By The Daily Upside - May 18, 2022 at 9:00PM
Do deadlines stress you out? Trigger warning: don't read the following story. Just about 300 SPACs have to find a company to merge with in the next three quarters or their investors risk losing money they put in, according to figures from data provider SPAC Research seen by The Wall Street Journal. The problem: SPACs, trendy in public markets just a year ago, are practically toxic now.
Some background: special-purpose acquisition companies (SPACs) are shell corporations that list publicly with the single objective of merging with another company, taking it public without an initial public offering. The typical deadline for this merger to be consummated is two years. They were super popular during the white-hot bull market of the last two years: there were 92 SPAC mergers in 2020 and 213 in 2021, after just 26 in 2019. Suddenly last summer, the SEC began scrutinizing SPACs and even sued some, alleging they were actually investment companies or made subpar disclosures. The sector tanked.
Earlier this month, Goldman Sachs -- the second-largest SPAC underwriter last year -- said it was pulling out of working with most of the SPACs it had helped to go public after the SEC introduced tougher rules. If that wasn't bad enough, there are still roughly 280 untethered SPACs, created during the glory days, that have merger deadlines in the first quarter of 2023. This has created an awkward middle-school dance scenario: if they miss the deadline, SPACs will need to return money to investors and forfeit the $5-10 million they paid to lawyers and auditors to set up the blank-check firms, and so they are seeking out dance partners just when just about everyone thinks they've lost their step:
"It's a ticking time bomb," Matt Simpson, a partner at Wealthspring Capital, told the WSJ. In their desperation, analysts fret that some SPACs could merge with weak companies and go public at implausible valuations in order to avoid losses.
One for the Record Books: Denis Sverdlov, the founder of electric vehicle maker Arrival, was worth $11.7 billion a year ago, when shares in his firm soared after a SPAC merger. (Or should we say, a hypothetical EV maker, as Arrival has yet to produce a single car.) Those shares have fallen 90% since. His wealth is down 94%, and he's no longer a billionaire. At least he doesn't have to worry about gas prices.