SPAC Attack: Are SPACs a gimmick, or are they here to stay?

With ambiguous names like SPAC CM Life Science II, GigCapital3 Inc. and Gores Holdings VI, and often with skimpy financial disclosures, special purpose acquisition companies, or SPACs, come with an air of mystery. 

They also come with the potential to earn windfalls for companies and investors. And of course, on the flipside, there’s a mountain of risk.

As these investment vehicles gain popularity, it becomes increasingly important for mom and pop investors to understand exactly where they’re pouring their savings.

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A SPAC is a publicly traded shell company with a built-in two-year lifespan that exists solely to merge with another company in order to take that second company public, representing an alternative to the traditional initial public offering process. 

When a SPAC, often formed by venture capitalists, identifies a company to acquire, it’s shareholders vote on the deal, and if approved, the combined company often takes on a new name and ticker symbol.

“Normally when you’re thinking about investing in a company, you’re thinking about just that: investing in a company,” University of Colorado Leeds School of Business professor Andrea Pawliczek told BizWest. “With a SPAC, you’re essentially buying money that’s going to be put into an account to eventually acquire some company in the future. There’s much more that’s unknown when you’re investing in a SPAC. When you invest in an IPO company, it has operations, you know what it does, what its plans are.”

Pawliczek and fellow CU professor Sarah Zechman have studied what attracts investors to SPACs with a keen eye on how SPAC financial and regulatory disclosures influence that attraction.

SPACs are sometimes referred to as blank-check companies and earned a pretty unsavory reputation in the 1980s when they first gained popularity due to lack of regulatory oversight.

In the decades that followed, blank-check companies were rebranded as SPACs and new regulations were introduced that forced managers to hold investment funds in escrow until the merger was complete. 

“When you invest in a SPAC, you’re betting on the management team and its ability to find a company [to acquire],” Pawliczek said. “And although they disclose an industry, you really have no idea what they’re going to target.”

While SPACs in their current form have existed for years, they’ve gained steam significantly of late.

A total of 59 SPACS were created, with $13 billion invested, in 2019, according to the Harvard Business Review. That total jumped to 247 in 2020 with $80 billion invested. During the first quarter of this year, 295 were created, with $96 billion invested.

“There are a lot of theories and not a really clear answer to why they’ve become so popular over the past couple of years,” Pawliczek said.

Her research suggests some of the factors include the increasing cost of the traditional IPO process and increasing comfort with alternative investment types such as cryptocurrency. 

While SPACs are traded on Wall Street, they often have Main Street connections, particularly in tech-centric regions such as the Boulder Valley and Northern Colorado.

Loveland-based Lightning eMotors Inc. (NYSE: ZEV) merged with a SPAC in May and is now trading on the New York Stock Exchange.

Boulder biotech company SomaLogic Inc. (Nasdaq: SLGC) went public in September after merging with a SPAC.

SPAC Crucible Acquisition Corp. is led by Boulder investor and Foundry Group founder Brad Feld, who is planning to launch two additional SPACs.

Los-Angeles-based venture capital fund The Gores Group has already launched a Boulder-based SPAC and is planning another.

Boulder-based equity fund Aravaipa Ventures has formed a pre-SPAC company called Aravaipa Growth Equity Fund II. 

SPACS function “like private equity for the layperson,” Zechman said. “It’s not exactly the same — there are some clear differences, but like private equity you’re trusting others to make decisions with your investment.”

Because SPACs are increasingly seen as a hip way to invest, the companies have gained the attention of Hollywood and the sports world both on the SPAC side and acquisition target side of the equation with figures such as former Broncos quarterback Peyton Manning and pop star Ciara being linked to them.

Even former President Donald Trump is getting in on the game on the target side of the SPAC equation with his new social media venture. Democrats, wary of both the former president’s track record of alleged shady business dealings and the potential for fraud that can be ripe within the SPAC ecosystem, have asked regulators to probe Trump’s SPAC merger for securities violations. 

Celebrities tend to play a more prominent role in SPACs than traditional investment vehicles because there is so little information available about SPACs beyond who’s involved.

“The [disclosure] requirements are exactly the same whether you’re a traditional IPO or a SPAC,” Zechman said. “What differs is that you have very little to say [if you’re a SPAC]. You have no historic operations, very few if any assets and liabilities. There is speculation about what your plans are for the future and who your sponsor team is and potential risks. But you’re likely missing most of the underlying substance.”

Experts are still working to determine whether the presence of a high-profile figure in a SPAC management team or the specificity of disclosure statements have a major impact on the performance of the company.

“Since much of the data is from the past two years, we really have nothing super long term” to study, Pawliczek said.  

But, Zechman added: “The idea is that [the presence of a celebrity] certainly attracts attention, but maybe it’s not based on fundamentals.”

That said, a well-known investor on a SPAC management team could indeed provide supporters with a certain level of comfort based on past performance.

“If I think Brad Feld is a smart investor who picks good tech firms, that might be why I’d want to invest” in one of his SPAC projects, Pawliczek said. “… That seems relevant because he has a significant track record.” 

In April, the U.S. Securities and Exchange Commission released a cautionary statement about SPACs. 

“Over the past six months, the U.S. securities markets have seen an unprecedented surge in the use and popularity of Special Purpose Acquisition Companies,” John Coares, the SEC’s Division of Corporation Finance acting director, said in the statement. “Shareholder advocates — as well as business journalists and legal and banking practitioners, and even SPAC enthusiasts themselves — are sounding alarms about the surge.”

The commission cites “risks from fees, conflicts, and sponsor compensation, from celebrity sponsorship and the potential for retail participation drawn by baseless hype, and the sheer amount of capital pouring into the SPACs, each of which is designed to hunt for a private target to take public.”

These concerns have taken on a local flavor with the October filing of a suit in U.S. District Court in Denver that alleges Lightning eMotors engaged in violations of federal securities laws in relation to its go-public move.

The company went public May 7 via a SPAC merger and reported results for its first quarter on May 18 and its second quarter on Aug. 16.

The lawsuit alleges that between May 7 and Aug. 16, “defendants made materially false and misleading statements regarding the company’s business, operations and compliance policies.”

Specifically, the lawsuit said as Lightning eMotors went public in May it didn’t disclose that it would report a higher year-over-year quarterly loss in its second quarter.

The company declined to comment, citing pending litigation.

Will SPACs remain such a popular fundraising and investment vehicle in years to come? It depends, experts say.

“It’s going to be highly dependent on the returns that we see,” Pawliczek. “As we start getting more longer-term returns from some of the SPACs that went public in 2020 and seeing how these merged companies are performing a year or two years after the merger, that may dictate the direction” of the SPAC trend. 

There appears to be no slowdown in sight in terms of the appetite for SPACs from private firms looking to go public, Zechman said. 

“It’s really a matter of whether or not the investing community still wants to put its money behind them,” she said. “We’ll see.”