Special purpose acquisition company. It is such an unwieldy phase that it demands an acronym. And so these investment vehicles,  also called blank check companies and shell companies, are known as SPACs.

A SPAC is a way for a small private company, — often with no revenue — to access public markets and investment without going through a cumbersome initial public offering (IPO). 

SPAC-sponsored companies can talk about their projections for scaling the business and project revenue several years in the future. Neither is allowed in an IPO. 

Another distinction between a SPAC and an IPO is that retail investors can participate early by purchasing shares of the sponsoring entity, which coincidentally raises funds via IPO. IPOs typically are controlled by bankers who lean toward institutional investors.

Investors in SPACs write a “blank check” to the shell company, so called because it has no actual business other than making an acquisition sometime within two years of the IPO. Investors don’t know the SPAC target in advance. But if they don’t like the choice, they often can get their money back..

Money raised by the SPAC sponsor is often increased from another investment called a PIPE, or private investment in public equity. Investment groups, mutual and  hedge funds buy shares in the SPAC for $10 each with the sweetener of a partial stock warrant exercisable later at $11.50. When those shares are purchased, the new company.gets the proceeds.

The history

SPACs began in the 1990s with a few investments in the technology, healthcare, logistics, media, retail and telecommunications industries. More recently,, SPACs have sprung up in a range of industries from civilian space travel to flying cars and electric vehicles.

SPACs began to gain popularity in 2019 when 59 of them pulled in $13.3 billion in gross proceeds. They exploded in 2020 when a record 248 SPACs started with gross proceeds of $83.3 billion invested. 

This year, through June 17, there have been 345 SPACs with gross proceeds of $107.9 billion, according to SPACInsider. The average SPAC this year has raised $336.1 million for the eventual business combination. That’s when the sponsor gives up its ticker symbol to allow the acquired company to list on the NYSE or NASDAQ.

SPAC sponsors typically claim 20% equity in the new company as the so-called Promote. Usually, the sponsors are prohibited from selling their shares for a period of time, typically six months to a year after the business combination.

Cracks develop

As SPACs took the investing world by storm, cracks in the too-good-to-be-true approach began to appear. 

Several young companies became targets of short sellers, determined to see the stock price fall from lofty heights. The most noteworthy example  was battery-electric and fuel cell truck startup Nikola Corp. (NASDAQ: NKLA).

Charismatic founder and Executive Chairman Trevor Milton spent years before its reverse merger with sponsor VectoIQ talking up the technical prowess and prospects for the company. 

Milton attracted interest from old line automaker General Motor Co. (NYSE: GM), which tentatively agreed  to partner with Nikola to  manufacture an electric pickup truck called Badger in exchange for 11% equity in the company. 

Short sellers strike

Two days after the announcement, which sent both Nikola and GM stocks higher, short seller Hindenburg Research released a blistering 67-page report entitled “Nikola: How to Parlay an Ocean of Lies into a Partnership with the Largest Auto OEM in America.”

Nikola stock cratered. GM fell silent, eventually walking away from an equity deal and replacing it with a face saving memorandum of understanding under which it might provide fuel cells for future generation Nikola trucks. Milton was out and gave up his board seat.

An eerily similar scenario played out more recently for Lordstown Motors Corp. (LMC)., a startup that went from practically no investment — other than a 55-year-old GM plant the company effectively gave to LMC — to a business combination with SPAC sponsor Diamond Peak Holdings Corp. in just 11 weeks, fast even by SPAC standards.

On June 8, LMC (NASDAQ: RIDE) filed a “going concern” notice with the SEC, saying it might not survive the year without additional funds. LMC received $780 million from its merger with Diamond Peak.

Hindenburg in March attacked Lordstown in a report called “The Lordstown Motors Mirage: Fake Orders, Undisclosed Production Hurdles and a Prototype Inferno.” that claimed 100,000 pre-orders did not exist, which the company effectively admitted following an internal investigation that dismissed the rest of the report as  being full of inaccuracies .

A day after CEO Steve Burns and Chief Financial Officer Julio Rodriguez resigned last Monday, LMC President Rich Schmidt told the Automotive Press Association in Detroit that the company  had enough orders to build 15,000 to 20,000 trucks before running out of money next May. 

The company told the SEC two days later that it has no firm orders.The SEC already was investigating LMC over Burns’ claims about orders. 

In both the Nikola and Lordstown cases, shares lost value. Both have been volatile since.

SEC scrutiny

New SPACs continue to be announced, but the pace has slowed since the SEC in April increased its scrutiny. The agency advised SPACs that they needed to account for stock warrants as liabilities rather than equity — and mostly non cash adjustment.

More ominous is other guidance which, if made into regulation, could topple the SPAC model by making the target company conduct the IPO rather than the SPAC sponsor. Such a change would remove the “safe harbor” protection that allows SPACs to make projections without fear of being held liable if they fall short.

“More disclosure should be required about the compensation that SPAC sponsors receive,” University of California Berkeley School of Law Professor Steven Davidoff Solomon wrote in The New York Times on June 12.

“And some SPACs are too aggressive or make companies public too soon or with faulty (or even fraudulent) business plans,” he wrote. “But the same can happen with traditional I.P.O.s. That is not a reason to kill the only thing that has revived the market for I.P.O.s of small and emerging growth companies in 20 years.”

Are SPACs redirecting blank check love to self-driving truck startups?

Once lightly regarded SPACs are here to stay

Waymo hauls in $2.5B from investors for autonomous expansion

Click for more FreightWaves articles by Alan Adler.

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