The world’s financial exchanges are now in gold rush mode for IPO listings fueled by the blank check company resurgence. Now called SPAC (for a special purpose acquisition company), this is fast becoming an exercise in financial contagion as one global exchange after another contemplates getting into action and retail investors looking to buy.
In 2020, SPACs accounted for more than half of all IPO revenue raised in the US, and in the month of January 2021 alone, more than 60 SPACS raised nearly $ 20 billion in revenue. Meanwhile, Singapore Exchange Ltd. is said to be considering new rules that would allow blank check companies to list at some point later this year. Similarly, the rise of SPAC has caught the attention of UK exchanges which are also looking for ways to increase their share of the listing phenomenon. The obvious investor protection issues that are endemic to these listings have the CFA Institute on alert. The similarities to the dot.com and subprime bubbles are unmistakable. We believe that the SEC should immediately establish a task force to examine issues related to marketing, shareholder rights, and investor protection. Investors considering SPAC should remember that many things can go wrong. Here are five important things retail investors should know before launching into SPAC: 1. Blank check alert: You are giving money to the SPAC sponsor without a defined plan on whether, when or how the money will be used to acquire one. business operation. As a retail investor, you are being told that this is your great opportunity to enter early. But the sponsor can be as vague as simply saying, “I have experience in this industry and will be looking for a promising company with growth potential in this space.” The potential for misinformation, even fraud, is high in these situations. 2. The 18-month rule: the sponsor has between 18 and 24 months to locate, negotiate and close an acquisition agreement, or must return the money from the SPAC IPO, plus interest. Sounds great, but if the SPAC shares you bought are traded based on hearsay, innuendo, and no basis before any acquisitions occur, chances are you’ve paid a premium for them. The cash back rule only applies when there is no deal, and the redemption is made at the original IPO offering price, typically $ 10 per share plus interest, not what an investor paid for it on the open market. In addition, the “no-take” rate or lousy acquisition results are likely to increase. There is an increasing likelihood that your blank check “investment” will leave you poorer. 3. Competition for private deals: No matter what the SPAC sponsor tells you, the competition to find a private rough diamond company to acquire and go public remains intense. Not only are hundreds of other SPACs looking for a target, but thousands of savvy private equity managers with huge portfolios and lots of dry dust (an estimated $ 1.5 trillion in private equity and venture capital funds) are looking for the exact same thing. , and they have a much longer track record. The odds of a SPAC sponsor finding a suitable, undiscovered gem that is fairly priced and ultimately profitable are mixed at best. 4. Understand Your Part of the SPAC Pie – You need to understand that even if a targeted acquisition is made, the amount of the value of the new public company that ends up in the hands of SPAC share buyers can be terribly meager. Your slice of the pie comes after the sponsor cut, the acquired company’s management cut, and usually another private investor filling in the capital needed to close the deal. It’s not uncommon for SPAC investors to end up scrambling for scraps. 5. History: Take the time to find out if the sponsor has any history in selecting private investments. The only way private equity works in the real world of investment management is to find a private equity manager with a proven track record of doing profitable business. Choosing a SPAC sponsor because you are linked to some kind of celebrity, but without actual private equity chops, represents the worst kind of blank check you could ever write. Margaret Franklin, CFA, is president and CEO of the CFA Institute. More: SPAC investors worry about ‘stigma’ after SEC warnings and increased lawsuits. Also read: Space infrastructure is the next investment frontier and SPACs are a launch pad