Are Spacs just for suckers?
This year has seen a big boom in activity by special purpose acquisition companies (Spacs) in the US and the Spac craze is spreading to other markets. But some people have their doubts about them.
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The special purpose acquisition company (Spac) boom is going global. Spacs are shell firms that list on the stockmarket in order to raise cash. They then use the money to buy an existing company. Spacs provide the acquired firm with a route to a stockmarket listing that is less bureaucratic than the traditional initial public offering (IPO).
This year has seen a big boom in Spac activity in the US. Now other exchanges want a slice of the action. Singapore has become the first big Asian exchange to allow Spacs. There have been just three IPOs in the city so far this year. Singapore hopes that the new rules will help attract big tech listings.
London is late to the Spac party
London is also jumping in. British rules requiring Spacs to suspend their listings after announcing acquisition plans had encouraged the vehicles to list elsewhere.
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But last month the Financial Conduct Authority (FCA), the City regulator, revised its rulebook to make “the fusty stock exchange more hospitable to these whizzy” vehicles, says Jim Armitage in The Evening Standard. The City has watched glumly as British businesses rush to do Spacs in New York, while Amsterdam blossoms as Europe’s Spac hub. “Stories like that make a patriotic government nervous.” Spacs in Amsterdam have raised about $3bn this year, compared with London’s “minuscule $6m”, says The Economist. The FCA reforms are welcome, but they are unlikely to be a game-changer.
British rules governing sponsors – the people who initiate a Spac – are still stricter than those in Amsterdam. Spacs planning to buy European firms will still prefer to raise capital in euros rather than in sterling to avoid currency risk. In any case, the Spac boom looks to be “petering out”.
In America regulators are turning against Spacs, says Michelle Celarier in New York magazine. They are accused of delivering “huge windfalls to their sponsors and early hedge-fund investors while burning individual investors”. Companies have been known to slash bullish revenue forecasts after deals are signed. Spac stocks in America have fallen by more than a fifth since the peak of the frenzy in February.
At their best Spacs can give ordinary investors access to exciting startups that were previously unavailable to them, says Kate Kelly in The New York Times. Yet they increasingly attract a “malodorous whiff”. The founder of electric truck company Nikola, which listed via a Spac last year, “was recently charged with securities fraud”. As Tyler Gellasch of nonprofit Healthy Markets puts it, “The only reason why someone would do a Spac is because they found a sucker”.
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