America’s “tech cash shell” boom

America's tech companies are eschewing going public through an IPO and opting to use “special purpose acquisition companies” (SPACs) – also known as cash shells – instead.

Special purpose acquisition companies (SPACs) – also known as cash shells – have “suddenly become the hottest way to raise capital, especially in tech”, says Kara Swisher in The New York Times. A SPAC raises money through an initial public offering (IPO), then uses the cash to buy a business that wants to list on the stockmarket but doesn’t want to go through the IPO process. As such, they are “essentially a back door to taking a start-up public”.

This appeals to many tech entrepreneurs, who believe that the investment banks that carry out IPOs tend to underprice them, leaving “billions on the table that should go to the companies, and not to Wall Street firms and their clients”. What’s more, most detest the hassle of taking part in an IPO: ”often they compare it to dental implant surgery”. So as the tech sector booms, so do SPACs: there have been 75 new SPAC listings in the US this year, raising more than $30bn.

There is another way to go public without an IPO, notes Yun Li on CNBC: a direct listing, when a firm simply lists its shares on the exchange. The limitation is that it can’t raise new capital at the same time – only existing investors can sell their shares. But last month US regulators approved new rules that will let firms carrying out a direct listing on the New York Stock Exchange and sell new shares on the first day of trading. This “could curb some of the enthusiasm in the booming SPAC market, as it provides similar advantages”.

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Cris Sholto Heaton

Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.

Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.

He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.