The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

SPACing Investors

11/15/2020

When a new company wants to sell some of itself, in the form of shares, to the general public, it normally does an Initial Public Offering (IPO).  This is a long, arduous process that is closely regulated by the Securities Exchange Commission (SEC).  Certain forward-looking projections are required, such as sales and expenses.  If any of those projections are off wildly, the SEC will ask some painful questions.  Criminal liability may result.

To avoid all this, another vehicle has become increasingly popular, called Special Purpose Acquisition Companies or SPACs.  A promoter goes to Wall Street and offers shares to the public.  After all the SPAC shares are sold and the money comes in, the promoter makes the acquisition of some company.  This has been done for cannabis, electric vehicles, online gambling, etc.  Often the SPAC changes its name to that of the acquired company.  Thus, a new company is then listed on the stock exchange without all that annoying scrutiny by the SEC.  If there is a way around intense regulation, people will find it.  Billions of dollars have flowed into 71 SPAC deals so far this year.  Fifteen were to buy companies with exactly zero revenue.

Back in the late 1980’s, billions of dollars were raised by real estate partnerships that were sold into the public markets.  All that new money drove up the price of real estate, especially commercial real estate.  Because so much more money wanted into real estate, promoters then started offering “blind pool” partnerships.  Investors would buy into partnerships without being told what was going to happen with their money.  Even worse, promoters started buying properties from their “friends” for prices.

As all  that money continued to roll into those “blind pool” partnerships back then, it put even more upward pressure on real estate prices.  As a result, the 1988 real estate collapse was inevitable, as was the 1990 economic recession.  It hurt the nation.

We are now seeing “blind pool” SPACs.  Promoters receive funds from investors and then sit on the money until the promoters find a company they want to buy.  What could go wrong?

I expect that SPACs will earn the same bad reputation that publicly-traded limited partnerships still have.  Beware!

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