Small investors are the financial losers when they invest in special purpose acquisition companies (SPACs), the CFA Institute is poised to say at a House Financial Services Subcommittee hearing today.
SPACs, sometimes called called blank-check companies, have been around for decades, but in the past year have taken off as a faster and cheaper alternative to IPOs for companies that want to go public.
Unfortunately, retail investors are rarely the beneficiaries of SPACs, Stephen Deane, the CFA Institute’s senior director of legislative and regulatory outreach, is prepared to tell lawmakers today, according to written testimony obtained by Financial Advisor. The hearing will explore whether SPACs should be subjected to tougher regulation.
“Big investors—the SPAC sponsor, the hedge funds and others who invest in the IPO, and [private] PIPE investors—generally do very well. Retail investors—who often buy their shares at the time of the merger announcement and hold them into the post-merger period—generally do poorly,” Deane says in the testimony.
One academic study cited by Deane, entitled “A Sober Look at SPACs,” analyzed 47 SPACs that completed mergers between January 2019 and June 2020 and found that sponsors have fared well, even in cases where the post-merger company has not. Specifically, sponsors enjoyed a mean return of 393% for both three and six months after the merger, and 187% after 12 months.
However, these returns stand in stark contrast to retail investors investing in the post-merger public company. The study found that the sample’s 12-month mean return for retail investors after the merger was was a loss of 34.9%. The median return in that time period was an even worse -65.3%.
Congress should look closely at “dilution—misaligned incentives that may work against the interests of certain SPAC investors, including retail investors; the lack of disclosure of side deals with other investors; the unlevel regulatory playing field; and the risks of biased information that flow from a safe harbor for forward-looking statements related to SPAC mergers,” Deane says.
Deane and other consumer advocates and academics worry that the ease to market enjoyed by SPACs also makes it easier to lure less sophisticated investors who may not understand some of the risks.
The number of new SPACs rose 420% over the past year, raising $83 billion, topping the $67 billion raised by traditional IPOs, according to a subcommittee release.
Retired sports stars Colin Kaepernick and Shaquille O'Neal, news commentator and former Trump administration economic advisor Larry Kudlow and pop star Ciara have all become spokespeople for the SPAC industry. Former baseball star Alex Rodriguez has also filed to start a SPAC called Slam Corp.
Usha R. Rodrigues, professor of corporate and securities law at the University of Georgia School of Law, and Andrew Park, senior policy analyst at Americans for Financial Reform, also plan to ask for greater SPAC regulation, according to their testimony.
Scott Kupor, managing partner at Andreessen Horowitz, a $16.5 billion multistage venture capital firm that has invested in AirBnB, Coinbase, Github, Roblox, Instagram and Lyft, who will also testify, is expected to urge the Securities and Exchange Commission to ease the initial public offering process so that more companies choose IPOs and not SPACs, which Kupor worries hollow out U.S. capital markets.
“We have heard that the SEC staff has been overwhelmed by the volume of offerings in its review pipeline. ... To ensure maximum flexibility for issuers, Congress should consider whether the SEC has adequate resources to manage a growing pipeline of companies seeking to go public,” Kupor says in his testimony.