Greater control over the accounting methods used by special-purpose procurement firms, along with a series of public relations headaches involving high-profile deals, threaten to stop the so-called blank check fashion.
A SPAC is a publicly traded trading company looking for an acquisition, allowing a private company to bypass the typically lengthy and costly process of a traditional initial public offering.
However, SPAC activity has fallen sharply in recent months.
A series of high-profile accounting problems at Nikola and Lordstown Motors electric vehicle startups, which were made public through blank verification contracts, has sparked increased skepticism on the part of investors, analysts and regulators. to other companies that use SPAC to make themselves public.
SPAC bids hit a speed
In the most recent quarter, according to S&P Global Market Intelligence, 110 companies raised $ 16 billion from SPAC operations. This is down from $ 88 billion raised in 320 SPAC transactions in the previous quarter. In the last quarter of last year, SPACs generated $ 35 billion in 147 bids.
Demand for SPAC, as well as for IPOs, has been driven in large part by the stimulus from the Federal Reserve, which helped boost the stock market after a brief Covid-induced setback.
Short sellers, most notably the research firm Hindenburg, have published scathing reports of several companies going public through SPACs, arguing that the figures often do not seem correct.
Companies listed on a stock exchange through SPAC often do not go through such a rigorous review by investment bankers and the Securities and Exchange Commission as companies listed on a stock exchange through an IPO. The SEC issued stricter guidelines on SPAC accounting in April.
And earlier this month, a lawsuit against SPAC Pershing Square Tontine Holdings by Bill Ackman claimed that the firm was illegally incorporated as an investment company that delivered “astronomical” compensation to Ackman.
Ackman previously said he would abandon SPAC’s plan to buy a 10% stake in Universal Music Group for $ 4 billion.
Ackman dismissed the lawsuit as “without merit” in a letter from shareholders, but also said it “could have a chilling effect on the ability of other SPACs to complete merger transactions or participate in IPOs … as a result of being considered an illegal investment “the company is extremely heavy”.
Blank verification exhaustion?
Plaintiff’s attorneys – former SEC commissioner and current NYU law professor Robert Jackson and Yale law professor John Morley – told CNN Business that the biggest problem they encountered with SPAC was Ackman was that it was structured in a Byzantine way looking more like an investment firm than one that wants to make business acquisitions.
They argue that SPACs should be subject to further regulation and that disclosures should be simple and clear. Jackson said the goal of the lawsuit was to “expect reform of the SPAC market.”
Current breath can be a good thing for investors. After the huge number of SPAC transactions during the second half of 2020 and the first quarter of this year, it is possible that investors will simply get tired of one blank check deal after another.
“The significant decline can be attributed to closer control by regulators as investors stop to digest the exception of SPACs and the disappointing performance of stock prices,” consulting firm EY said in a report last month .
It probably won’t help that many of the companies that want to go public through blank check mergers are emerging companies in industries such as electric vehicle charging and biotechnology, where real sales, let alone profits, can be years from materializing.
