Taking your private company public in the normal way is a pain in the ass. There are lots of fiddly little transparency rules that the SEC insists you follow. You have to publicly reveal how much money you make, what your assets are worth, what your debt structure looks like—and you have to do it truthfully! Can you imagine?
Luckily, along came the SPAC, where your company just quietly merges with a pile of money that happens to have a stock market symbol. Except for the owners of the SPAC, no one need know all the details of your financial performance.
Sounds great, doesn't it? And it is. But not for everybody:
Stock-market investors in SPACs that merged with private companies since 2015 lost an average 37% of their investment a year after the merger through the end of September, according to the authors of a forthcoming paper on SPACs in the Review of Financial Studies, an academic journal.
At the same time, SPAC managers, known as sponsors, turned an average investment of about $8 million into about $54 million, giving them average annualized returns of 110% on their initial investment in the SPACs, the authors found.
This is pretty much what the normal, SEC-regulated version of becoming a public company is supposed to stop. And it does, though hardly perfectly. But even that's too much honesty and transparency for a lot of modern CEOs and their Wall Street managers, so they invented the SPAC and it worked pretty well for a while.
For them, anyway. Not so much for everyone else.
MORE FROM THE STORY:
SPACs are essentially publicly listed pools of cash in search of private companies to merge with—providing an alternative to an IPO. The sponsors who form the SPAC—private-equity managers, hedge funds and the occasional celebrity—commit an average of 5% of this initial funding and then raise the rest from stock investors, according to the researchers.
When the SPAC sponsor completes a merger, the sponsor gets a bonus typically equivalent to 20% of the value of the SPAC.
Many investors and academics have criticized this bonus—known as a promote—as overly generous given that it can lead sponsors to profit even if the SPAC’s investors are down over 90% in many cases. Regulators from the U.S. Securities and Exchange Commission have called SPAC sponsor compensation costly and drafted rules to make it more transparent to investors.
Same as it ever was?
Whereas in contrast, investors in the SEC-regulated IPOs had results of ... what? Don't have a WSJ account to see if their article says so, and I don't have any particular fondness for SPACs, but that would seem to be a salient point when comparing.
A compares with returns of ... what for those who make pre-IPO investments?
Good points....
The IPO market is funky. Too many people want the stock price to jump right after the IPO--more headlines, more investors...in the short term. That short changes the company, but may help the founders make even more money. The really low capital gains tax has distorted the market.
one born every minute...
It's also symptomatic of there being too much capital in the market. People are investing in what seem to be scams, and not in local businesses. Unfortunately, investments don't really make it down to mom and pop stores--that's typically loans from banks and/or family lending money.
Making SPACs more transparent is good. But, are SPACs inherently bad?
If you look at what SPACs do, they're tools for the ordinary person to get into venture capital-like investments of startups, including the high risk of failure of any given individual startup.
Hi Risk'
Just what the ordinary investor understands.
What the ordinary investor thinks: I'm Gonna Make a Killing!!!!
As he puts the gun to his head.
OT question. Medicare Part B premium in 1966 was $3. Inflation adjusted to now would be about $27.50. But next year Medicare Part B premium is going to be $164.90. Government is bilking us.
MRIs, Da Vinci robotic surgery, heart transplants, insulin pumps, DNA sequencing etc etc probably cost a little more than whatever the hell was going on back in 1966.
Old folks are living longer -- a LOT longer. Medicare coverage has ended up lasting 30-40 years, instead of 5-10. And it's basically a self-funding program, so...
Babies are dying like they used to so the average lifespans push upwards. Rich folks living longer due to modern medicine but average folks still dying at same ages. It's a cruel myth being pushed to justify cuts in Social Security and Medicare.
The infant mortality rate in the US was 25/1000 in 1965 and 6/1000 in 2020.
And “average” folks are significantly more obese than 60 years ago. It’s only through modern medicine that they aren’t dying younger than back then.
Hell take it back to 1866 when the cost was zero!!!
Rich assholes fleecing each other. Fuck em.
Good Washington Post story today about the SPAC (or SPACs?) which is backing Trump's Truth Social. Intriguingly, it's a Shanghai-based investment company that is currently on the hook for the money to fund Truth Social, as I understand it. It's such a bad investment -- obviously you're going to lose all your money -- that I have to think anyone actually putting up money for it wants something other than investment returns. Maybe, making a mess of US politics and society? Sounds familiar, and the Chinese have a lot more to gain from that than the Russians, I'd say. I haven't seen a nice big piece on Trump's ties to China, but it sure seems like it's sitting there waiting to be written.
SPACs must be corrupt. If not why would a grifter like TFG use one to take Truth Social public. The good news is all the Magat’s who wouldn’t believe Trump was a crook who are now bashing their teeth over losing most of their life savings investing with him.