The world’s financial exchanges are in a rush to find gold for IPOs, fueled by the revival of the white-check firm. Now known as SPAC (for special-purpose acquisitions), this is quickly turning into an exercise on financial spread when a global exchange is after an exchange. Other consider participating and retail investors looking to buy.
By 2020, SPACs account for more than half of all IPO proceeds in the US, and in January 2021 alone, more than 60 SPACS raised nearly $ 20 billion in proceeds. Meanwhile, Singapore Exchange Ltd. It is said to be reviewing new rules that will allow companies to use listed white checks later this year. Likewise, the SPAC boom has caught the attention of UK exchanges that are also looking to increase their participation in the listing phenomenon.
The investor protection issues that are clearly endemic to these lists have been warned by the CFA Institute. Similarities with dot.com and the unmistakable subprime bubble. We think the SEC should immediately set up a working group to examine relevant marketing, shareholder rights and investor protection issues. Investors considering SPAC need to remember that many things go wrong. Here are five important things retail investors need to know before jumping into SPAC:
1. Blank check warning: You are giving money to an SPAC sponsor without a specific plan for if, when, or how the money will be used to acquire an active company. As a retail investor, you are being told that this is a great opportunity for you to join early. But the sponsor can vaguely say, “I have expertise in this industry and will be looking for a promising company with growth potential in this area.” The possibility of misinformation, even fraud, is very high in these situations.
2. The 18-month rule: Sponsors have 18 to 24 months to define, negotiate and finalize an buyback agreement, or they are required to pay back the SPAC IPO, plus interest. It sounds great, but if the SPAC stock you bought traded on rumors, allusions, and had no fundamentals prior to any buyback, you might have paid a premium. premium for it. The refund rule applies only when there are no transactions and the refund is at the initial IPO offer price, usually $ 10 per share plus interest, not the amount the investor is. paid for it on the open market. What’s more, the “no get” or bad acquisition results is likely to go up. Increasing probabilities exist that your blank check “investment” will make you poorer.
3. Competition for private transactions: No matter what SPAC sponsor tells you, the competition to find a potential private company to acquire and go public remains fierce. Not only are there hundreds of other SPACs looking for targets, but thousands of professional private equity managers with huge portfolios and lots of dry powder – an estimated $ 1.5 trillion in Private equity and venture capital funds – are looking for the same thing, and they have a much longer track record. The odds of an SPAC sponsor of finding a suitable, undiscovered gemstone have a relative and ultimately profitable price tag.
4. Understand your SPAC pie: You must understand that even if a target acquisition is made, the amount of new public company value that ends up in the hands of SPAC buyers may be very small. Your pie comes after a sponsorship cut, a management cut in the acquired company, and often another private investor put in the capital needed to close the deal. It is not uncommon for SPAC investors to end the fight for the fight.
5. Track records: Take the time to know if the donor has any track record in choosing private investments. The only way private equity works in the real world of investment management is to find a private equity manager with a proven track record of making profitable trades. Choosing an SPAC sponsor because they are associated with some sort of celebrity – but no real private equity share – represents the worst kind of blank check you can write.
Margaret Franklin, CFA, is the president and chief executive officer of the CFA Institute.