Chamath Palihapitiya among SPAC sponsors asked by senators about potential conflicts of interest

Founder/CEO of Social Capital, Chamath Palihapitiya, speaks onstage during the Vanity Fair New Establishment Summit at Yerba Buena Center for the Arts on October 19, 2016 in San Francisco, California, and Senator Elizabeth Warren (D-MA) speaks during a Senate Finance Committee hearing June 8, 2021 on Capitol Hill in Washington, D.C.
Senator Elizabeth Warren (D-MA) and Founder and CEO of Social Capital, Chamath Palihapitiya.

Chamath Palihapitiya, once dubbed the “SPAC King,” and five other blank-check company sponsors were asked by Senator Elizabeth Warren and three other Democratic legislators about conflicts of interest and business practices that disadvantage retail investors.

The letters pointed to the alleged “range of maneuvers – some of them downright astonishing to the uninitiated – to win even when investors lose.”

“We seek information about your use of SPACs in order to understand what sort of Congressional or regulatory action may be necessary to better protect investors and market integrity and ensure a fair, orderly, and efficient marketplace,” the letters added.

Warren as well as Sens. Sherrod Brown, Tina Smith, and Chris Van Hollen sent identical individual letters dated September 22 to Palihapitiya, co-founder and CEO of The Social+Capital Partnership; Michael Klein, founder of M. Klein & Associates; Stephen Girsky, managing partner at VectoIQ; Tilman Fertitta, chairman and CEO of Fertitta Entertainment; Howard Lutnick, chairman and CEO of Cantor Fitzgerald; and David Hamamoto, CEO and chairman of DiamondHead Holdings.

The senators said they expect a response by October 8.

SPACs, or special purpose acquisition companies, are shell companies that list with the aim of merging with private companies and taking them public. Several major companies such as Virgin Galactic and DraftKings have debuted via SPACs.

Touted as a faster and cheaper alternative for companies to go public compared to the traditional IPO, they have garnered support from Wall Street heavyweights as well as pop icons and professional athletes. But they also require fewer disclosures than IPOs do.

SPACs, which have been around for decades, rocketed to prominence last year with the trend accelerating in 2021. Year-to-date SPAC issuance has far outpaced full-year 2020 totals.

“This meteoric rise is concerning,” the letters said. “The SPAC process often appears to be structured to exploit retail investors to the benefit of large institutional investors such as hedge funds, venture capital insiders, and investment banks.”

The senators said industry insiders can “take advantage of ordinary investors throughout this process,” such as making “overly optimistic statements about target companies” – something not allowed in a traditional IPO route.

“Statements by SPAC sponsors to convince shareholders to vote in favor of a merger may not have to meet the same disclosure standards,” the senators added.

The concerns raised by the lawmakers aren’t the first time authorities have questioned the process of SPACs.

The US Securities and Exchange Commission, under then Acting Chair Allison Herren Lee, began an inquiry in March into Wall Street’s blank-check company craze by seeking voluntary information.

And current Chair Gary Gensler said in July the SEC was investigating major banks over conflicts of interest in the SPAC deal-making process that exploded in the past year.

Other controversies seem to follow SPACs. In August, billionaire hedge fund manager Bill Ackman’s blank check firm, Pershing Square Tontine Holdings, was sued by former SEC Commissioner Robert Jackson and Yale law professor John Morley for not operating as a SPAC.

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eToro postpones plans to go public via SPAC to the 4th quarter, citing regulatory delay

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An eToro logo is seen on a smartphone and a computer screen.

  • eToro is postponing its plans to go public to the fourth quarter, citing regulatory delays.
  • The company first announced its plans to list in March through a $10.4 billion merger with Betsy Cohen’s FinTech V SPAC.
  • The Robinhood rival has been looking to expand in the US, a region that accounts for only 12% of its users.
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Online trading platform eToro is postponing its plans to go public via blank check merger to the fourth quarter – slightly later than its initial plans to debut during the third – citing regulatory delays.

The platform told Insider via email that it has already filed its F-4 publicly and is in the final stages of comments from the US Securities and Exchange Commission. F-4 is a type of SEC filing that mandates foreign issuers to register certain securities.

Once approved, SPAC shareholders need to vote on the transaction, which takes 20 days, and then a few more days to finalize, eToro said.

“Given this timeline and where we are today, we wanted to be transparent with the market that a Q3 closing was no longer possible,” eToro told Insider. “We have been working closely with the SEC since before we publicly announced the transaction and continue to do so.”

Financial News was first to report.

The company first announced its plans to list in March through a $10.4 billion merger with Betsy Cohen’s FinTech V SPAC.

The brokerage, which competes with apps like Robinhood, has been looking to expand in the US, a region that accounts for only 12% of its users. As of the second quarter of 2021, most of eToro’s customers are in Europe, comprising 68%, followed by the Asia Pacific region at 15%.

“We are committed to expanding our crypto offering,” Yoni Assia, eToro CEO and cofounder, told Insider in August. “We’re very excited about the outsized growth that we’re seeing in America.”

In the second quarter of 2021, crypto assets drove 73% of eToro’s total trading commissions compared with 7% in the same period last year.

SPACs, shell companies that list with the aim of merging with private companies and taking them public, have exploded in popularity, and year-to-date SPAC issuance has far outpaced full year 2020 totals.

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An exchange for trading in shares of private companies is going public via $2 billion SPAC deal

Wall Street
  • Forge Global will go public in a merger with a SPAC valuing the firm at $2 billion, the WSJ reported.
  • Forge allows investors to trade shares of pre-IPO companies.

Forge Global, a firm that allows customers to trade shares of pre-IPO companies is going public in a SPAC merger with Motive Capital Corp. in a deal that values the company at $2 billion, the Wall Street Journal reported on Monday.

The deal is expected to close later in 2021, and would mark the first public listing of a marketplace for private shares. Forge expects to raise $500 million from the offering, according to the WSJ.

Forge, based in San Francisco, says it has almost 400,000 registered users, though due to Securities and Exchange Commission guidelines, individual investors must be accredited or high net worth individuals, while the rest using Forge’s platform are professional investment managers.

According to the WSJ, Forge has handled $10 billion of trades in shares of 400 companies since it was founded in 2014, including Lyft, Robinhood, and Palantir before they went public. While Forge will be the first private share marketplace to go public, there are a number of other firms competing in the same space.

Earlier this year, Nasdaq announced it would spin off its private shares exchange into a separate business backed by investment from Citi, Goldman Sachs, and Morgan Stanley, among others. Other firms similar to Forge include Carta, EquityZen, and ClearList.

Motive Capital is a blank-check company backed by fintech-focused private equity firm Motive Partners. The SPAC is led by former JPMorgan executive Blythe Masters.

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A-Rod’s SPAC has reportedly ended merger talks with a sports collectibles maker after it lost a licensing deal with the NBA and NFL

Alex Rodriguez
  • The SPAC backed by Alex Rodriguez has ended talks with Panini after it lost licensing deals with NBA and NFL, Bloomberg reported.
  • The SPAC, Slam Corp. had been conducting due diligence on a transaction that would value Panini at $3 billion.
  • NBA and NFL trading cards were supposed to be exclusively manufactured by Panini through 2025 and 2026.
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The blank-check company backed by retired baseball star Alex Rodriguez has ended merger talks with Panini after the sports collectibles maker lost licensing deals with the National Basketball Association and National Football League, Bloomberg first reported.

Slam Corp. had been conducting due diligence on a transaction set to value the iconic Italian sticker brand at $3 billion, Bloomberg reported in July.

The discussions, however, ended following news that sports merchandising company Fanatics had signed with leagues including the NBA, NFL, and MLB, multiple reports said.

NBA and NFL trading cards were supposed to be exclusively manufactured by Panini through 2025 and 2026. Now, the company will lose those rights to Fanatics.

In a similar move, the MLB this summer ended its long-standing partnership with Topps and agreed to a new contract with Fanatics. This led to another SPAC, Mudrick Capital Acquisition, to terminate its proposed merger with Topps in August.

Panini, named after the brothers who founded it, was established in 1961 in Modena, Italy. It made its first FIFA World Cup stickers for the 1970 soccer tournament in Mexico, making trading cards and sticker collections a part of the experience ever since. Some rare stickers can fetch high prices on the collectors’ market and at an auction.

SPACs, shell companies that list with the aim of merging with private companies and taking them public, have exploded in popularity in the past few years.

But the frenzy is also drawing the attention of regulators, who are looking into tightening the rules, particularly around projections of future earnings potential and conflicts of interest among dealmakers.

In 2020, a total of 248 SPACs raised $83.3 billion according to SPAC Analytics. 2021 has far outpaced that total already, with data showing 421 SPACs raising $122 billion, comprising 44% of initial public offerings.

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Nearly 50 law firms have banded together to voice their defense of SPACs as lawsuits mount against blank-check firms

Bill Ackman
Bill Ackman, founder and CEO of Pershing Square Capital Management

  • 49 law firms are hitting back at lawsuits against SPACs that are seeking to have them regulated as investment companies.
  • The firms said the SEC has reviewed more than 1,000 SPACs and haven’t deemed them subject to the Investment Company Act of 1940.
  • A high-profile lawsuit was filed last month against billionaire Bill Ackman’s SPAC, Pershing Square Tontine Holdings.
  • See more stories on Insider’s business page.

A number of US law firms are pushing back on lawsuits against SPACs that claim the blank-check companies are operating as investment firms and should be regulated as such.

The 49 law firms “view the assertion that SPACs are investment companies as without factual or legal basis,” they said in a letter issued Friday.

The firms said consistent with longstanding interpretations of the Investment Company Act of 1940, any company that temporarily holds short-term Treasuries and qualifying money market funds while engaging in its primary business of seeking a business combination is not an investment company under the 1940 Act.

They said staff at the Securities and Exchange Commission have reviewed more than 1,000 SPAC initial public offerings over two decades and those haven’t been deemed to be subject to the Act.

The letter was released after billionaire hedge fund manager Bill Ackman’s SPAC, Pershing Square Tontine Holdings, was sued earlier this month and the high-profile case could have an impact on the wider industry that’s seen a boom in business over the past year.

The lawsuit against Pershing Square Tontine Holdings alleges it’s operating more like an investment fund than an operating company – similar to his hedge funds – and that it should be regulated by the 1940 Act. Investing in securities “is basically the only thing that PSTH has ever done,” the complaint viewed by Insider said, adding that buying stocks is not what a SPAC should be doing.

The lawsuit by shareholder George Assad is being backed by a group of lawyers that include former U.S. Securities and Exchange Commissioner Robert Jackson and Yale law professor John Morley. Assad also filed lawsuits against blank-check firms Go Acquisition and E.Merge Technology Acquisition with the group’s backing.

The lawyers that sued Ackman’s SPAC are targeting as many as 50 different SPACs in the coming months, according to a Reuters report and a CNBC report last week.

“We believe this litigation is totally without merit,” Pershing Square Tontine Holdings said in a statement this month. “The complaint bases its allegations, among other things, on the fact that PSTH owns or has owned US Treasurys and money market funds that own US Treasurys, as do all other SPACs while they are in the process of seeking an initial business combination.”

Ackman in July ended his plan to buy 10% of Universal Music for $4 billion after federal regulators raised issues about the proposed transaction, the billionaire announced in his shareholders’ letter.

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Billionaire investor Bill Ackman’s SPAC is reportedly being sued for not operating as a blank-check firm

bill ackman
  • Bill Ackman’s SPAC is being sued for not operating as a blank-check firm, the New York Times reported.
  • They argued that Ackman’s SPAC has behaved more like an investment company than an operating company.
  • Ackman’s SPAC pushed back saying it has never held investment securities that would require it to be registered under the Act.
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Billionaire hedge fund manager Bill Ackman’s SPAC is being sued for not operating as a blank-check firm, the New York Times first reported Tuesday, a case that could affect the broader industry amid a boom in the past year.

Ackman’s Pershing Square Tontine Holdings was hit with a lawsuit by former SEC Commissioner Robert Jackson and Yale law professor John Morley.

Both argued that Ackman’s SPAC is operating more like an investment fund than an operating company -similar to his hedge funds – which means it should instead be regulated by the Investment Company Act of 1940.

Investing in securities is basically the only thing that PSTH has ever done,” the complaint viewed by Insider said, adding that buying stocks is not what a SPAC is supposed to do.

The lawsuit, filed in US District Court in Manhattan, also pointed to the warrants – the right to purchase common stock at a certain price – that sponsors and directors would receive.

“This staggering compensation was promised at a time when the returns to the Company’s public investors have starkly underperformed the rest of the stock market,” the complaint said.

Pershing Square pushed back against the lawsuit Tuesday saying it has never held investment securities that would require it to be registered under the Act – and does not intend to do so in the future.

“We believe this litigation is totally without merit,” the statement said. “The complaint bases its allegations, among other things, on the fact that PSTH owns or has owned US Treasurys and money market funds that own US Treasurys, as do all other SPACs while they are in the process of seeking an initial business combination.”

In July, Ackman scrapped his plan to buy 10% of Universal Music for $4 billion after federal regulators poured cold water on the proposed transaction, the billionaire announced in his shareholders’ letter.

Days after, Ackman lamented his nixed SPAC deal but hinted he already has alternative targets in mind.

SPACs, shell companies that list with the aim of merging with private companies and taking them public, have exploded in popularity in the past few years.

This method is typically done in lieu of an IPO or a direct listing and has garnered support from Wall Street heavyweights as well as pop icons and professional athletes.

Ackman, for his part, has tried to rewrite the rules for his SPAC.

For instance, he said he will be “taking no compensation” in a bid to appeal to more investors. “We created the most investor-friendly SPAC in the world,” Ackman said, adding that SPACs are an easier route to public markets than a traditional IPO.

But given the frenzy around blank-check listings, regulators have begun looking into tightening the rules.

In 2020, a total of 248 SPACs raised $83.3 billion according to SPAC Analytics. Over halfway through 2021 alone, data already show 412 SPACs that have raised $121 billion, comprising 53% of initial public offerings.

The past months however have seen a slight cooling off in the red-hot SPAC market as first-day trading spikes that were common in the space earlier this year begin to evaporate.

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Ford-backed EV battery producer to go public via SPAC merger at a $1.2 billion valuation

Solid Power Inc batteries
  • Solid Power announced it is going public via a SPAC merger in a deal that would value the entities at $1.2 billion.
  • The company is expected to have $600 million in cash, including $165 million from private investors.
  • Ford Motors and BMW recently participated in the $135 million Series B funding of Solid Power in May.

Electric-vehicle battery producer Solid Power on Tuesday announced it’s going public by merging with blank-check firm Decarbonization Plus Acquisition Corporation III in a deal valued at $1.2 billion.

The company is expected to have approximately $600 million in cash, including $165 million from investors such as Koch Strategic Platforms, Riverstone Energy Limited, Neuberger Berman funds, and Van Eck Associates Corporation. The capital will be used to fund operations and growth.

Ford Motors and BMW recently participated in the $135 million Series B funding of Solid Power in May. The two companies also expanded partnerships with Solid Power to secure all solid-state batteries for future electric vehicles.

Solid Power produces rechargeable batteries for electric vehicles and mobile power markets. The company claims its production mirrors lithium-ion manufacturing processes while eliminating certain expensive and timely steps.

Upon closing of the transaction, which is expected to be completed in the fourth quarter of 2021, the combined company will trade under the Nasdaq ticker “SLDP.”

Solid Power is expected to have a nine-person board composed of a majority of independent directors and will continue to be led by Solid Power’s existing management team.

Other electric vehicle makers went public via SPAC this year such as Lucid Motors and Nikola Corp.

SPACs, shell companies seeking to merge with private companies with the intention of taking them public, have exploded in popularity in the last year.

In 2020, a total of 248 SPACs raised $83.3 billion according to SPAC Analytics. But in the sixth month of 2021 alone, data already show 340 SPACs that have raised $106 billion, comprising 61% of initial public offerings.

Read more: A client portfolio manager at Cathie Wood’s Ark Invest shares which of its ETFs are projected to see the most growth over the next 5 years, and explains the recent downturn in the broader family

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Billionaire investor Chamath Palihapitiya files for 4 new biotech-focused SPACs that seek to raise $800 million

Chamath Palihapitiya, social+capital partnership, sv100 2015
Chamath Palihapitiya.

Chamath Palihapitiya filed for four blank-check companies on Wednesday along with a new partner, according to paperwork registered with the Securities and Exchange Commission.

The latest additions build on his roster of 6 special-purpose acquisition companies already raised, yielding more than $1 billion.

The four new SPACs are launched under a partnership between Palihapitiya’s venture firm Social Capital and hedge fund Suvretta Capital Management. One of Suvretta’s core investing strategies is to identify companies that are disruptive to the healthcare sector.

The companies may initially pursue a combination target in any industry as part of its proposed business strategy, filings state. Each SPAC is seeking to raise $200 million with ultimate specific focuses within the biotech industry: neurology, oncology, organs, and immunology.

They are each named Social Capital Suvretta Holdings Corp., distinguished by the Roman numerals I, II, III, and IV. The tech billionaire has said he plans to eventually do 26 SPAC deals, one for every letter of the alphabet.

Palihapitiya will serve as CEO and chairman, while Suvretta’s healthcare portfolio manager, Kishen Mehta, will serve as president.

“Our company unites scientists, physicians, entrepreneurs and biotechnology-oriented investors around a shared vision of identifying and investing in innovative and agile biotechnology companies,” the filing stated.

The SPACs, which carry the ticker symbols DNAA, DNAB, DNAC, and DNAD, are expected to trade on the Nasdaq.

Suvretta, founded in 2011 by former Soros fund manager Aaron Cowen, is dedicated to three investing strategies. One of these is its healthcare-focused unit Averill, set up in March 2020.

Palihapitiya first began making big money during his early days as an employee at Facebook, but became even more accomplished as a VC by backing companies like Box, SurveyMonkey, Yammer, and Slack. He has made a name for himself as the “SPAC King,” by kicking off mergers that took companies such as insurance startup Clover Health and Opendoor public.

Read More: 2 veteran VCs are betting on the rise of the solo capitalist. They explain how their fund backs the booming trend with investors like Anthony Pompliano and Cindy Bi – and share tips for breaking into VC.

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There were no new SPAC debuts last week for the first time since March 2020, as signs point to the end of the blank-check craze

Stock Market Bubble
A trader at the New York Stock Exchange.

  • The air may be coming out of the SPAC market, with last week marking the first week of 0 new debuts since March 2020, said Bespoke Investment Group.
  • The firm said 20 holdings in the SPAK ETF have lost roughly 50% or more since mid-February.
  • 308 SPACs have raised $99.7 billion so far this year, according to SPAC Analytics.
  • See more stories on Insider’s business page.

The boom in SPACs, or blank-check firms that merge with private companies to take them public, has collapsed with new issuances drying up, according to market research from Bespoke Investment Group.

There has been no issuance so far this week and none last week, marking the longest SPAC drought since last March.

SPACs have surged in popularity, in part as they allow private companies to bypass the traditional IPO process, which can be slower and more expensive, in favor of a quicker route to public markets. The method of going public has been popular with many pre-revenue startups.

Bespoke said since February, $23.4 billion in SPAC issuance has been priced, which is roughly the same as the volume for the last two weeks of February, and a “small fraction” of the $135 billion in the second half of last year through the end of February.

“Given the collapse in performance since late February, it’s no surprise the register has stopped ringing,” said Bespoke in a note published Tuesday.

The firm noted that 20 stocks in the Defiance Next Gen SPAC Derived ETF that broadly tracks the SPAC space have lost about 50% or more since mid-February. Many of these are electric-vehicle and clean-energy names.

“Collectively, these stocks have seen their market cap fall from over $135 billion down to just $55 billion,” said Bespoke.

Among the biggest decliners, shares of XL Fleet, a company that converts commercial vehicles like small trucks into electric vehicles, and Diginex, a Hong Kong-based digital financial services company, have each fallen by about 67%, while Lordstown Motors shares pulled back by 64%.

So far in 2021, 308 SPACs have raised $99.7 billion, comprising 76% of all IPOs, according to SPAC Analytics. In 2020, 248 SPACs raised $83.4 billion.

In a SPAC Analytics list of top-performing SPACS, Primoris, a construction and engineering services provider, has logged a return of 672%, and sports-betting company DraftKings has posted a return of 604%.

A number of high-profile investors such as billionaire Chamath Palihapitiya and hedge fund manager Bill Ackman have been active in the space, and SPACs have lured famous non-Wall Street figures including ex-baseball player Alex Rodriguez, tennis star Serena Williams, and ex-House Speaker Paul Ryan.

The Securities and Exchange Commission has reportedly launched an inquiry into the SPAC craze and a top regulator with the SEC recently warned about the jump in fundraising SPACs, according to a report by The Wall Street Journal.

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The SEC says it’s looking closely at the wild earnings projections attached to many SPAC offerings

FILE PHOTO: The U.S. Securities and Exchange Commission logo adorns an office door at the SEC headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst
FILE PHOTO: The U.S. Securities and Exchange Commission logo adorns an office door

The US Securities and Exchange Commission issued a warning to blank-check companies presenting projections that only give an optimistic outlook of future growth. The agency added that it will “look carefully” at SPAC filings and disclosures as well as those of their private targets.

John Coates, the agency’s acting director for the corporation finance division, said on Thursday that a company would be on “shaky ground” if it only disclosed favorable projections and omitted “equally reliable but unfavorable projections.”

Special purpose acquisition companies or SPACs have been booming, enabling many pre-revenue startups to go public. SPACs are essentially shell companies seeking to merge with private companies with the intention of taking them public. SPACs are often considered a cheaper, faster alternative to a traditional IPO.

SPAC sponsors have also generally been allowed to more freely give projections of future growth than is allowed for companies going public via traditional IPO, which are not allowed to broadcast future sales or earnings.

Coates pointed to the Private Securities Litigation Reform Act safe harbor, a legal liability SPACs often refer to when making optimistic forward-looking statements.

“This…is the reason that sponsors, targets, and others involved in a de-SPAC feel comfortable presenting projections and other valuation material of a kind that is not commonly found in conventional IPO prospectuses,” he said, referring to the safe harbor.

This, he said, raises significant investor protection questions, and is why he is calling on the agency to treat SPAC deals with the same level of scrutiny as IPOs.

“Any simple claim about reduced liability exposure for SPAC participants is overstated at best, and potentially seriously misleading at worst,” Coates said. “Indeed, in some ways, liability risks for those involved are higher, not lower, than in conventional IPOs, due in particular to the potential conflicts of interest in the SPAC structure.”

Coates added that while projections are woven into the fabric of business combinations, they have to be fair. Forward-looking information, he said, can be “untested, speculative, misleading or even fraudulent, as reflected in the limitations on the PSLRA’s liability protections.” He floated the possibility of having guidance about how projections and related valuations should be presented.

SPACs have attracted a number of high-profile investors including famed fund manager Bill Ackman and billionaire Chamath Palihapitiya. Celebrities have also joined the bandwagon, with icons such as baseball star Alex Rodriguez and tennis legend Serena Williams backing recent SPAC offerings.

Regulators have recently turned their eye to the soaring market. On March 11, acting SEC Chair Allison Herren Lee said that SPAC returns don’t warrant the “hype” they’re getting.

Last year, a total of 248 SPACs raised $83.3 billion according to SPAC Analytics. But by the fourth month of 2021 alone, data already show 306 SPACs that raised $98.3 billion, comprising 79% of all public offerings.

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