Over recent years, SPAC financing has been viewed as an opportunity for private companies to go public in a shorter time frame, with fewer risks to company valuation, than the more traditional IPO route.
Numerous companies, especially in the tech sector, opted for SPAC financing. This approach allowed them to obtain substantial amounts of funding needed to spur company growth without succumbing to the significant regulations present in the IPO process.
However, several companies viewed as having a high potential for considerable ROI after their successful SPAC offerings have faced significant losses and dwindling cash, sometimes just a year after their public listings.
According to the Wall Street Journal, 25 companies that merged with SPACs in 2020 and 2021 have issued going concern warnings amidst floundering revenues and big losses. On average, shares of companies tied to SPACs were down 59.5% from last year.
From a regulatory perspective, the U.S. is seeking to enhance the regulatory requirements for SPACs to align them better with conventional IPOs. Senator Elizabeth Warren has said she would introduce a new bill to tighten the incentives for SPAC investors, while the SEC has proposed changes to the disclosure rules for SPACs.
As the SPAC market considers these regulatory changes and the disappointing results from SPAC-supported companies, many investors are becoming warier of the SPAC model.
A deteriorating stock market and rising inflation haven’t helped matters. Over the next year, we’ll likely see a continued decrease in SPAC-backed companies and declining interest from investors.
What Is SPAC Financing?
Special Purpose Acquisition Companies (SPACs) are investment businesses that target certain private companies for acquisition.
The SPAC itself becomes publicly listed before finding private firms that can potentially benefit from a public listing. Once a company is identified as a target, the SPAC works to quickly merge itself with the company, allowing the company to obtain a public listing on the stock exchange.
Investors who put up the financing in a SPAC company don’t know what company will be acquired. The SPAC has two years to find an appropriate business before it must be delisted from the stock exchange and all monies returned to the investors.
Once it finds its target, the SPAC has 90 days to meet all of the regulatory requirements for the merger and listing to comply with SEC rules.
Even if the SPAC can meet all of the timeline and regulatory requirements, it runs the risk of failure if investors disapprove of the investment. Investors may also withdraw their investment in the SPAC at any time, which can completely derail the merger or acquisition deal.
What Makes SPACs Attractive?
SPAC financing is desirable to companies and SPAC investors for several reasons.
Less Risk of Devaluation
In the traditional IPO model, the valuation of a company is set by market sentiment and industry trends. These factors may not always align with what the stock market dictates once the company goes public.
As a result, the shares of a newly listed public company can drop dramatically. The volatility of shares can lead to significant losses for the original investors.
Under SPAC financing, the share price model is quite different. The SPAC determines the value of its target company and pays a fair price for its acquisition. Thus, there is less market volatility in shares when the company’s stock appears on the trading floor.
Shorter Period to Public Listing
For a company seeking the traditional IPO route, regulations and rules can lead the process to take up to 15 months before the company is finally listed. There are numerous laws that the company must comply with before an IPO is approved.
SPAC is attractive to new companies since the listing process can occur within five months. This tight timeframe can significantly reduce the risk of market volatility.
Public Company Guidance
Investors who pool money in SPACs have lots of industry and financial expertise that they can leverage to guide the company in its new life as a public company.
When a company attempts to navigate into an IPO on its own, it may not have the knowledgeable leadership that a SPAC-approved board of directors does. Lack of expertise can lead to growing pains and hiccups in the organization.
What Is the Expectation for Future SPAC Financing?
While SPACs had significant popularity in recent years, rising inflation and increasing interest rates have put a damper on the stock market. News of failing companies associated with SPACs hasn’t helped, either. More investors are turning to less risky endeavors to curb potential losses, such as bonds and heavy metals investments.
The unknowns associated with potential new SPAC regulations make them less attractive investments for large venture capitalist firms. We’ll likely see a decline in financing using the SPAC model until the market steadies and changes in the regulatory environment are hammered out.
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