What are SPACs and why are they the new craze in tech listings?

24 Feb 2021

Richard Branson. Image: Julien Behal Photography

Investors are pumping billions into the blank-cheque firms that have become the darlings of going public, rather than traditional IPOs.

What do Richard Branson, Shaquille O’Neal and former Trump adviser Gary Cohn all have in common? Special purpose acquisition companies, or SPACs.

These investors have all put money into SPACs over the last year as a means to bring private firms onto the public markets. Branson set up a SPAC that recently agreed to take genetic testing company 23andMe public.

It is like a reverse merger. A SPAC is a blank-cheque shell company – it doesn’t have any actual business – that raises money from investors and is listed on a stock exchange. The SPAC then merges with an established company that actually has a business, which in turn takes that company public.

Investors in SPACs generally invest under an agreement that the shell company will find a target for a merger within a set period of time – usually two years. Once a target is found, this approach can be a quicker way of bringing a company public rather than the traditional route of an initial public offering.

In the case of 23andMe, it has agreed to merge with Branson’s publicly listed SPAC, VG Acquisition Corp. This means it can avoid the rigmarole of an IPO, which a company of its stature would typically pursue to go public, and the overheads that come with that.

Since last year, several companies including Opendoor and DraftKings have gone public through these vehicles, setting off something of a craze. SPACs have existed for a long time but in 2020, as the coronavirus pandemic rocked the global economy, it became a favoured path to the public markets in the US for several tech companies.

SPACs in Europe

The craze has been seeping into Europe of late too. Klaus Hommels, the founder of venture capital firm Lakestar Ventures, which has invested in Revolut and Spotify, created a black-cheque company to take a European tech business public.

Lakestar SPAC I SE launched on the Frankfurt Stock Exchange this week. It aims to raise €275m and is keeping its potential target companies broad – fintech, SaaS, transport and health are all on the agenda.

“Through this listing, we aim to provide a strongly positioned tech company in Europe with access to capital, unlocking its growth potential,” Hommels said after the listing on Monday (22 February).

It’s one of the first major SPACs in Europe, so could trading hubs like London, Frankfurt or any of Euronext’s exchanges become the go-to locations for European blank-cheque companies?

Xavier Rolet, the former chief executive of the London Stock Exchange, said in a report today that London should open its arms to more SPACs. Rolet, who floated his own SPAC in January in New York rather than London, said that his former base in the UK ought be more accommodating to these types of companies. But while SPACs have started to gather steam in Europe, New York remains the destination of choice.

Cazoo, the London-based online car marketplace that is only two years old, is reportedly exploring a SPAC as an avenue to go public in New York. The management of Rocket Internet, the German start-up builder and investor, filed for a $250m SPAC on the New York Stock Exchange earlier this month.

Big bucks

In January 2021 alone, SPACs raised $25.6bn. For some context, that figure was $1bn in January 2020.

The money is flowing strong and investors clearly see value in SPACs as a method to go public. Could it usurp IPOs? Not so fast.

The speed and efficiency that make these vehicles attractive may also be to the detriment of companies. Nikola, the electric truck maker, went through a SPAC merger last year and listed on the Nasdaq in June, but by September its chief executive had resigned over fraud allegations.

The company was accused of falsifying information about the efficacy of its technology. The incident has resulted in shareholder lawsuits against the company and Nikola’s share price plunging.

Would this have happened if Nikola pursued a traditional IPO? The administrative and disclosure requirements associated with an IPO mean it probably would not. This raises questions around the regulatory oversight of SPACs.

Jay Clayton, who was chair of the US Securities and Exchange Commission before retiring in December, said last September that he had concerns around disclosures during SPAC mergers and that there needs to be assurances that these deals are going through the “same rigorous disclosure that you get in connection with bringing an IPO to market”.

There may be some wariness among investors now. After Lucid Motors, another electric vehicle maker, recently announced its plans for going public via Churchill Capital Corp IV, the blank-cheque company saw its share price drop in value.

Furthermore, SPACs have been shown to typically fall in value once the merger is complete, according to researchers at Stanford Law School and New York University School of Law.

But for now, the SPAC train is moving full steam ahead. Even WeWork could very well revive its stock market dreams with a SPAC.

Jonathan Keane is a freelance business and technology journalist based in Dublin