6 ms·

I have never understood why SPACs aren't illegal. Even when someone knowledgeable in finance describes it to me on the surface, in layman's terms, it appears sk

by yardie 3y ago

I have never understood why SPACs aren't illegal. Even when someone knowledgeable in finance describes it to me on the surface, in layman's terms, it appears sketchy. A SPAC is basically a way for investors to dump a company with no real business model, yet, onto the unsuspecting public. It relies heavily on pump and dump strategies to raise funds before its special opportunity time runs out. While you can't time the market this seems like a vehicle designed to do exactly that. Its just odd.

rapsey 3y ago
I thought SPACs were some new thing but they are actually not. They just show up periodically to scam a new generation.
- bombcar 3y ago
  They basically have no "real" legitimate reason to exist, but they don't run afoul of any laws, so they only appear when there are scams to be done.
- boeingUH60 3y ago
  The SPAC pioneers were actually good investors, e.g., Bill Ackman and Martin Franklin. The shysters came in 2020 and ruined it for everyone.
  - esotericimpl 3y ago
    [dead]
polygamous_bat 3y ago
Unfortunately, SPACs are legal (so far) because they are a Frankenstein's monster made of legal body parts. There's nothing illegal about creating a public company, no matter how stupid it is, if your finances are above broad. Financially, SPACs are as simple as a public company gets: practically take people's money and hold them in a big pot. There's also nothing illegal about a public company acquiring or merging with a private one, although I believe this is the Achilles' heel of our current legal system: mergers generally don't require the same level of minute disclosures an IPO does. Clearly, this is a regulatory arbitrage, just like a lot of our "innovations" in the past decade, fueled by a near zero interest rate. The way to move forward would be to take another look at our regulation and close the arbitrage. Otherwise, next time there's a low interest rate environment, I can guarantee you there will be another garbage SPAC boom.
- kylecordes 3y ago
  Right, the obvious fix is not "make it illegal!"; but rather to have the regulatory/disclosure/etc. requirements for a SPAC more similar to those of an IPO. (There's also a good argument that IPO requirements are too extreme, as demonstrated by many companies that would previously have gone public, staying private. Perhaps the right trade-off is to make both IPO and SPAC processes have a more well considered, moderate set of requirements.)
  - toomuchtodo 3y ago
    The SEC is working to crack down on SPACs, just takes time.
cj 3y ago
While I'm not a fan of SPACs, I think this is going to far > way for investors to dump a company with no real business model, yet, onto the unsuspecting public. The "unsuspecting public" are people who bought a stock with full knowledge that they don't know what they'll end up owning. The "unsuspecting public" is a mischaracterization, people who invest in SPACs aren't doing so unknowingly. SPACs aren't automatically part of the typical portfolio (like, say, the S&P 500). People who own SPACs went out of their way to buy them. I completely agree with your other points, but we have to acknowledge that the victims of a poorly executed SPAC merger isn't your blue collar worker, it's people who sought out a highly speculative asset, and that's what a SPAC is.
- MR4D 3y ago
  There is still a simple solution to the "SPAC problem" - don't let them list. A SPAC is effectively (and I'm simplifying here for brevity) like a Private Equity fund. However, those are limited to accredited investors, and the general public can't buy into them. SPACs could (should?) be limited in the same form. By prohibiting them from listing, it's the smallest regulatory change that solves the issue of unknowing investors buying something speculative without knowing it's true risks.
  - sgjohnson 3y ago
    > By prohibiting them from listing, And you've killed SPAC as a concept.
    - yardie 3y ago
      Maybe it's for the best.
    - MR4D 3y ago
      I think that's what the debate is essentially about. Private equity funds are basically unlisted SPACs, and have been doing this forever. To me this is one of the key differences between sophisticated and unsophisticated investors, and knowing how to do due diligence is really key.
kasdi 3y ago
> Even when someone knowledgeable in finance describes it to me on the surface, in layman's terms Could you share the explanation in layman’s terms?

by yardie 3y ago

rapsey 3y ago

I thought SPACs were some new thing but they are actually not. They just show up periodically to scam a new generation.

bombcar 3y ago
They basically have no "real" legitimate reason to exist, but they don't run afoul of any laws, so they only appear when there are scams to be done.
boeingUH60 3y ago
The SPAC pioneers were actually good investors, e.g., Bill Ackman and Martin Franklin. The shysters came in 2020 and ruined it for everyone.
- esotericimpl 3y ago
  [dead]

polygamous_bat 3y ago

Unfortunately, SPACs are legal (so far) because they are a Frankenstein's monster made of legal body parts. There's nothing illegal about creating a public company, no matter how stupid it is, if your finances are above broad. Financially, SPACs are as simple as a public company gets: practically take people's money and hold them in a big pot. There's also nothing illegal about a public company acquiring or merging with a private one, although I believe this is the Achilles' heel of our current legal system: mergers generally don't require the same level of minute disclosures an IPO does. Clearly, this is a regulatory arbitrage, just like a lot of our "innovations" in the past decade, fueled by a near zero interest rate. The way to move forward would be to take another look at our regulation and close the arbitrage. Otherwise, next time there's a low interest rate environment, I can guarantee you there will be another garbage SPAC boom.

kylecordes 3y ago
Right, the obvious fix is not "make it illegal!"; but rather to have the regulatory/disclosure/etc. requirements for a SPAC more similar to those of an IPO. (There's also a good argument that IPO requirements are too extreme, as demonstrated by many companies that would previously have gone public, staying private. Perhaps the right trade-off is to make both IPO and SPAC processes have a more well considered, moderate set of requirements.)
- toomuchtodo 3y ago
  The SEC is working to crack down on SPACs, just takes time.

cj 3y ago

While I'm not a fan of SPACs, I think this is going to far > way for investors to dump a company with no real business model, yet, onto the unsuspecting public. The "unsuspecting public" are people who bought a stock with full knowledge that they don't know what they'll end up owning. The "unsuspecting public" is a mischaracterization, people who invest in SPACs aren't doing so unknowingly. SPACs aren't automatically part of the typical portfolio (like, say, the S&P 500). People who own SPACs went out of their way to buy them. I completely agree with your other points, but we have to acknowledge that the victims of a poorly executed SPAC merger isn't your blue collar worker, it's people who sought out a highly speculative asset, and that's what a SPAC is.

MR4D 3y ago
There is still a simple solution to the "SPAC problem" - don't let them list. A SPAC is effectively (and I'm simplifying here for brevity) like a Private Equity fund. However, those are limited to accredited investors, and the general public can't buy into them. SPACs could (should?) be limited in the same form. By prohibiting them from listing, it's the smallest regulatory change that solves the issue of unknowing investors buying something speculative without knowing it's true risks.
- sgjohnson 3y ago
  > By prohibiting them from listing, And you've killed SPAC as a concept.
  - yardie 3y ago
    Maybe it's for the best.
  - MR4D 3y ago
    I think that's what the debate is essentially about. Private equity funds are basically unlisted SPACs, and have been doing this forever. To me this is one of the key differences between sophisticated and unsophisticated investors, and knowing how to do due diligence is really key.

kasdi 3y ago

> Even when someone knowledgeable in finance describes it to me on the surface, in layman's terms Could you share the explanation in layman’s terms?