OPINION: SPACs are still getting and holding billions of investors’ cash for M&A for either very early stage or distressed companies, and the road ahead is unclear.
After a record-setting beginning to this year for blank-check companies, the deal flow slowed drastically in the second quarter thanks to some regulatory interference and more investor scrutiny of some particularly risky deals.
“I am not seeing a whole bunch of new money rushing into SPACs,” said Sam Dibble, a partner at Baker Botts, a law firm in San Francisco. Dibble noted that the recent moves by the Securities and Exchange Commission, especially an accounting rules clarification, were designed to put the brakes on the flood of deals.
Lordstown, for example, recently said that a special committee was looking at the allegations in a report by Hindenburg Research that the company misled investors on its demand and production capabilities. The company said an investigation by a special committee into the shortseller’s report detected issues in how it was reporting orders and found some orders that were “too vague and infirm” to be appropriately included in pre-orders.
“We have also seen a change in perception not how are you doing but how big is the market,” Chanos said. “A lot of us understand that is one of the problems with the SPAC world…projections rather than risk factors.” Blank-check companies that have gone public have a two-year limit to find an acquisition target. If investors do not approve of the acquisition target, they can redeem their shares. With so many SPACs flush with money and hunting, there is going to be a rush to complete a merger.More from Therese: The tiny, $1 chip that is behind record price increases for computers
Ramifications from a failure to make an acquisition vary with each specific deal, but in general, at least 90% of the invested money lands in an escrow account. The other portion can be used by the SPAC sponsors to identify acquisition transactions, Dibble said. If a deal is not found, the approximate 90% of the initial investment is returned to investors.