Tuesday, 27 February, 2024

What Happened to the SPAC Market Boom?


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While many people in the SPAC industry claim the slowdown is good for the industry, others are saying it’s bad. In fact, some SPAC proponents admit the frenzy caused many transactions that shouldn’t have taken place. “The SPAC frenzy led to deals that should never have been made,” says Alex Vogel, the lobbyist for a new SPAC-friendly trade group in D.C. Vogel believes that the industry will lose safe harbor protections as lawmakers and big investors start looking at the potential ramifications.

SPACs are easy money for banks

Wall Street banks have become increasingly wary of SPACs as their fees have soared. While some investors like the idea of a blank check, there are serious concerns that SPAC deals create a moral hazard and increase risk for investment banks. In addition, regulators have proposed new rules that would increase banks’ liability for work on SPAC deals. According to the Stanford Law School, there have been 47 SPAC-related class-action shareholder lawsuits filed since the start of the year 2021.

They aren’t liable for overly rosy financial forecasts

As a result of the SPAC model, investors have no way of evaluating the long-term value proposition of the company’s offering. Because there are no operations or business plan for the company, investors aren’t able to gauge its long-term value proposition. Therefore, it’s important to understand the risks that investors face when making financial predictions based on forward-looking information.

What is a SPAC

“A special purpose acquisition company (SPAC) is a company that has no commercial operations and is formed strictly to raise capital through an initial public offering (IPO) or the purpose of acquiring or merging with an existing company.”

They attract big-name underwriters

It wasn’t that long ago when the SPAC market was fast becoming a mainstay of the IPO process, with the redemption process being separate from the shareholder vote on the merger. Private investment in public equities was helping to cement the merger. Big-name underwriters were also stepping into the market, including Davis Polk, which is representing underwriters for more than two dozen IPOs had high hopes, expecting to raise over $1 billion by 2020.

They are largely dead money

The SPAC Markets are largely dead money, but some high-profile investors are stepping up to help them. Companies like Goldman Sachs Group Inc. and Thoma Bravo LLC have shown interest in SPACs in recent months. Such investors have improved the perception of SPACs and made them more appealing to retail investors. But the success of these deals is not without risk. It is important to keep these factors in mind, and the SPAC Markets are still largely dead money. Currently, the investment environment has decidedly chilled to SPACs.

They aren’t regulated by the SEC

Critics of SPACs have argued that the terms of these deals are detrimental to the interests of average investors. Those who have bought shares of a SPAC company’s stock have raked in an average return of 468 percent over the past year. But that return fell to just 284 percent by August, when concessions, forfeitures, and vesting were taken into account. SPAC sponsors have defended the practice, saying it protects investors.

CNBC reports “The oversaturated SPAC market is continuing to get crushed in the new year as speculative stocks with little earnings fall further out of favor in the face of rising rates, while a growing number of deals were abandoned in the tough environment.”

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