic paper citation needed
    - vtantia 6y ago
      Good point. Unfortunately, I couldn't find where their funding comes from from a quick cursory search (and I don't just mean the funding for graduate students, or salaries). If anyone could provide details about this, I would much appreciate it

HNfriend234 6y ago

I invest in SPACs regularly and have made a killing off investing in them. Plain and simple, SPACs are all about hype in terms of how much hype the target company can garner. I only buy pre-LOI SPACs and then consider selling them on the merger announcement or right before the merger completes. This strategy works because of social media. People go around social media to hype up the company so to a certain extent it is a giant pump and dump scheme but the pumping is done by the collective internet communities on social media. Typical aspects of the company don't matter. What matters is being able to hype the company. That's why stuff like electric vehicle makers, fintech and clean energy is stuff that everyone focuses on. Right now the average joe strongly believes that electric cars and clean energy are the future so they're more likely to buy into these SPAC companies because they're sold as "the next big thing" even though the reality could be that they're very risky but no one cares about that long-term because we all dump the SPAC shares before the merger completes anyways.

ashika 6y ago
>but no one cares about that long-term indeed. and i congratulate you on your recent success in predicting the tastes of others who buy equities based on speculative price action. spac management likely makes their decisions largely focused on share price, which i suppose as an equity investor would feel like they have your back. but when you consider the role equity is meant to play in corporate finance, you would concede that in an ideal world management would not pay attention to share price at all, they would be working on making the most money possible using the assets and equity they already had, and then either returning or reinvesting those profits. the equity markets will always have a chaotic bent in the short term, so we should be careful of the ways we let them influence policy. its really a circular dependency if you think about it.
- dasm 6y ago
  It seems you are implying that this sort of arrangement is fundamentally unhealthy for a market focused on accurate price discovery, and I think that's trivially true. Some investing incentives are aligned with accurate price discovery, some are not (warren buffet vs a pump and dump).

sriram_sun 6y ago

If a "promising startup" uses SPAC money to go from series B to public, that would be a good proposition for the public. Something like 23 and Me after seed round F has already been picked clean even before they enter the public markets!

mooreds 6y ago

Marketplace did an deep dive into SPACs a few days ago: https://www.marketplace.org/shows/make-me-smart-with-kai-and-molly/spacs-are-turning-wall-street-into-silicon-valley/ https://www.marketplace.org/shows/make-me-smart-with-kai-and... Seems like pure regulatory arbitrage to this guy. Edit: Bonus, it's also a pump and dump scheme!

snarkypixel 6y ago

My slightly different look on SPACs: SPACs are more like Handshake deals. When two people trust each others, you can save a lot of time and money with a handshake deal. You agree on something, and then (optionally) get lawyers do the paperwork. I find SPACs similar because investors and the SPAC owners have a mutual trust about smartly using that raised money to bring a great companies public. You can totally get burned, but personally I trust someone like Chamath to make great decisions. So, in my view, I've got a handshake deal with him where he smartly uses my capital to bring great companies public. It's a win win.

RhodoGSA 6y ago

Imagine if Elon made a SPAC. I'd invest every penny I had.

deleted 6y ago

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littlemtman 6y ago

99% of SPACs are scam. They really are, because if they weren't going public via an IPO there must be something wrong and if not they had reasons why not to go public, smarter for companies working on government projects etc.