SPAC-ed Out! — The Rise and Fall of SPACs

Special purpose acquisition companies, or SPACs, had very short-lived fame. These publicly traded “blank cheque companies” with a two-year life span and unspecified acquisition targets boomed during the 2020-21 period. Unlike an Initial Public Offering (IPO), SPACs introduced a faster and easier way for companies to go public. IPOs take years to complete, whereas SPAC mergers can occur within months.

A SPAC starts as a private company and goes public through an IPO to raise money to buy a company or its majority stake. This merger process is called a de-SPAC transaction. If a SPAC is unable to reach a de-SPAC transaction, it must liquidate and distribute all its assets back to the company’s shareholders. That being said, the cost of carrying out a SPAC transaction is notably lower than going public through an IPO. The shareholders can also benefit from experienced financial investors and private equity or hedge fund industry professionals.

Additionally, because an acquisition target is not required for a SPAC to be formed, a SPAC has the flexibility to negotiate terms that are good for its investors. By 2020, the COVID-19 pandemic created volatile market conditions which made private companies wary about investing large capital, thereby turning investors to low-risk SPACs. Further, lenient government regulations imposed relaxed monetary policies and encouraged investments, thereby pushing SPACs to stardom.

The IPO market took a backward march in 2022, with 1145 IPOs filed compared to 2436 IPOs in 2021. However, this trend seemed to be catching up with the SPACs too. Market instability forced companies to stay private longer. The decline was further accelerated by new SEC regulations requiring more disclosure regarding de-SPAC transactions and target companies. These regulations, per the SEC Chair Gary Gensler, fall under three categories—disclosure, marketing practice standards, and gatekeeper issuer obligations. The new disclosure regulations require that SPACs disseminate documents related to the SPAC process to investors to ensure fairness and help them make informed decisions. Additionally, the SEC proposed to amend the definition of “blank cheque company” to encompass SPACs so that they cannot turn to the Private Securities Litigation Reform Act (PSLRA) for safe harbor. The proposal also imposed liabilities on third parties such as auditors, lawyers, and underwriters to ensure disclosures’ accuracy and adequacy. Nonetheless, these regulations are yet to be passed.

In conclusion, several factors could be attributed to the rise and fall of SPACs. Even though SPACs are a quick, affordable, and easy way for businesses to go public, their appeal was ephemeral. It remains to see whether SPACs can adjust to new regulations and market changes and once again regain their popularity.