A Lordstown Motors pre-production all electric pickup truck, the Endurance, is seen after being merged with a chassis at the Lordstown Assembly Plant in Lordstown, Ohio, U.S., June 21, 2021. REUTERS/Rebecca Cook
July 26 (Reuters) – Lordstown Motors Corp (RIDE.O) said on Monday hedge fund YA II PN Ltd has committed to purchase up to $400 million of the company’s shares, over a three year period, coming at a crucial time when the electric-truck maker faces heightened regulatory scrutiny related to its SPAC merger and vehicle pre-orders.
Under the deal, YA can receive nearly 35 million Lordstown shares upon execution of the agreement, subject to the approval of Lordstown shareholders, as well as a small discount on the shares whenever purchased, according to a regulatory filing.
Lordstown’s shares rose 3.9% to $7.77 and are on track to snap a three-day streak of losses.
Some industry observers called it a good deal for Lordstown.
“Existing shareholders are not taking $400 million worth of dilution. It’s like a standby commitment on the part of YA to buy stock when Lordstown says it needs more money,” said Erik Gordon, professor at the University of Michigan’s Ross School of Business.
“I was surprised. It’s more like the knight in shining armor than the vulture at the carcass.”
The agreement comes a month after Lordstown warned it may not be able to continue as a “going concern.” The company had since attempted to allay fears by saying it was in talks with multiple parties to raise funds.
The investor, YA II PN Ltd, is a fund managed by Mountainside, New Jersey-based investment manager Yorkville Advisors Global LP.
Yorkville has investments in more than 700 companies in over 20 countries, according to its website. Its current active sectors include healthcare, metals and mining, energy, technology, and cannabis. Some of its investments include cannabis deals network Leafbuyer.com, copper ores company Copperstone Resources and biotechnology company CytoTools.
Yorkville Advisors Global did not immediately respond to a Reuters’ request for comment.
(This story corrects typo in headline to say “up to”)
Reporting by Eva Mathews and Ankit Ajmera in Bengaluru and Ben Klayman in Detroit; Editing by Shailesh Kuber and Krishna Chandra Eluri
Our Standards: The Thomson Reuters Trust Principles.
Lynn E. Turner, a former chief accountant for the Securities and Exchange Commission, called the proposed fix “an excellent idea.” Because sponsors are the ones advertising “here’s what we’re going to do in this time period,” he said, “they should be locked into that.”
Mr. Palihapitiya was less enthusiastic.
“This isn’t a very good idea,” he told me. “Why would a sponsor agree to a five-year lockup when management wouldn’t, nor would other investors including PIPE investors?” (At the time of the deal, institutional investors are often invited to buy shares with favorable terms through what’s called a private investment in public equity, or PIPE.)
That is true. Management can typically sell shares after a short restricted period. But, as Mr. Turner pointed out, isn’t it the sponsor that is selling the deal to the public?
“What if management lied?” Mr. Palihapitiya argued. “Should the sponsor now be on the hook for bad behavior of management?” He said there were “too many corner cases where this fails.”
Mr. Palihapitiya said he had a better idea: “Make a sponsor invest at least as much as 10 percent of the deal size,” which is far more than most sponsors do. “The more they invest, the more they would need to scrutinize the projections,” he said. “This has always been the only meaningful way to align sponsors, management and investors.”
In some ways, the market is already forcing some sponsors to agree to longer lockups. Michael Klein, a former banker who has become a serial SPAC deal-maker, recently agreed to keep his stake in Lucid Motors, a high-flying electric vehicle maker, for at least 18 months as a way to seal the deal.
And with more and more SPACs losing their shine — most SPACs that went public in recent weeks are now trading below their offering price — investors may demand more from sponsors, perhaps even before regulators do.
But, in the end, investors shouldn’t have to ask sponsors to commit to their own deals.
Investors who bet against stocks are targeting special-purpose acquisition companies, one of the hottest growth areas on Wall Street. The dollar value of bearish bets against shares of SPACs has more than tripled to about $2.7 billion from $724 million at the start of the year, according to data from S3 Partners.
Some of the stocks under attack belong to large SPACs that surged in recent months, in part because they were backed by high-profile financiers. A blank-check company created by venture capitalist
Chamath Palihapitiya
that plans to merge with lending startup Social Finance Inc. is a popular target, with 19% of its shares outstanding sold short, according to data from S&P Global Market Intelligence. The short interest in
Churchill Capital Corp. IV,
a SPAC created by former investment banker
Michael Klein
that is merging with electric-vehicle startup Lucid, more than doubled in March to about 5%.
Others are wagering against companies after they combine with SPACs. Muddy Waters Capital LLC announced last week it was betting against
XL Fleet Corp.
, a fleet electrification company that went public in December after merging with a SPAC. XL has since said Muddy Waters’s report, which alleged XL inflated its sales pipeline and made misleading claims about its technology among other issues, had “numerous inaccuracies.”
XL’s stock price dropped the day Muddy Waters released its report by about 13%, to $13.86, from its prior close on March 2. Shares closed Friday at $12.79.
Shares of
Lordstown Motors Corp.
fell nearly 17% Friday after Hindenburg Research released a report saying the electric-truck startup had misled investors on its orders and production. The company, which merged with a SPAC in October, said the report contained half-truths and lies. The short interest in Lordstown shares rose to 5% from 3.4% in the week before the report’s publication, according to data from S&P.
“SPACs are an area of focus,” said Muddy Waters’s
Carson Block.
The veteran short seller said SPACs largely make up the universe of companies he views as both “abysmal” and relatively free from technical challenges, such as high short interest, which can make betting against them difficult.
SPACs are shell firms that raise capital by issuing stock with the sole purpose of buying or merging with a private company to take it public. They are dominating the market for new stock issues, becoming a status symbol for celebrities while pumping the value of acquisitions, like betting company
DraftKings Inc.,
into the tens of billions of dollars.
Hedge funds that buy into SPACs early see them as a way to make lofty returns without much risk. Individual investors are attracted by the chance to get positions in newly public companies that they could rarely purchase through traditional IPOs. The Securities and Exchange Commission issued a statement on Wednesday warning that it “is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it.”
A monthslong rally in the stocks lost steam recently amid a broad selloff in technology and high-growth companies. An index of SPAC stocks operated by Indxx fell about 17% from mid-February to March 10, while the Nasdaq Composite Index declined about 7.3% over the same period.
“These are all momentum stocks, and a lot of people want to short them,” said
Matthew Tuttle,
whose firm Tuttle Tactical Management runs an exchange-traded fund that allows investors to hold a portfolio of SPAC stocks. Mr. Tuttle is preparing to launch an ETF that bets against “de-SPAC” stocks of companies that have merged with a SPAC—like electric-truck manufacturer
Nikola Corp.
and baked-goods maker
Hostess Brands Inc.
—and a separate fund that invests in the stocks.
Private companies are flooding to special-purpose acquisition companies, or SPACs, to bypass the traditional IPO process and gain a public listing. WSJ explains why some critics say investing in these so-called blank-check companies isn’t worth the risk. Illustration: Zoë Soriano/WSJ
Postmerger companies are particularly attractive to short because they have larger market capitalizations, making their shares easier to borrow, and because early investors in the SPACs are eager to sell shares to lock in profits, analysts and fund managers said.
Short sellers borrow stocks they believe are overvalued and immediately sell them, hoping to repurchase the shares for a lower price when they need to be returned and to pocket the difference. The strategy proved dangerous in recent months when individual investors organized on social media to push up stocks like GameStop Corp., forcing short sellers to buy shares and cap their losses, helping to drive prices still higher.
Continued strong investor demand for SPACs could catch short sellers in a similar squeeze. Shorting SPACs can also be risky because their shares have a natural floor at $10, the price at which they can be redeemed before a merger, and because they are prone to sharp price moves, analysts said.
Still, the portion of shares sold short in SPACs and their acquisitions is climbing.
A blank-check company created by venture capitalist Chamath Palihapitiya that plans to merge with lending startup Social Finance Inc. is a popular target.
Photo:
Brendan McDermid/Reuters
Some are betting against stocks they believe rose too fast, to unsustainable valuations. The price of bioplastics company
Danimer Scientific Inc.
nearly tripled to $64 in the first six weeks of the year after it was bought by a SPAC. The short interest in Danimer stock has climbed to 8.5% from around 1% in January, and its share price has traded down to about $42, according to data from S&P.
Others are making bearish bets to hedge against potential losses in SPAC stocks they own.
Veteran short seller
Eduardo Marques
cited SPACs and their boosting the number of U.S.-listed stocks as a short-selling opportunity, according to a pitch for a stock-picking hedge fund called Pertento he plans to launch this year. America’s roster of public companies had shrunk from the mid-1990s onward, but that trend has recently reversed, partly because of SPACs.
Their popularity has helped spark new Wall Street offerings.
Goldman Sachs Group Inc.
this year started offering clients set baskets of similar stocks to short, pitching them as a way to hedge SPAC exposure, people who have seen the offering said. Clients typically customize the baskets Goldman offers, which are thematic and sector-focused, such as on bitcoin and electric vehicles.
Kerrisdale Capital founder
Sahm Adrangi
started shorting postmerger SPAC companies earlier than most, with a public bet in November against the stock of frozen-food maker
Tattooed Chef Inc.,
which still trades above its price at that time. But the stock has fallen about 13% during the recent market slump.
“We saw these stocks go up a lot and now that people are de-risking, these highflying SPACs are coming down to earth,” Mr. Adrangi said.
—Amrith Ramkumar and Mike DeStefano contributed to this article.
SHARE YOUR THOUGHTS
How long do you think the SPAC boom will continue, and why? Join the conversation below.
Write to Matt Wirz at matthieu.wirz@wsj.com and Juliet Chung at juliet.chung@wsj.com
The New York Stock Exchange welcomes Desktop Metal Inc. (NYSE: DM), today, Thursday, December 10, 2020, in celebration of its listing. To honor the occasion, Ric Fulop, Co-Founder and CEO, rings The Opening Bell®.
NYSE
Roger Lee of Battery Ventures says that “SPAC” used to be a “bad four-letter word” in Silicon Valley.
Now, the board of every high-profile start-up is discussing special purpose acquisition companies as a legitimate way to go public, according to Jeff Crowe of Norwest Venture Partners.
In the eyes of Lux Capital co-founder Peter Hebert, SPACs are “stealing from the 2021 IPO calendar.”
“We have encouraged our highest-quality companies to seriously consider this,” said Hebert, whose firm raised its own health-tech SPAC in October and is looking for a target. “The vast majority of companies looking at doing traditional public offerings are dual-tracking SPACs.”
Within Lux’s portfolio, 3D-printing company Desktop Metal went public through a SPAC in December. Others like real estate software companies Latch and Matterport have announced deals this year with so-called blank-check companies.
The sudden burst of SPACs reminds some long-timers of the dot-com bubble in the late 1990s. Pre-revenue businesses with far-out goals are going public at astronomical valuations, and famous athletes and other celebrities are getting in the mix. Mention the acronym to any well-known start-up CEO and you’ll likely hear about the non-stop calls they receive from sponsors with hundreds of millions of dollars to spend.
To Wall Street skeptics, it looks like the finance industry’s latest scheme to make money from speculators in a low interest rate environment with the market at a peak and investors hungry for all things tech. SPACs have raised more than $44 billion so far this year for 144 deals, according to SPACInsider. That’s equal to more than half the money raised in all of 2020, which itself was a record year.
While there’s undeniable mania in the SPAC boom, there’s another story playing out in parallel. Venture-backed tech companies with high-growth prospects are shunning the IPO process, which has its own flaws. Instead they’re getting comfortable with the idea of hitting the market in a way that would have been unfathomable just a year ago.
In a SPAC, a group of investors raise money for a shell company with no underlying business. The SPAC goes public, generally at $10 a share, and then starts hunting for a company to acquire. When it finds a target and a deal is agreed upon, the SPAC and the company pull in outside investors for what’s called a PIPE, or private investment in public equity.
The PIPE money goes onto the target company’s balance sheet in exchange for a big equity stake. The SPAC investors get stock in the acquired company, which becomes the publicly-traded entity through what’s known as the de-SPAC.
One major advantage: SPACs allow companies to provide forward-looking projections, which companies typically don’t do in IPO prospectuses because of liability risk.
“An IPO is what I would call backward-looking,” said Betsy Cohen, who led a SPAC that recently took car insurer Metromile public. “Because a SPAC is technically a merger, you’re required to tell investors what the merged companies will look like after the merger and project forward.”
It’s also a much faster process than the IPO, which involves spending many months with bankers and lawyers to draft a prospectus, educate the market, carry out a roadshow and build a book of institutional investors.
Fin-tech companies have been big SPAC targets
Many of the better-known SPAC targets so far have been at the intersection of tech and financial services. For these companies, cash burn rates are high and real GAAP profits often won’t come for years, even under the best circumstances.
Metromile, whose technology allows drivers to pay by the mile rather than a monthly fee, started trading on Wednesday after merging with INSU Acquisition Corp. II, a SPAC led by Cohen and her son, Daniel. Chamath Palihapitiya, the venture capitalist turned mega SPAC sponsor, and billionaire Marc Cuban invested in a $160 million PIPE.
As of Friday’s close, the stock was trading at $17.23, giving Metromile a valuation of over $2 billion based on the fully diluted share count.
“Metromile enters the insurance market at a time when telematics are installed in virtually every car going forward, so there’s the opportunity to look at insurance on an individualized customized basis, which is huge,” Cohen said in an interview. “We felt it was an important company to bring to the public markets and allow them to have access to capital in way insurance companies do.”
Cohen, who founded The Bancorp, said she will have closed seven SPACs by later this year, including payments company Payoneer and boutique investment bank Perella Weinberg.
Metromile CEO Dan Preston told CNBC this week that around the middle of 2020, as his board was evaluating financing options, he expected to raise a large round of private capital and then go public in four to six quarters. The company had been around for a decade and raised hundreds of millions of dollars in funding.
Metromile CEO Dan Preston
Winni Wintermeyer
Other insurance-tech businesses like Lemonade and Root held traditional IPOs last year. But Preston says the more he learned about SPACs, the more he realized it was the better approach for his company, which faced the high costs of operating in the heavily regulated insurance industry— and a pandemic that slashed the amount of miles driven.
“The sweet spot are companies that are pretty close to being public but need a little more historical data to get ready,” said Preston.
Metromile said in its merger filing that it expects insurance revenue to increase 39% to $142.1 million in 2021, and then jump 81% in 2022 and more than 100% in 2023. Adjusted gross profit will increase from $11.1 million last year to $144 million in 2023, the filing says.
Online lender SoFi said in January that it was going public through a SPAC run by Palihapitiya in a deal valuing the company at $8.65 billion. In the merger agreement, SoFi projects annual revenue of $980 million this year, increasing annually to $3.7 billion in 2025, while contribution profit will more than quintuple over that stretch to $1.5 billion.
In other finance SPACs, Palihapitiya led the reverse-merger of digital real estate company Opendoor, which went public last year and is now worth over $20 billion. He did the same with health insurer Clover Health (which said this month that it’s under investigation by the SEC) and is leading the PIPE for solar financing provider Sunlight Financial.
Top-tier investors joining the fray
He’s also doing software deals. In January, Palihapitiya was a PIPE investor in Latch, a developer of smart lock systems sold to real estate companies. Latch generates recurring software sales and said 2020 booked revenue jumped 49% from the prior year to $167 million.
Blackrock, Fidelity and Wellington are also part of the PIPE, meaning they’ll be equity holders when Latch goes public. Those names, viewed as top-tier public market investors, are becoming familiar to SPACs, with at least one of them showing up in the PIPE for SoFi, Matterport, Opendoor and consumer genetics company 23andMe.
For companies that can attract investors of that caliber, and have sponsors they trust to stick with them through the ups and downs of the journey, a SPAC can be the most efficient way to raise money. Large private rounds typically require hefty dilution, while IPOs often come with a discount of 50% to 100% for new investors.
In a SPAC, the target ends up handing up to 20% of shares to the sponsors and additional stock to PIPE investors. The rest primarily remains with insiders. When public, the company has the ability to raise follow-on capital at market rates. For example, Opendoor just announced it’s raising $770 million at $27 a share, marking an increase in valuation of about 200% from the time of the PIPE investment.
Norwest’s Crowe, whose firm was a venture investor in Opendoor and online therapy provider Talkspace, another SPAC target, said that pricing is favorable for the best companies because there are so many SPACs going after them.
“Pricing is nuts,” Crowe said. “There’s enormous pent-up demand for all these companies. A lot of companies that would’ve gone public in a relatively even fashion over 2021 and ’22, if markets hold, now are all going out in a mad rush.”
Venture investors are jumping in as well. In addition to Lux, firms including FirstMark Capital, Ribbit Capital, Khosla Ventures and SoftBank have raised their own SPACs. Separate from their firms, venture capitalists Steve Case, Reid Hoffman and Bradley Tusk have followed Palihapitiya into the SPAC sponsor arena.
Growth stage venture firm G Squared announced this week the close of a $345 million SPAC. Founder Larry Aschebrook, in an interview, called it “just another tool in our toolbox” to help companies access capital. He said it can be a good option for a CEO who’s ready to run a public company and a business that’s raised a lot of money in the past and can benefit from ready access to the capital markets.
G Squared Ascend I Inc. SPAC IPO at the New York Stock Exchange on Feb. 5th, 2021.
NYSE
“There are only a handful we think are super high-quality companies,” Aschebrook said about the tech SPAC deals that have already been announced. “Companies we’re interested in are teetering on profitability or are profitable and are logos that everyone knows.”
While Battery’s Lee no longer views SPACs as equivalent to a curse word, he said there hasn’t yet been one out of his firm’s portfolio. However, Battery is an investor in Coinbase, which is going public through a direct listing, following the lead of Slack, Spotify and Palantir in allowing existing stakeholders to sell in the debut rather than issuing new shares as a company.
Lee said he wouldn’t at all be surprised to see a SPAC from one or more of his companies this year, acknowledging that it’s become a third viable mechanism to go public.
“The direct listing was the first thing new thing to happen in the capital markets in 50 years — and the rebranding of SPACs is the second thing,” Lee said. “At the end of the day, you’re still running a public business and you have to be capable of withstanding the rigor and scrutiny.”
WATCH: Matterport CEO on going public through SPAC deal with Gores Group
The IPO market is red-hot right now. Plenty of big-name companies have decided to come public now, and many of them are looking at some non-traditional ways to make their shares available to ordinary investors. Although traditional IPOs are still plentiful, you’re also seeing many companies choose direct listings with stock exchanges.
Another popular alternative that has taken the investing world by storm involves special purpose acquisition companies, or SPACs for short. SPACs are publicly traded stocks in their own right, but their only mission is to find a suitable privately held company to merge with. By doing so, the privately held business gets to have its shares publicly traded, and early SPAC investors often get a nice payday as well as the opportunity to get in on the ground floor.
With hundreds of SPACs in the market, it’s hard to know which ones to follow. Below, though, are three that investors really can’t afford to ignore. The future of these three SPACs could well determine how health of the entire business going forward.
Image source: Getty Images.
1. Churchill Capital IV
Among SPACs, Churchill Capital IV (NYSE:CCIV) has gotten the most attention by far lately. Churchill offered shares back in September 2020, and as its name suggests, it was the fourth offering from SPAC specialist Michael Klein. It’s the largest Churchill SPAC yet, having raised $1.8 billion.
Rumors have swirled for quite a while about Churchill Capital IV potentially merging with electric vehicle maker Lucid Motors. Deliveries of the Lucid Air luxury sedan are set to begin this spring, and with a price tag starting just under $70,000 and a maximum projected range of more than 500 miles, many auto aficionados are highly excited about the California-based company’s prospects.
What’s amazing, though, is that Churchill Capital IV shares have more than tripled without any firm agreement with Lucid in place. That’s a ton of speculation, and shareholders stand to lose a lot of a deal with Lucid doesn’t materialize. Nevertheless, the amount people are paying up for a SPAC that seems to have the inside lane on a possible EV merger shows just how much activity there is in the electric vehicle space right now.
2. Pershing Square Tontine Holdings
The largest SPAC ever offered came from Bill Ackman’s hedge fund in September 2020, and Pershing Square Tontine Holdings (NYSE:PSTH) has been a big hit. The SPAC broke many of the conventions that the industry set, including coming public with a stock price of $20 per share rather than $10. All told, Pershing Square Tontine raised $4 billion to put to work toward finding an acquisition candidate.
Pershing Square Tontine hasn’t yet found a merger candidate, and that’s caused some SPAC investors to get anxious about the price increase its shares have experienced lately. There’ve been some rumors about possible targets, most notably the privately held fintech company Stripe. Yet there’ve also been some who’ve attempted to debunk that idea, and thus far, there haven’t been any announcements.
Pershing Square Tontine is likely to find a merger target, and when it does, it’ll be big news. But if Ackman’s SPAC somehow goes the 24-month period without finding a partner, that could be a huge setback for the SPAC industry overall.
3. Social Capital Hedosophia Holdings V
Finally, an article on SPACs wouldn’t be complete without at least one of the offerings from pioneering tech venture capitalist Chamath Palihapitiya. The Social Capital founder’s Social Capital Hedosophia Holdings V (NYSE:IPOE) is just one of six SPACs that he has offered, and three successful combinations with the likes of Virgin Galactic Holdings (NYSE:SPCE), Opendoor Technologies (NASDAQ:OPEN), and Clover Health (NASDAQ:CLOV) speak for themselves.
SCHH V has entered into an agreement to merge with Social Finance, the company behind the popular SoFi financial app. With financial services including loans, banking, and investments, SoFi is aiming to revolutionize the financial industry. SCHH V investors are excited about the potential combination, as the SPAC price has doubled since the announcement. Yet many see even better times ahead for SoFi, and that could keep shares moving higher long after the SPAC merger is complete.
Be smart with SPACs
Not every special purpose acquisition company will be successful. Some combinations aren’t as lucrative as others, and some SPACs might not even find merger candidates at all.
Yet with so many interesting privately held companies looking to come public, you can expect the SPAC industry to be full of excitement for the foreseeable future. Keep your eyes on these three SPACs in particular, as what happens with them could well define the course of future activity in the area for months or even years to come.
Special-purpose acquisition companies—shell companies planning to merge with private firms to take them public—are rising more than 6% on average on their first day of trading in 2021, up from last year’s figure of 1.6%, according to University of Florida finance professor
Jay Ritter.
Before 2020, trading in SPACs was muted when they made their debut on public markets.
Now, shares of blank-check companies almost always go up. The last 140 SPACs to go public have either logged gains or ended flat on their opening day of trading, per a Dow Jones Market Data analysis of trading in blank-check companies through Thursday. One hundred and seventeen in a row have risen in their first week. The gains tend to continue, on average generating bigger returns going out to a few months.
The gains in companies that don’t yet have any underlying business underscore the wave of speculation in today’s markets. Merging with a SPAC has become a popular way for startups in buzzy sectors to go public and take advantage of investor enthusiasm for futuristic themes.
But lately, day traders are even putting money into SPACs before they have revealed what company they are buying. At that stage, they are pools of cash, so investors are wagering that the company will eventually complete an attractive deal.
Despite the risks, many are embracing the trade, underscoring how online investing platforms and social-media groups now send individuals flocking to new corners of markets, including shares of unprofitable companies such as GameStop and
AMC Entertainment Holdings Inc.
AMC 53.65%
That trend also is playing out in everything from shares of silver miners to SPACs, which were relatively rare before last year but are suddenly ubiquitous in finance.
“I would just have a bad case of FOMO if I wasn’t in SPACs,” said
Marco Prieto,
a 23-year-old real-estate agent living in Tucson, Ariz., referring to the fear of missing out that is driving many individuals to put money into markets.
He has a roughly $50,000 portfolio and about 60% of his holdings tied to blank-check companies. Some of his positions are early on in shell firms such as
Social Capital Hedosophia Holdings Corp. VI,
while others are based on rumors tied to possible deals by companies including
Churchill Capital Corp. IV.
Share-price performance of existing SPACs without deals announced*
Amount of cash
held by SPAC:
Biotechnology/Life science/Health care
Share-price performance of existing SPACs without deals announced*
Amount of cash
held by SPAC:
Biotechnology/Life science/Health care
Share-price performance of existing SPACs without deals announced*
Amount of cash
held by SPAC:
Biotechnology/Life science/Health care
Share-price performance of existing SPACs without deals announced*
Amount of cash
held by SPAC:
Biotechnology/Life science/Health care
Shares of that company have more than doubled since Bloomberg News reported on Jan. 11 that it is in talks to combine with electric-car firm Lucid Motors Inc. Trading got so frenzied that the SPAC put out a statement a week later saying it wouldn’t comment on the report and that it is always evaluating a number of possible deals. The stock has still been gyrating in the days since.
Investors betting on SPACs even before such reports is extraordinary because the underlying value of a blank-check firm before it pursues a deal is the amount of money it raises for a public listing. That figure is typically pegged at $10 a share. Still, it has become common for investors to buy at higher prices such as $11 or $12 to back big-name SPAC founders such as venture capitalist
Chamath Palihapitiya
and former Citigroup Inc. deal maker
Michael Klein.
In another sign blank-check firms are now frequently traded by individuals, several SPACs and companies that have merged with them recently joined GameStop and AMC on a list of stocks that had position limits on Robinhood Markets Inc., a popular brokerage for day traders. Those restricted included Mr. Klein’s Churchill Capital IV and a few of Mr. Palihapitiya’s SPACs in the
Social Capital Hedosophia
SPCE 2.74%
franchise.
The flood of money pouring in is a concern for skeptics who worry that everyday investors don’t understand the dangers of the trade. Even recent losses in a few hot companies such as electric-truck startup
Nikola Corp.
NKLA -0.39%
and health-care firm MultiPlan Inc. that merged with blank-check firms aren’t deterring investors because of the gains in other SPACs.
“It’s a tremendous amount of speculation,” said
Matt Simpson,
managing partner at Wealthspring Capital and a SPAC investor. His firm invests when SPACs go public or right after, then takes advantage when shares rise and typically sells before a deal is completed. He advertised an expected return from the strategy of 6% to clients, but last year it returned 20%.
Ninety-one SPACs have raised $25 billion so far this year, putting the market on track to shatter last year’s record of more than $80 billion, according to data provider SPAC Research.
Fast gains in the shares can result in big payoffs for their founders and the first investors in blank-check firms like Mr. Simpson. These earliest investors always have the right to withdraw their money before a deal goes through. The traders who get in later don’t have those same privileges, but that hasn’t been a deterring factor.
“If you don’t take a risk, there’s really no opportunity at all,” said
Chris Copeland,
a 36-year-old in upstate New York who started day trading on the platform Robinhood with his girlfriend last month. Roughly three-quarters of his portfolio is tied to SPACs such as
GS Acquisition Holdings Corp. II.
Mr. Prieto checks SPACs on his phone. ‘I would just have a bad case of FOMO if I wasn’t in SPACs,’ he says.
Photo:
Cassidy Araiza for The Wall Street Journal
Trading volumes in many popular blank-check firms have increased lately, an indication of investors’ heightened activity. That trend is even drawing attention from some SPAC founders.
“It worries me,” said veteran investor and SPAC creator
Bill Foley.
Trading volumes have surged in one of the SPACs founded by the owner of the Vegas Golden Knights hockey team, especially since it announced a $7.3 billion deal to take
Blackstone Group Inc.
BX 0.21%
-backed benefits provider Alight Solutions public last week.
One reason traders are getting into blank-check firms when they are just pools of cash is that the time it takes for a SPAC to unveil a deal has dwindled. Blank-check firms normally give themselves two years to acquire a private company, but many these days need only a few months.
SHARE YOUR THOUGHTS
Are you investing in SPACs? Why or why not? Join the conversation below.
It also doesn’t take long for investor speculation about a blank-check firm’s acquisition to build, particularly because SPACs can indicate the sector in which they hope to complete a deal.
Excitement can be triggered by a SPAC pioneer like Mr. Palihapitiya, who sometimes hints to his more than 1.2 million Twitter followers when activity is coming. The former Facebook Inc. executive took space-tourism firm
Virgin Galactic Holdings Inc.
public in 2019 and last month reached a deal with Social Finance Inc.
Even though he invests in a number of blank-check firms other than his own—often when SPACs need to raise more money to complete deals—shares of his own companies can climb following such tweets. One example came Jan. 21, when one of his blank-check firms rose about 4% after Mr. Palihapitiya started a tweet by saying “I’m finalizing an investment in ‘???.’”
The SPAC has since given back those gains after no news about an acquisition came out and it was revealed that Mr. Palihapitiya’s investments were in companies unrelated to his own. He declined to comment.
Mr. Palihapitiya also has thrown himself into the frenzy of activity around GameStop trading, publicizing an options trade last week in the stock and taking profits on it.
Reports about possible mergers like those surrounding the Churchill Capital IV SPAC and a possible combination with Lucid Motors also quickly attract hordes of buyers. That blank-check firm is now owned by many individuals, including Messrs. Prieto, Copeland and
Jack Oundjian,
a 40-year-old who lives in Montreal.
“I’m very excited that we have a chance to be able to participate in what could be future unicorn companies,” or startups valued at $1 billion or more, Mr. Oundjian said. He said he views SPACs as long-term investments rather than fast trades, and holdings tied to the sector make up about 30% of his roughly $1.2 million portfolio.
Private companies are flooding to special-purpose acquisition companies, or SPACs, to bypass the traditional IPO process and gain a public listing. WSJ explains why some critics say investing in these so-called blank-check companies isn’t worth the risk. Illustration: Zoë Soriano/WSJ
Write to Amrith Ramkumar at amrith.ramkumar@wsj.com
