CBx Daily

Buyer Beware: Is The $70 Billion SPAC Party Coming To An End?

Mar 22

By CultureBanx Team

  • In 2021, more than 200 SPACs that have raised a collective $70B
  • Shaquille O’Neal, Colin Kaepernick, Jay-Z, Serena Williams, Alex Rodriquez and Steph Curry have all recently gotten into the SPAC game

The SEC is sounding the alarm on SPACs that nearly anyone can start,  which have enticed a cross-section of big named athletes, activists and Wall Street executives. SPACs, the so-called “blank check” shell corporations are designed to take companies public without going through the traditional IPO process. Notable people including Shaquille O’Neal, Colin Kaepernick, Jay-Z, Serena Williams, Alex Rodriquez and Steph Curry have all recently gotten into the SPAC game. However, the bottom could be getting ready to fall out for the more than 200 SPACs that have raised a collective $70 billion this year, according to Bloomberg.  

Why This Matters: Colin Kaepernick’s Mission Advancement SPAC plans to raise $287 million to generate a positive social impact. Shaq and his friends SPAC, called Forest Road Acquisition, plan to raise $250 million, specifically to make deals in the media and technology sectors. Just last month they announced a deal to take the Beachbody fitness brand public.

Herein lies the problem as Harvard’s Law School points out that SPACs are a cheap way to go public, they are right, but only because SPAC investors are bearing the cost, which is an unsustainable situation. Although SPACs issue shares for roughly $10 and value their shares at $10 when they merge, by the time of the merger the median SPAC holds cash of just $6.67 per share.

“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,” the commission wrote on its website. The SEC goes on to state 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.

Situational Awareness: With the popularity of blank check companies comes increased scrutiny, because SPACs raise cash in an IPO and then have two years to search for a private company with which to merge and thereby bring public. The primary source of SPACs’ high cost and poor post-merger performance is dilution built into the circuitous two-year route they take to bringing a company public.

CBx Vibe:Good Investments” Marsellis