In the first few months of 2021, SPACs, also known as blank check companies, raised more funding than the whole year of 2020. SPACs have raised $83.1billion globally so far this year. This amount is up by 20 fold exceeding $82.6 billion funding raised in 2020.
SPAC has become a global mania in the investor's community as making companies public via SPAC is hassle-free. It attracts less scrutiny. For instance, when Adam Neumann's unicorn startup WeWork was all set out to open up to the world, its IPO collapsed, and the management of WeWork went under intense scrutiny. Now WeWork is considering going public via a different route — SPAC.
What is SPAC?
Special Purpose Acquisition Companies (SPAC) are like shell companies with no operations or assets but have cash and investments. Their sole purpose is to take private and unlisted companies public to circumvent the traditional scrutiny and hassle associated with taking companies public. This vehicle works by raising money through an IPO, which is then put into an interest-bearing account until the SPAC management finds a valuable company to acquire. However, if SPAC fails to purchase a company in a given deadline, usually two years, the SPAC is liquidated, and the money is given back to the investors.
Initially, for the past couple of years, SPAC was used by companies that couldn't withstand the scrutiny of a traditional IPO. Then several giant corporations decided to use the SPAC route to take part in business acquisitions, including Virgin Galactic.
SEC to begin Investigation
SEC is likely to begin an investigation into SPACs. SEC is seeking voluntary information from top Wall Street Banks to know about the details of risk being managed by such banks involved in SPAC. The growing attractiveness of SPACs is also of grave concern as the hunt for a good deal and money raised may exceed the number of good quality private companies available to go public.
Rick Rieder, executive of a global investment firm, pointed out that many SPAC have soaring valuations, and they are 40 times their revenue. According to him, it is infrequent for any company to grow into that valuation. He further adds that some of the SPACs have excellent business and technological ideas, and they have potential in them while others don't make sense.
Celebs backed SPAC
One of the reasons why SPACs are called blank-check companies is because the investors putting money in the vehicle are not aware of the company SPAC will be acquiring. Still, they invest it because of the people backing the vehicle. Recently SEC issued a warning alert for the public to avoid investing in celebrities backed SPACs. SEC also advised to not invest in SPAC solely because of celebrities. Political figures, professional athletes, and entrepreneurs are supporting specific SPACs recently.
SEC further added that "Celebrities, like anyone else, can be lured into participating in a risky investment or may be better able to sustain the risk of loss. It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment."
What caused a surge in SPAC funding
The $1,400 stimulus checks are considered to be an unexpected source of demand for SPACs and other stocks and assets. Stimulus checks are mainly used to make ends meet; however, many Americans are thought to have invested these checks into wall street. According to Rieder, it's healthy that the stimulus money gets into the stock market and assets that will appreciate in value over time.