Will the SPAC boom go bust?

SPACs are exploding in 2021. As of June 8, 2021, SPACs have raised capital in 333 U.S. IPOs in 2021 alone, compared to the 248 SPAC IPOs in all of 2020. Recent high-profile SPAC launches like BuzzFeed and Virgin Galactic are making waves, and when Richard Branson was asked why he went the SPAC route, he succinctly stated:

“I’m impatient. The SPAC gets through all of the rigmarole of public companies. Yes, I thought, that’s great, let’s do it,”

While this is certainly true, it changes the picture a bit to know that it had recently seen a funding round fall apart and likely would not have been able to go public otherwise. It worked out well, too – in February 2021 the share price jumped from $12 to $49.36 despite some high-profile Virgin Galactic failed launches and delays. 

Many critics rightly point out that the short IPO window and lack of due diligence allow SPACs to capitalize on the current market hype, with lots of risk to regular investors. With the SEC continually putting out warnings and potential regulations incoming, will the bubble last into 2022 and beyond?

SPAC vs. Traditional IPO at a glance

Why are so many companies taking the SPAC route?

The traditional Initial Public Offering (IPO) is a fairly straightforward and organic process, though it can involve a good deal of due diligence. Public trading has traditionally been considered the way to take your private company to the next level.

The traditional IPO process uses entities called underwriters to take on a portion of the risk – these underwriters act as intermediaries during the selling of the shares. However, this process can end up costing the business a significant amount of cash (often up to 7% of cash raised to the investment bank alone, not to mention fees for lawyers and accountants). The IPO window is also long, requiring you to plan 12-18 months before the formal process even begins.

Given how long and costly this window is, many business owners are instead looking to Special Purpose Acquisition Company (SPAC) to make their exit. After all, a faster IPO makes it easier to cash in on the hype.

A SPAC is a shell company – an entity that is created not for commercial operations, but rather strictly to raise capital for a traditional IPO. The capital raised is then used to acquire an already existing company. As a shell corporation, a SPAC doesn’t need to have assets other than cash when it goes to the public market, and the window from inception to purchase is only two years. 

When it comes to SPAC vs. IPO, the fact of the matter is that the shell company SPACs are a lot faster and more nimble than traditional IPOs. The SPAC model is alluringly simple – unlike with a traditional IPO, SPAC sponsors can start seeking investment capital right away, and decide where it’s going to go later – which is why it’s also known as a blank check company. 

Will the trend of going public using a SPAC continue?

Traditionally SPACs were reserved for businesses that felt they couldn’t handle the scrutiny of IPO due diligence, but that has changed. 

The impact of COVID on the SPAC market can’t be denied, as a traditional IPO typically involves many in-person touchpoints that simply couldn’t occur. The relative speed of going public with a SPAC during this turbulent time was also a key factor, as were many unverified investors using their stimulus checks to fuel investments.

The SPAC investment trend has also been largely spurred on by the high-profile names associated as investors in these shells such as Colin Kaepernick and Shaquille O’Neal, among others. It has become so out of control that the SEC had to step in, stating in March 2021 to “Never invest in a SPAC based solely on a celebrity’s involvement.”

SPACs are under increasing scrutiny by the SEC due to the incredible surge in popularity, with new statements going out constantly. As investment opportunities in SPACs open up to unverified investors, the concern is that while the sponsors may benefit from a less than successful SPAC IPO due to their favorable terms, regular investors can take a huge hit they cannot weather.

In the aptly titled CNN article from March 2021, SPAC fundraising is up an insane 2,000% from a year ago, Blackrock executive Rick Reider spelled out some of the potential dangers of the SPAC trend: 

“If you look at the SPAC market, there’s some really attractive new companies and new technologies coming to the market that are financing effectively… and then there are some that make no sense… You’ve got to be really selective about where you go and not just jump onto that train because it’s gotten crazy.”

So is the SPAC trend a bubble waiting to burst? Due to concerns over the lack of disclosure requirements for SPACs and unknowns regarding how long a SPAC company will be able to be profitable, many wealth advisors will no longer pitch SPAC investments.

Yun Li at CNBC also points out that the actual target of a SPAC and the type of deal it eventually makes can vary wildly, “A leisure SPAC is now doing a biotech deal, while a cannabis blank-check company ended up merging with a space company.” The volatile market is forcing SPACs to settle for less than ideal targets.

The SEC is currently looking to implement disclosure requirements for SPACs, and that likely won’t be where regulation stops. The real test of the lasting power of SPACs will be whether investor sentiment swings in the other direction in the face of these warnings.

Despite this, Goldman Sachs estimates that the SPAC boom still has some longevity left, estimating in March 2021 that “$103 billion in SPAC capital was actively searching for an acquisition target, and SPACs could generate more than $700 billion in acquisitions in the next two years.” 

For businesses looking to make their exit shortly, a SPAC may well yet be a relatively easy and lucrative way to do so.

Looking to Strategize on Your Exit Plan?

At Greenough Group, we’ve helped hundreds of VCs and midmarket company founders over more than 20 years plan for a successful and lucrative acquisition. If you have any questions about whether an IPO, SPAC, or Direct Listing is the right fit for you, we encourage you to reach out to one of our CFO Consultants.