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The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

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Re: The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

#51

Post by LatteLazy »

I'm confused.

This only applies to SPACs with a sponsor, and even then only when the sponsor takes a bigger cut than the profit from buying the firm and taking it public.

And even then, it seems like a stretch to call it a scam: if you buy an investment product because it sponsors someone you like, you're gonna pay accordingly. Nike or Coke Cola aren't a scam because they cost more and spend the money sponsoring celebs. Neither are these.

Are they worse value for money? Yes. But that's pretty obvious and people don't just look at cost/ingredients when they make their purchasing decisions. That's their right not a scam.

Re: The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

#52

Post by woodpanel »

cl42 wrote: post #4

For those investing in public equities: I personally believe some SPACs are definitely worth it in the long run. SPACs suffering on the public markets are a great opportunity to make long-term investments if you are very, very careful and wait a bit longer than most to jump into the right companies. From my experience, the strategic part is to wait until warrants expire. Most SPACs have very, very positive investor p…

Doing the same.

Partially what also interests me is that the "quant data" is just emerging. Meaning you have a fully new set of key indicators, of facts to look out for when making sense about a possbile investment.

OTOH I agree that SPACs are equally useful for fraudsters: Exiting a failing business no professional investor wants to purchase. E.g.

[Trigger warning!] the conservative coffee brand "Black Rifle Coffee" is IPOing via a SPAC. I would be really surprised if their grandiose revenue projections materialized without their Trump-base which they have annihilated recently. [Trigger Ending]

But that's just one example out of many such SPAC companies, which will slash portfolios of retail investors. And in doing so tainting those SPACs with actual value and prospects.

Re: The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

#53

Post by LatteLazy »

rexreed wrote: post #3
Animats wrote: post #2

Right. You pay 20% of the company's value to avoid some legal fees and SEC scrutiny. And then there's an average net loss for investors.

What am I missing? Other than the sponsors, what are people getting out of it? Going "public" and selling shares on the public market without having to disclose anything first? This feels so bubble.

Like so much of finance, it's about risk.

If you're a company owner: If you take your company public in an IPO, you have no idea what people will pay. With a SPAC you can discuss and negotiate and fix a price. That might be 100% shares or 100% cash. But you know you will end up with X percent of the shares and Y dollars once the deal is done so you can manage your risk.

If you're the SPAC, you are taking more risk. But you think you're getting the company cheaper than the market will value it. So you'll profit from the first day of trading.

Public companies (in theory) are better run and have easier access to capital. So the act of going public should increase company value and that adds motivation to both sides.

Using a sponsorship deal and charging investors for it is just advertising really. If the SPAC wastes money on it, that's the investors problem.

Re: The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

#54

Post by rexreed »

LatteLazy wrote: post #51

I'm confused. This only applies to SPACs with a sponsor, and even then only when the sponsor takes a bigger cut than the profit from buying the firm and taking it public. And even then, it seems like a stretch to call it a scam: if you buy an investment product because it sponsors someone you like, you're gonna pay accordingly. Nike or Coke Cola aren't a scam because they cost more and spend the money sponsoring cele…

Which SPACs don't have a sponsor? In which SPACs do non-financial sponsors take less than 20% of the total company value? Would you invest in a company that has no defined product, service, or business model, and puts all their eggs into the basket of a private company that you might not have ever heard of, in a business relationship between the SPAC and acquired company that is never fully disclosed in which the share price is almost assured to drop at least 1/3 the day after trading and in which there is no long term evidence of value creation?

These companies aren't like Coca-Cola that started as a small business and then grew, delivering value along the way. There is no way for an investor to "look at the ingredients" of a SPAC at the time they invest in the SPAC before the merger.

Re: The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

#55

Post by vmception »

jldugger wrote: post #35
vmception wrote: post #30

Earlier quoted context omitted.

Both. But only for the credit worthy, which is determined by the market. They all rely on new money from investors to pay back the old one. There is a word for that, but it doesn't matter. The investors rely on assurances that their investment could be paid back from other sources. In practice though they just use new debt from new investors to payoff the old one to old investors. The remaining proceeds can and are u…

> In practice though they just use new debt from new investors to payoff the old one to old investors. One particularly interesting idea I've heard bandied about is to eliminate the rollover risk this represents by allowing the issue of perpetuities. Obviously repayment risk remains, as Evergrande currently reminds us.

So the issuer just pays interest forever until it happens to be paid off?

Similar to how a credit card is paid off? Or line of credit? That’s kind of interesting, crowd invested credit lines. Doable now, only by investing in a lending corporation, but not on the open market.

CREAM Finance’s Ironbank in the defi/open finance space is attempting something like that, where protocols get a credit limit and can borrow to finance their operations. Interest payments shared with investors.

Re: The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

#56

Post by vmception »

seibelj wrote: post #33
rexreed wrote: post #23

Earlier quoted context omitted.

So what's to stop a VC firm from juicing the returns they provide their own limited partners by simply standing up a series of SPACs which they in turn use IPO proceeds to acquire some of their own poorly performing companies that couldn't get acquired or go public on their own, while also enjoying the 20% "promote" that sponsors get?

There is not supposed to be any prior relationship between the SPAC's sponsors and the company being acquired. I believe it violates SEC rules. So the VC shouldn't be able to set up SPACs specifically for acquiring their own companies.

It wouldn’t be the express purpose.

And yeah the SEC has input on the wording of the proposed target company vote. So they would eventually know.

But since VCs typically have single to low-double digit ownership of anything in their portfolio, it would probably pass muster just fine. Would just need to be disclosed.

I’ve seen SPAC investors approve buying newly formed companies, formed two months prior. So they’ll approve anything (except buzzfeed lol)

Re: The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

#57

Post by jldugger »

vmception wrote: post #55
jldugger wrote: post #35

Earlier quoted context omitted.

> In practice though they just use new debt from new investors to payoff the old one to old investors. One particularly interesting idea I've heard bandied about is to eliminate the rollover risk this represents by allowing the issue of perpetuities. Obviously repayment risk remains, as Evergrande currently reminds us.

So the issuer just pays interest forever until it happens to be paid off? Similar to how a credit card is paid off? Or line of credit? That’s kind of interesting, crowd invested credit lines. Doable now, only by investing in a lending corporation, but not on the open market. CREAM Finance’s Ironbank in the defi/open finance space is attempting something like that, where protocols get a credit limit and can borrow to…

> So the issuer just pays interest forever until it happens to be paid off?

Well, by definition perpetuities are never paid off. You could just buy your debt back on the open market though. I'm not a lawyer, so IDK if there's any interactions with "Dead hand" rules in the area based on a brief review of wikipedia[1], similar to 99 year leases or whatever motivated this potential disaster[2].

[1]: https://en.wikipedia.org/wiki/Rule_against_perpetuities [2]: https://www.latimes.com/business/story/2019-08-09/etf-spy-lo...

Re: The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

#58

Post by ac29 »

pjc50 wrote: post #46
trophycase wrote: post #40

Earlier quoted context omitted.

Is that why the most profitable companies are also the most valuable?

But the reverse does not hold true: plenty of the highest priced companies don't make a "profit", in the accounting sense. Such as Amazon.

That hasnt been true for years. Amazon has had a positive net income for quite a while. Their margin is small, but not negative.
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