It's faster and cheaper, those are things that are generally considered valuable.
Faster: the finance markets have been extremely tenuous the past 4 years between pandemics, supply chain crisis, world wars, inflation, and so on. An IPO requires 12 to 18 months of work / process before listing. SPACs can be done in a quarter or 2. In uncertain times it is much less risky to get the listing done fast.
Cheaper: Startups pay much less in fees to investment bankers when going through SPACs, there is also less dilution for investors and employees and more valuation transparency. In traditional IPOs investment bank underwriters have some conflict of interest to get lower valuations to pass the 'pump' onto their high value clients or proprietary trading desk. Why should they benefit over the people who have literally built the company?
While it is true that there is room to better regulate SPACs, there haven't been horrible abuses yet. It is also true that SPACs have not had the best returns for retail investors over the past few years however drawing a conclusion that this is due to SPAC usage versus the complex macro economic environment of recent years is very difficult.
We’ve seen pre-revenue companies that promised flying cars and other obvious scams go public via SPACs. If you don’t consider that SPAC abuse your bar is a lot lower than mine. These are companies that had no chance of surviving the more serious road show due diligence that the likes of GS demand when they take startups public.
Instead we saw popular podcasts push their SPACs on gullible retail investors, based on fuzzy concepts like disruption and TAM. Subsequently these SPACs lost 90% of their value and the insiders made bank. I hope to see jail sentences for the more shameless SPAC pump and dump players.
Index ETFs have been around for 15+ years now, and the advice is widely known that if you are an uneducated investor without inside information or some type of edge, you should stick to sub 0.15% expense ratio index funds. It is so easy nowadays that all you have to do is figure out the year you want to retire and buy that year’s target date fund and forget about it.
If people want to gamble, then that is their problem.
I'm not sure what your argument is. Sophisticated investors don't invest in obvious scams. That's tautologically true. Does that mean we should just watch and do nothing while people get scammed?
The thing is, nobody is born sophisticated and there are many ways to get hurt in financial markets in the absence of scams even if you're intelligent and do your homework.
You mention index trackers, but they are no silver bullet. Their mechanism is basically to buy more of stocks that go up, and to sell those stocks that stumble badly. The more people rely on index trackers (exchange traded or not) the more volatile they'll become, and because index funds use such a simple trading strategy it's easy to front-run or otherwise exploit them. Furthermore, index trackers depend on active investors for price discovery, and the fewer active investors you have the worse index funds will perform. Relying on a vanguard ETF might continue to work, but to assume that it will is hopelessly naïve. It's no coincidence that ETFs got so popular with interest rates at 0 and a fed that made stonks go up.
> Sophisticated investors don't invest in obvious scams. That's tautologically true. Does that mean we should just watch and do nothing while people get scammed?
Imagine I buy a chainsaw which is clearly labelled as something that can cut your hands off, it's widely known and obvious to everyone that chainsaws can cut your hands off very easily, not just in the specialist financial press but also on comedy shows and from TV news pundits and loads of other sources - I'm a mentally competent adult, I'm informed about the substantial risks, I want the chainsaw anyway so I can chop down lots of trees fast. Then I chop my own hand off by mistake.
Was it society's responsibility to protect me from my own mistakes, even when I was fully informed of the risks?
It's like giving 40% of the adult population a chainsaw that they have to use if they want to retire at a reasonable age. The outcome is predictable and they would be wise to invest in a prosthetics company.
You can buy a 2x levered daily vix ETF. You can buy 0dte options. You can buy options on the aforementioned ETF. You can go to a casino and put all your money on the roulette wheel. What is so risky about spacs that they need special attention?
Should publicly listed companies should publish their financial results every quarter? Do they have to use GAAP or can they make up their own financial metrics? What do you think would happen if we removed the regulations surrounding financial disclosure for public companies?
The questions are rhetorical. Companies will rob their shareholders blind if you let them. You can't just be "lol caveat emptor".
(Casinos also cheated players shamelessly in the good old days before regulatory oversight.)
Yeah I can just like I am about all those other great ways to lose money that I just posted.
But, I'm really not getting your point here. SPACs have to report financial results just like any other public company. They aren't allowed to commit fraud any more than any other company.
SPACs are basically an incorporated bag of money, so yes, while they technically have the same disclosure requirements as any other public company the disclosures won't tell you anything. There is no Form S-1 for SPAC acquisition targets.
A conventional IPO has a number of roadblocks for fraudsters. First they have to convince a reputable investment bank (like Goldman Sachs) to take them on as a client. Then the CEO and CFO of the company have to go on a grueling road show where they talk to groups of sophisticated investors, present their business prospects, and answer difficult questions. The IPO doesn't happen if those investors aren't willing to pay up, or if the investment bank feels like management is not transparent about their realistic business prospects.
With a SPAC you have none of that. You can have a slide deck and a webcast and make outrageous claims and nobody will call you out on it. The company and SPAC sponsor can dump their shares on retail investors who think they are investing alongside the executives and SPAC sponsor, when in reality they are their exit liquidity.
Nikola Motor went from a 34bn market cap to near bankruptcy in 2 years. Their tech was a sham and the founder got prosecuted and convicted for defrauding investors.
Lordstown Motors. Faked their order book. Blatant securities fraud.
>> Instead we saw popular podcasts push their SPACs on gullible retail investors, based on fuzzy concepts like disruption and TAM. Subsequently these SPACs lost 90% of their value and the insiders made bank. I hope to see jail sentences for the more shameless SPAC pump and dump players.
> Index ETFs have been around for 15+ years now, and the advice is widely known that if you are an uneducated investor without inside information or some type of edge, you should stick to sub 0.15% expense ratio index funds....
> If people want to gamble, then that is their problem.
So what? It's also well known that the IRS doesn't take payment in iTunes gift cards. So do you think if people get scammed, it is their problem for not knowing better? Should we just repeal all the laws against fraud and scams, because caveat emptor?
The behavior described in the GP post is unacceptable, and the fact that someone theoretically should have known better doesn't excuse it.
I don't think you can avoid the conclusion that this is a legal loophole. It's "easy" to get listed as an empty shell because there's nothing there to check. Then you buy an actual business and everything is just dandy? Seems fishy to me.
“Faster and cheaper” isn’t really the goal when selling stock to retirees and pension funds. Going public is supposed to be a rigorous process of assuring your grandparents that this company meets a minimum bar of compliance and financial quality. Finding a back door to avoid scrutiny is a flaw, not a feature. I get that we all want to avoid the paperwork and red tape in life, but there are certain things that we have seen burn too many people too many times that we as a society demand you slow down and dot your i’s and cross your t’s for very good reasons.
>> The fact this is not only legal, but common practice baffles me ...
> It's faster and cheaper, those are things that are generally considered valuable.
For the company. It's also faster and cheaper for the company to just to ignore all regulatory requirements (financial reporting, product safety, pollution, labor, etc.), but that's usually illegal for good reason.
It's seems pretty dysfunctional that companies would be allowed to do an end-run around pre-IPO scrutiny like this.
I mean a few years back I was told by my accountant that I made too much money to contribute to a Roth IRA, but it was 100% kosher to open a traditional IRA and immediately convert it to a Roth IRA. The fact that this was legal also baffles me.
When you convert your traditional IRA to a Roth you immediately owe taxes on the amount. Then, presumably, due to your income, you can no longer contribute to it. Makes sense to me.
It was a while ago, but IIRC you only owe taxes on the pre-tax contributions (which, in this case was $0). But I couldn't make a post-tax contribution directly to a Roth, just a post-tax contribution to a traditional, then convert...
[edit]
Some googling[1] implies my memory was mostly correct.
The point is that there are income limits for this process:
1. Take N dollars of post-tax money.
2. Put it in a Roth IRA.
But the same limits don't apply to this process:
1. Take N dollars of post-tax money.
2. Put it in a traditional IRA.
3. The next day, convert the traditional IRA to a Roth IRA.
When you do the conversion, you only owe taxes on any additional earnings (not your post-tax contribution) during the one day that it was a traditional IRA. So the second procedure accomplishes almost exactly the same thing as the first one, but it legally gets around the limit designed to prevent rich people from getting Roth IRA tax breaks.
It's probably going to be made illegal, or at least a lot more heavily regulated, any day now. The SEC has indicated that they're not happy with how SPACs are being used to skirt IPO disclosures.
Is it? VCs don’t raise money from “mom and pop and Reddit” retail investors, but SPACs have enabled insiders to sell stock at $10 that often ends up being worth less than $1 or even bankrupt just a year or two later. These often included a social media pump like the SPACs promoted by “SPAC king” Chamath Palihapitiya.
However the companies that go public via SPAC are mostly VC-funded, so in that sense you’re right that they’re also profiting from the SPAC con by being able to dump their holdings in these companies that were not actually ready to go public.
