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Weak companies that didn't want the public scrutiny of a traditional IPO but wanted big investor bucks used SPACs and are now failing because they're weak. Tota

Weak companies that didn't want the public scrutiny of a traditional IPO but wanted big investor bucks used SPACs and are now failing because they're weak. Totally unsurprising. SPACs should require the same public disclosure that is required in an IPO.

bradleyjg 4y ago
Why? It’s not like these are pink sheet companies being sold out of boiler rooms to retirees. The people losing their shirts on these SPACs are greedy gamblers. I don’t think we need to waste regulation resources protecting them from themselves. There are polluters and things to spend time on instead.
- cyanydeez 4y ago
  Gamblers always have leverage and your attitude ignores the systemic risk when these gamblers leverage themselves 30x chasing capital for billionaires?
  - eftychis 4y ago
    Given the terms -- funds are retained contingent on a deal and confirmation of the deal -- I wouldn't call that a gamble. Gamble would be keeping the stock after the fact or buying it post formation -- if it was a "less valuable company." Also I think at some point we need to reconsider the bail out approach of lending companies because they are too big to fail. Also separating institutions and trimming through their lending money practices makes better sense than bailing them out, because "too big too fail." When I borrow money I am assigned an interest plus collateral rate based on the inflation/cost of money at the time+projected and my risk of defaulting. On average the "bank" has zero risk (and I have liquidity). If the bank gets greedy and like some institutions that we are all well aware of in the recent years, forgets to do basic risk planning and hedge appropriately flounders that, then if most people default it is their fault -- people paid them for that event. Start bankruptcy proceedings, liquidate/fire the executive team, absorb valuable teams/assets, renegotiate with company's lenders and move on. This happens constantly B2B. Business bankruptcy is different than individual one (at least in the U.S. and some other E.U. countries I am familiar with) -- due to liability plus other measures. Somehow politicians came into the story of systemic risk and allowed certain parts of the economy to become immune to such issues... (Which lead to the Wall Street/Big Bank cockiness.)
  - t-3 4y ago
    If the system faces risk because it can't tell a good borrower from a gambler, it deserves to fail. The corpses of those lacking good judgement will serve double duty as object lesson and food for a new generation.
- ac29 4y ago
  After IPO, large index funds are picking up these de-SPAC companies. So, I think its not just "greedy gamblers" who are exposed to losses - conservatively invested retirees are taking losses too.
  - stickfigure 4y ago
    What large index funds, what companies? Do you have any examples?
    - yareally 4y ago
      The Russell 2000 (IWM). Pretty big index. https://finance.yahoo.com/quote/IWM/holdings/ https://finance.yahoo.com/quote/IWM/holdings/
      - rajup 4y ago
        If it's a pretty big index it's unlikely a company going bust here or there is a big deal.
      - stickfigure 4y ago
        That's half the answer but still not enough information. What de-SPAC companies are part of that index? What percentage of the index do they represent?
    - ac29 4y ago
      VTI (Vanguard's Total US Market) owns SPCE, CLOV, and SOFI (the only three I looked up). All three currently trade below IPO price.
  - systemvoltage 4y ago
    Then let’s change the way these funds built their portfolios. More regulation isn’t the right answer.
  - mccorrinall 4y ago
    Uh, then they shouldn’t pick up squoze stocks like AMC and GME either? I don’t agree.
bobbylarrybobby 4y ago
Well, the rules of a SPAC are that if it doesn't close then the investors get their money back, and the "leader" (I don't know the technical term) of the SPAC just loses out on any money, time, and effort spent trying to close a deal. Not sure what disclosure that would warrant for investors except "make sure you ask for interest when you get your money back".
- maxfurman 4y ago
  Isn't the bigger risk that the SPAC closes at an insanely inflated price and the investors get stuck holding the bag?
  - MichaelBurge 4y ago
    No, because the investors can individually choose to decline the deal and get their money back with interest. Any investors remaining after the deal closes implicitly agreed to the closing price. I don't think there were any cases of a SPAC not returning deposit money if someone asked, and the institutional investors generally preferred the "guaranteed return" over gambling so the redemption percentage was quite high(I think 50%+).
  - MangoCoffee 4y ago
    SPAC investors can back out for example: Buzzfeed https://nypost.com/2021/12/02/buzzfeed-investors-pull-funds-as-company-plans-to-go-public-via-spac/ https://nypost.com/2021/12/02/buzzfeed-investors-pull-funds-...
- paxys 4y ago
  In this case the article is talking about the SPACs that did "close", but the combined company is possibly not going to stay afloat for another year.
  - sbarre 4y ago
    And that's a possibility for any business... Private businesses are run into the ground all the time, including those that raise funds through friends & family or angel investors... (Not saying you're implying otherwise here, just building on the fact that a closed SPAC is not more guaranteed to be a stable business any more than a private business).
refurb 4y ago
There are a lot of reasons for going public through paths other than an IPO other than your company is “weak”.
- al_borland 4y ago
  What are some of the reasons? I'm no SPAC expert. When I first heard about them I wrote them off almost immediately and never had an interest to dig in any further. It seemed like the business equivalent of a subprime mortgage and it was only a matter of time before it caught up with them.
  - sbarre 4y ago
    One reason that I've understood is if you're a smaller company that can't afford the whole IPO process, this is a way to get access to public markets in a simpler/faster/cheaper way.
    - al_borland 4y ago
      Those justifications fit well with my subprime mortgage equivalency. Fast, easy, and cheep money for people who aren't ready and aren't willing to wait until they are ready. That throws up red flags for me and makes me wonder what else they may have cut corners on in the name of speed or cost cutting. I think I saw in another comment that it may be due to investors looking to get their money out, so maybe there is pressure there. I understand investors not wanting to take 10 years to see returns, but not if it comes at the expense of the business. I don't know all the ethics around startup investing, but if we start seeing a lot of these business go south (significantly more than traditional IPOs), a line may have been crossed. This could be a means to shift what used to be pre-IPO investment risk over to public investors if things start to look shaky internally. Again, I'm not expert, just spitballing.
      - refurb 4y ago
        The IPO process is incredibly burdensome. You basically can't tap public equity markets without being a very large business. Otherwise you can't justify the time and expense. I see the similarity to sub-prime mortgages, but the differences are: 1) this is the stock market so I don't think anyone doesn't understand the risks, 2) SPACs are no where big enough to drag down the rest of the market. Before SPACs, companies would do reverse mergers. A basically bankrupt public company "buys" a private company and merges. Swap the private equity for public and now you're a public company with far less hassle than an IPO.
loeg 4y ago
I believe the SEC has recently started requiring similar disclosures for SPACs (but historically did not).
awsrocks 4y ago
pbreit 4y ago
Is there any inherent or structural reason why SPACing would make a company worse off than IPOing? Or is it just that weaker companies choose to SPAC?
- throwaway_1928 4y ago
  The incentives are misaligned with SPACs. If I gave you $1 billion and said: 1. buy a company within 2 years and keep 20% of the equity of that company for yourself. You do not need to hold that equity for the long term. You can sell that 20% equity immediately and pocket the proceeds. 2. do not buy a company within 2 years and return the $1 billion to me with interest. If you had to choose between buying a trashy company and pocketing $200 million or returning me the $1 billion and pocketing nothing, which would you choose?
  - donavanm 4y ago
    Also in case 1, of a sale, you can issue additional warrants to “friends” and key “investors” as an incentive. Which further dilutes the actual post merger equity pool that everyone is buying in to. SPACs are free money for early investors at the cost of everyone else whos too small to get sweetheart terms or actually sticks with the equities.
  - pbreit 4y ago
    So, the latter?

bradleyjg 4y ago

Why? It’s not like these are pink sheet companies being sold out of boiler rooms to retirees. The people losing their shirts on these SPACs are greedy gamblers. I don’t think we need to waste regulation resources protecting them from themselves. There are polluters and things to spend time on instead.

cyanydeez 4y ago
Gamblers always have leverage and your attitude ignores the systemic risk when these gamblers leverage themselves 30x chasing capital for billionaires?
- eftychis 4y ago
  Given the terms -- funds are retained contingent on a deal and confirmation of the deal -- I wouldn't call that a gamble. Gamble would be keeping the stock after the fact or buying it post formation -- if it was a "less valuable company." Also I think at some point we need to reconsider the bail out approach of lending companies because they are too big to fail. Also separating institutions and trimming through their lending money practices makes better sense than bailing them out, because "too big too fail." When I borrow money I am assigned an interest plus collateral rate based on the inflation/cost of money at the time+projected and my risk of defaulting. On average the "bank" has zero risk (and I have liquidity). If the bank gets greedy and like some institutions that we are all well aware of in the recent years, forgets to do basic risk planning and hedge appropriately flounders that, then if most people default it is their fault -- people paid them for that event. Start bankruptcy proceedings, liquidate/fire the executive team, absorb valuable teams/assets, renegotiate with company's lenders and move on. This happens constantly B2B. Business bankruptcy is different than individual one (at least in the U.S. and some other E.U. countries I am familiar with) -- due to liability plus other measures. Somehow politicians came into the story of systemic risk and allowed certain parts of the economy to become immune to such issues... (Which lead to the Wall Street/Big Bank cockiness.)
- t-3 4y ago
  If the system faces risk because it can't tell a good borrower from a gambler, it deserves to fail. The corpses of those lacking good judgement will serve double duty as object lesson and food for a new generation.
ac29 4y ago
After IPO, large index funds are picking up these de-SPAC companies. So, I think its not just "greedy gamblers" who are exposed to losses - conservatively invested retirees are taking losses too.
- stickfigure 4y ago
  What large index funds, what companies? Do you have any examples?
  - yareally 4y ago
    The Russell 2000 (IWM). Pretty big index. https://finance.yahoo.com/quote/IWM/holdings/ https://finance.yahoo.com/quote/IWM/holdings/
    - rajup 4y ago
      If it's a pretty big index it's unlikely a company going bust here or there is a big deal.
    - stickfigure 4y ago
      That's half the answer but still not enough information. What de-SPAC companies are part of that index? What percentage of the index do they represent?
  - ac29 4y ago
    VTI (Vanguard's Total US Market) owns SPCE, CLOV, and SOFI (the only three I looked up). All three currently trade below IPO price.
- systemvoltage 4y ago
  Then let’s change the way these funds built their portfolios. More regulation isn’t the right answer.
- mccorrinall 4y ago
  Uh, then they shouldn’t pick up squoze stocks like AMC and GME either? I don’t agree.

bobbylarrybobby 4y ago

Well, the rules of a SPAC are that if it doesn't close then the investors get their money back, and the "leader" (I don't know the technical term) of the SPAC just loses out on any money, time, and effort spent trying to close a deal. Not sure what disclosure that would warrant for investors except "make sure you ask for interest when you get your money back".

maxfurman 4y ago
Isn't the bigger risk that the SPAC closes at an insanely inflated price and the investors get stuck holding the bag?
- MichaelBurge 4y ago
  No, because the investors can individually choose to decline the deal and get their money back with interest. Any investors remaining after the deal closes implicitly agreed to the closing price. I don't think there were any cases of a SPAC not returning deposit money if someone asked, and the institutional investors generally preferred the "guaranteed return" over gambling so the redemption percentage was quite high(I think 50%+).
- MangoCoffee 4y ago
  SPAC investors can back out for example: Buzzfeed https://nypost.com/2021/12/02/buzzfeed-investors-pull-funds-as-company-plans-to-go-public-via-spac/ https://nypost.com/2021/12/02/buzzfeed-investors-pull-funds-...
paxys 4y ago
In this case the article is talking about the SPACs that did "close", but the combined company is possibly not going to stay afloat for another year.
- sbarre 4y ago
  And that's a possibility for any business... Private businesses are run into the ground all the time, including those that raise funds through friends & family or angel investors... (Not saying you're implying otherwise here, just building on the fact that a closed SPAC is not more guaranteed to be a stable business any more than a private business).

refurb 4y ago

There are a lot of reasons for going public through paths other than an IPO other than your company is “weak”.

al_borland 4y ago
What are some of the reasons? I'm no SPAC expert. When I first heard about them I wrote them off almost immediately and never had an interest to dig in any further. It seemed like the business equivalent of a subprime mortgage and it was only a matter of time before it caught up with them.
- sbarre 4y ago
  One reason that I've understood is if you're a smaller company that can't afford the whole IPO process, this is a way to get access to public markets in a simpler/faster/cheaper way.
  - al_borland 4y ago
    Those justifications fit well with my subprime mortgage equivalency. Fast, easy, and cheep money for people who aren't ready and aren't willing to wait until they are ready. That throws up red flags for me and makes me wonder what else they may have cut corners on in the name of speed or cost cutting. I think I saw in another comment that it may be due to investors looking to get their money out, so maybe there is pressure there. I understand investors not wanting to take 10 years to see returns, but not if it comes at the expense of the business. I don't know all the ethics around startup investing, but if we start seeing a lot of these business go south (significantly more than traditional IPOs), a line may have been crossed. This could be a means to shift what used to be pre-IPO investment risk over to public investors if things start to look shaky internally. Again, I'm not expert, just spitballing.
    - refurb 4y ago
      The IPO process is incredibly burdensome. You basically can't tap public equity markets without being a very large business. Otherwise you can't justify the time and expense. I see the similarity to sub-prime mortgages, but the differences are: 1) this is the stock market so I don't think anyone doesn't understand the risks, 2) SPACs are no where big enough to drag down the rest of the market. Before SPACs, companies would do reverse mergers. A basically bankrupt public company "buys" a private company and merges. Swap the private equity for public and now you're a public company with far less hassle than an IPO.

loeg 4y ago

I believe the SEC has recently started requiring similar disclosures for SPACs (but historically did not).

awsrocks 4y ago

pbreit 4y ago

Is there any inherent or structural reason why SPACing would make a company worse off than IPOing? Or is it just that weaker companies choose to SPAC?

throwaway_1928 4y ago
The incentives are misaligned with SPACs. If I gave you $1 billion and said: 1. buy a company within 2 years and keep 20% of the equity of that company for yourself. You do not need to hold that equity for the long term. You can sell that 20% equity immediately and pocket the proceeds. 2. do not buy a company within 2 years and return the $1 billion to me with interest. If you had to choose between buying a trashy company and pocketing $200 million or returning me the $1 billion and pocketing nothing, which would you choose?
- donavanm 4y ago
  Also in case 1, of a sale, you can issue additional warrants to “friends” and key “investors” as an incentive. Which further dilutes the actual post merger equity pool that everyone is buying in to. SPACs are free money for early investors at the cost of everyone else whos too small to get sweetheart terms or actually sticks with the equities.
- pbreit 4y ago
  So, the latter?