The SPAC boom has cooled off but lawsuits against the blank-check firms are reportedly booming

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Big Tech recovers after a rough day Wednesday on Wall Street.

  • Class-action suits against SPACs ramped up in the first half of 2021, according to a new report.
  • 14 federal lawsuits were filed against SPACs in the first half of 2021, up from seven in the first half of 2020 and just six in 2019.
  • “The better the market for investors, the worse the market for class-action securities lawyers,” said Joseph Grundfest, director of the Stanford clearinghouse and a former SEC official, in a statement.
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A cooling of the SPAC craze that gripped markets over the last two years has been followed by a wave of class-action suits against blank-check firms in the first half of 2021, according to a new report by Cornerstone Research and Stanford Law’s Securities Class Action Clearinghouse.

14 federal lawsuits were filed against SPACs in the first half of 2021, up from seven in the first half of 2020 and just six in 2019. Eight of the 14 filings in 2021 revolved around alleged misrepresentation of a product’s commercial viability. Half of all federal lawsuits against SPACs so far this year involved the auto industry.

“The rise of SPAC-related suits is no surprise given the huge increase in SPACs we saw in 2020 and early 2021,” Bloomberg intelligence analyst Elliott Stein told Bloomberg.

The report comes as interest in SPACs is waning, as some investors worry the blank-check deals pose outsized risks compared to normal IPOs.

In July, the SEC fined space SPAC Momentus $8 million for misrepresenting the commercial viability of its rocket propulsion technology. Execs at Momentus said the company’s tech had been shown to be effective, although company test flights had not met internal benchmarks for success.

In the wake of the Momentus revelations, several federal class-action suits against the company are being prepared, according to public statements.

Bloomberg was the first to report the findings from Cornerstone.

“The better the market for investors, the worse the market for class-action securities lawyers,” said Joseph Grundfest, director of the Stanford clearinghouse and a former SEC official, in a statement.

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Tom Barrack’s SPAC withdraws its IPO filing days after the billionaire was arrested and charged with illegal lobbying

Tom Barrack, former Deputy Interior Undersecretary in the Reagan administration, delivers a speech on the fourth day of the Republican National Convention on July 21, 2016 at the Quicken Loans Arena in Cleveland, Ohio.
Thomas Barrack

  • The SPAC backed by Thomas Barrack withdrew its IPO application with the SEC on Friday.
  • The move comes days after the billionaire was arrested and charged with seven felony counts.
  • Falcon Acquisition had filed for a $250 million IPO in March with the goal of targeting tech-driven businesses.
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The blank-check company backed by billionaire Thomas Barrack withdrew its application for an initial public offering Friday, just days after the 74-year-old was arrested and charged with seven felony counts.

Falcon Acquisition, the New York based-SPAC led by Barrack, filed for a $250 million IPO in March this year with the goal of targeting tech-driven businesses. Falcon Acquisition was founded in 2020.

In a letter to the Securities and Exchange Commission dated July 23, the company only said, “it has elected to abandon the transactions subject thereto.”

On July 20, Barrack, the chairman of Donald Trump’s inaugural fund, was accused of illegally lobbying the Trump administration on behalf of the United Arab Emirates.

Barrack was charged along with Matthew Grimes and Rashid Sultan Rashid Al Malik Alshahhi.

The billionaire’s spokesperson told Insider that Barrack, founder and former executive chairman of the investment-management firm Colony Capital, would plead not guilty.

Barrack was arrested in Sylmar, California, and has been held in a federal jail in Los Angeles since then. He is scheduled to appear before a federal judge in Los Angeles on Friday.

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The SEC is reportedly looking into conflicts of interest among major banks in the SPAC deal-making process

The headquarters of the U.S. Securities and Exchange Commission (SEC) are seen in Washington, July 6, 2009. REUTERS/Jim Bourg
The headquarters of the U.S. Securities and Exchange Commission are seen in Washington

  • The SEC is investigating banks over conflicts of interest in the SPAC deal-making process, Reuters first reported.
  • In particular, the regulator is looking into instances of banks acting as underwriter and adviser on the same deal.
  • The SEC has requested information from top SPAC underwriters including Morgan Stanley and Goldman Sachs.
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The US Securities and Exchange Commission is investigating major banks over conflicts of interest in the SPAC deal-making process that exploded in the past year, Reuters first reported.

In particular, the regulator is looking into instances wherein the banks acted both as the underwriters and the advisers on the same SPAC deal and whether certain fee structures may have incentivized underwriters to secure unsuitable mergers, sources told Reuters.

“The big issue for the SEC is to understand if the advisers are conflicted,” one of the sources told Reuters.

The SEC, according to sources, has requested information from top SPAC underwriters including Citigroup, Credit Suisse, Morgan Stanley, and Goldman Sachs. Requests do not imply malpractice.

SPACs are shell companies that list with the aim of merging with private companies and taking them public.

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.

Management teams of SPACs, also known as sponsors, generally pay banks a 5.5% fee for underwriting the process. Banks, however, can earn more if they also represent the merger target.

Such conflict of interest could harm investors, sources told Reuters.

Under the current law, banks are not required to disclose their fees in regulatory filings while law and accounting firms are.

SPACs have exploded in popularity in the last year. In 2020, a total of 248 SPACs raised $83.3 billion according to SPAC Analytics. But over halfway through 2021 alone, data already show 368 SPACs that have raised $190 billion, comprising 59% of initial public offerings.

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Jim Chanos in an interview slammed SPACs for enticing investors to buy ‘very bad businesses’ and revealed he’s shorting several of them

Jim Chanos

Legendary short-seller Jim Chanos slammed special purpose acquisition companies for deceiving investors in a recent interview with the Financial Times.

The Kynikos Associates founder also revealed that he’s shorting several SPAC companies that are “very bad businesses” with “silly” valuations. He declined to name the SPACs to the Financial Times. Kynikos did not immediately respond to Insider’s request for comment.

“You’re seeing all kinds of situations now that probably wouldn’t pass muster in the IPO process that are coming public via the SPAC machinery,” said Chanos. “As the boom has gone on, we suspect that more and more companies are playing . . . fast and loose with their projections in order to entice investors to commit capital.”

Unlike traditional IPOs, blank-check companies can show projected revenue numbers to get valued off their future earnings. SPAC sponsors argue that the projections are important for investors, especially when target companies are unprofitable startups, but investor advocates argue they are frequently too optimistic or misleading.

The US Securities and Exchange Commission is looking into reforming regulations around lofty projections SPACs are allowed to make. Chanos said the US regulator should intervene, because the projections are where “investors get stars in their eyes and are prone to losing a lot of money.”

His criticism comes as certain high-profile SPAC stocks have been battered by reports from short-sellers. Lordstown Motors, for instance, has dropped nearly 42% since going public via a blank check company in October. The electric vehicle start-up is under attack from Hindenburg Research, which has accused Lordstown of pumping up preorder numbers to generate investor interest.

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The $171 billion of US IPOs in 2021 is already a full-year record

Coinbase IPO
  • Initial public offerings in the US this year have already broken 2020’s record with six months still go in the year.
  • Sky-high valuations in the stock market thanks to stimulus packages and the Federal Reserve’s low interest rate policies are driving the boom.
  • By the end of 2021, US IPOs could potentially raise a staggering $250 billion-$300 billion.
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Initial public offerings in the US this year have already broken 2020’s record with six months to go.

In the first half of this year alone, IPOs have raised $171 billion, surpassing last year’s record $168 billion, according to Reuters, citing data from Dealogic.

The average one-day gain for IPOs this year is 40.5% versus the 28.2% during the same period in 2020 and 21.7% in 2019, the report said.

Furthermore, the average one-week return this year is 35.7%, an increase from 2020’s 32.2% and 2019’s 25.5%.

This doesn’t come as a surprise with this year’s blockbuster IPO including South Korean e-commerce firm Coupang, which has raked in $67 billion, cybersecurity firm Darktrace, and cryptocurrency exchange Coinbase Global.

There is a slew of hotly anticipated IPOs still to come, with upcoming debuts by payments giant Stripe, Chinese ride-hailing firm Didi Chuxing, and trading platform Robinhood, among others.

Among the many factors driving the surge in companies going public, from traditional IPOs to SPACs, is the heady valuation of the stock market due in large part to the flush of stimulus packages passed during the pandemic and the Federal Reserve’s low interest rate policies.

“Five-hundred million used to be a pretty big IPO,” Jeff Bunzel, global co-head of equity capital markets at Deutsche Bank told Reuters. “Nowadays everything seems to be in the billions or three-quarters of a billion-plus. So there’s really been an explosion in the size of transactions as well.”

By the end of 2021, US IPOs could potentially raise a staggering $250 billion-$300 billion or more, data from Dealogic showed.

Meanwhile, SPACs, a popular route to public markets used by many startups, have boomed as well.

In 2020, a total of 248 SPACs raised $83.3 billion according to SPAC Analytics. But 2021 data already shows 340 SPACs have raised $106 billion just six months into the year.

Read more: Bank of America flags 26 stocks to buy that are also hugely popular among giant Wall Street investors

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Investors are worried Bill Ackman’s SPAC is struggling to find an acquisition target

FILE PHOTO: Bill Ackman, chief executive officer and portfolio manager at Pershing Square Capital Management, speaks during the SALT conference in Las Vegas, Nevada, U.S. May 18, 2017.  REUTERS/Richard Brian
Bill Ackman, chief executive officer and portfolio manager at Pershing Square Capital Management, speaks during the SALT conference in Las Vegas

  • Investors are getting anxious about billionaire hedge fund manager Bill Ackman finding a target for his SPAC to take public, Institutional Investor reported.
  • Ackman says a deal has been in the works since November, and that the SPAC team has done its homework.
  • Even so, if he can’t get the transaction done, Ackman said his SPAC will move on to another target.
  • See more stories on Insider’s business page.

Investors are starting to worry Bill Ackman’s blank-check company is struggling to find an acquisition target, Institutional Investor reported this week.

The billionaire hedge fund manager told investors on a Wednesday call that he will make an announcement whether his Pershing Square Tontine Holdings SPAC gets a deal done with the current target or has to move on.

The uncertaintly is making retail investors anxious. The story from Institutional Investor found sentiment was low on a “PTSH support group” page comprised of retail traders. One told the magazine that it “seems like the deal won’t happen” as Ackman keeps mentioning the idea of a backup target.

His SPAC – which launched with the goal of spending $5 billion to take a private business public – started working on a transaction in early November.

“We’ve done our homework, we like the business, we love the management team, and we are working to complete a transaction, as I said within weeks,” he said on the call, according to a transcript from Seeking Alpha.

“If we cannot get this transaction done, we will move on to target number two, and there are other interesting opportunities for us to pursue,” he added.

Following Ackman’s comments, shares of Tontine, which went public in July 2020 under the ticker PTSH, declined, closing out the day 1.2% lower.

According to a Monday filing with the Securities and Exchange commission, Tontine said it’s “currently in negotiations with a specific business target and while substantial progress has been made, significant issues remain to be addressed before a transaction can be announced and consummated, if at all.”

Several institutional investors have sold all or some of their positions in the SPAC, though its early backers are still in place. Hedge Fund Soroban Capital sold its stake of 5 million shares, Taconic Capital sold half of its 1.1 million shares, and the Ontario Teachers Pension Plan sold 4.3 million shares, though that was only part of its investment, Institutional Investor reported.

But early backers Guggenheim Capital and Baupost Group still hold tens of millions of shares in Ackman’s SPAC.

On The Wall Street Journal’s “The Future of Everything Festival,” Ackman said he and his team found an “iconic, phenomenal, great business with a great management team that meets all of our criteria.” But, the nature of the target, the complexity of the deal, and other issues have caused delays, he said, adding that the company is so attractive it will be “worth the energy and the effort.”

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SPACs have raised a record $100 billion in 2021, but activity levels have plummeted by more than 80% in recent months

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Danny Meyer, founder of Shake Shack, is the chairman of a new SPAC.

  • Data from Refinitiv shows that global SPAC IPOs have raised a record $100 billion in 2021 so far.
  • Despite the record amount of proceeds, the volume of SPAC listings has plummeted.
  • The Refinitiv data is another sign the blank-check frenzy driven by the Fed’s easy-money policies is drying up.
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The amount of money raised by SPACs around the world has reached a record high, but the blank-check frenzy is showing signs of slowing.

As of May 19, global IPO SPAC proceeds have reached a record high of $100 billion, 23% more than the level recorded throughout all of 2020, new data from Refinitiv shows.

But despite reaching this milestone, the number of special purpose acquisition companies going public has plummeted in recent months. In March, a total of 116 special purpose acquisition companies listed. In April, the number of listings dropped to just 18.

SPAC activity ballooned in 2020 and the beginning of 2021 as the Federal Reserve’s easy-money policies pumped liquidity into the market. Investors were hungry to deploy their cash, and SPACs were just one of their targets.

Now, concerns of overheating inflation out of the pandemic has investors worried the Fed may taper its asset purchases sooner than expected and dry up the market. Minutes from the Fed’s April meeting published Wednesday showed that some officials signaled they would be open “at some point” to begin discussing a plan for adjusting the pace of asset purchases.

Another key driver in the SPAC slowdown is heightened regulatory scrutiny, according to Goldman Sach’s David Kostin. In an April note the chief US equity strategist highlighted that the SEC has recently released two statements expressing concerns over the reporting, accounting, and governance of special-purpose-acquisition companies.

And although proceeds have reached a record high, the performance of blank-check companies and companies that have recently gone public via them is declining.

The Defiance Next Gen SPAC Derived ETF (SPAK), which consists of more than 200 US-listed SPACs and de-SPACs, has underperformed the S&P 500 year-to-date. The SPAC ETF is down 16.33% in 2021, while the benchmark index has gained 9.8%.

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Dozens of startups raised hundreds of millions to go public with a SPAC or IPO after taking government loans during the pandemic

SPAC popularity in real esate tech world 4x3
Samantha Lee/Insider

  • About 30 startups took government-backed pandemic loans before raising millions in a SPAC deal.
  • Another 16 startups went public with an IPO in the months after they received the loan.
  • IPOs and SPACs took off amid the pandemic, taking hundreds of companies public.
  • See more stories on Insider’s business page.

Dozens of startups took government-backed loans for small businesses during the pandemic and then went public, new data show.

The data, provided to Insider by PitchBook, showed about 30 startups went public with a special purpose acquisition company, better known as a SPAC, in the months after receiving a Paycheck Protection Program loan, a forgivable loan aimed at helping business owners harmed by the pandemic.

Another 16 companies, ranging in valuation from $187 million to $8.5 billion, joined the public markets with an initial public offering after they received the loan.

The Wall Street Journal, which first reported on the data, said the dichotomy of receiving a government-backed loan followed by raising millions with a SPAC or public offering has sparked debate as to whether the companies should pay back the PPP loans, even if they meet the qualifications for forgiveness.

Read more: A 29-year-old crypto billionaire who’s perfected digital-currency arbitrage shares 2 tips for investors looking to get started in trading – and explains why ether is unlikely to surpass bitcoin

Through interviews with executives and analysis of public documents, the Journal found a third of the 15 highest-valued startups that took a PPP loan ahead of a SPAC deal already repaid the money or have said they’ll do so.

The government doled out 5.2 million PPP loans, totaling $782.2 billion as of May. The businesses who got a loan can receive forgiveness if it was used for qualified expenses, like rent or worker pay.

Some companies were scrutinized for taking a PPP loan meant for small business-owners. Shake Shack, for example, received a $10 million loan and later paid it back after people criticized the company for receiving one as program funds dried up, leaving other businesses without any aid.

One CEO told the Journal the $3 million loan was an “invaluable tool” at the time the pandemic hit, and he was happy to repay it after raising $600 million in a SPAC deal. The executive, Scott Mercer, founded Volta Industries Inc., and merged with Tortoise Acquisition Corp II in a deal that valued the electric-vehicle-charging company at $2 billion, Reuters reported.

SPACs took off in a big way during the pandemic. The blank-check companies merge with private businesses and take them public, without the target having to go through an initial public offering. In 2020 alone, SPACs raised a record $73 billion, which was a 462% jump over the previous year.

So far this year, the number of SPAC deals has already beaten that record. But the SPAC boom may be slowing down, Insider reported previously. Regulators have been monitoring the SPAC craze, and in March, the Securities and Exchange Commission warned investors of the risk in SPACs not living up to the hype.

The IPO market also took off during the pandemic, with 430 new companies listing in 2020, which is the most since 2000, according to Dealogic.

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JPMorgan is calling the top for SPACs – and says declining day-trader interest is to blame

Stock Market Bubble

The SPAC boom that defined market euphoria in 2020 and continued into 2021 has officially peaked, according to a Wednesday note from JPMorgan.

Since February, performance in SPAC stocks has materially underperformed the S&P 500, and new deal activity with SPACs has plummeted in April following a strong start to the year.

The Defiance Next Gen SPAC Derived ETF is down 25% from its February peak, and is down 9% year-to-date.

The decline in SPAC activity has been driven by a decline in retail traders pouring money into the new deals, as well as increased regulatory scrutiny from the SEC, according to JPMorgan.

The bank highlighted that SPAC reverse mergers “come and go in waves” as they tend to exhibit boom and bust cycles.

“The boom [is] typically driven by momentum and imitation by sponsors, investors, and target companies looking to take advantage of strong equity market demand conditions, and the bust [is] typically triggered by the emergence of poor quality players, strong levels of dilution for shareholders, waning hype by retail investors and regulatory concerns,” JPMorgan explained.

So far this year, more than 308 SPAC IPOs have raised $100 billion in proceeds, according to data from SPACInsider. In 2020, 248 SPAC IPOs raised $83 billion in proceeds. More SPAC deals were raised in the first quarter of 2021 than all of 2020.

“The acceleration in SPAC activity in Q1 was so strong that was more reminiscent of a peak especially when combined with the emergence of poor quality players and regulatory scrutiny during the first quarter,” JPMorgan said.

New SPAC offerings in April have been almost non-existent, with last week marking the first week with zero new SPAC debuts for the first time since March 2020.

Read more: SPAC short-sellers have taken home $500 million in 30 days. These are the 10 most profitable blank-check companies to bet against right now.

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A SPAC backed by an LA Dodgers co-owner will take online ticket marketplace Vivid Seats public at a $2 billion valuation

GettyImages 576940202 (1)
LA Dodgers owners of Guggenheim Baseball Management, LLC – (from left) Stan Kasten, Mark Walter, Earvin Magic Johnson, Peter Guber, and Todd Boehly during the press conference to introduce the new owners of the Dodgers at Dodger Stadium in Los Angeles, CA on May 2, 2012.

  • A SPAC backed by LA Dodgers co-owner Todd Boehly is taking online ticket marketplace Vivid Seats public.
  • The deal will put the combined valuation of both companies at $1.95 billion.
  • The SPAC, Horizon Acquisition, will provide around $769 million of gross proceeds to Vivid Seats, including a $225 million PIPE.
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A blank check company backed by Los Angeles Dodgers co-owner Todd Boehly announced Thursday that it is taking online ticket marketplace Vivid Seats public, putting the combined valuation of both companies at $1.95 billion.

Boehly’s Horizon Acquisition SPAC will provide around $769 million of gross proceeds to Vivid Seats, including a $225 million private investment in public equity, or PIPE, at $10 per share from investors including Fidelity Management & Research Company and Eldridge Industries, which Boehly is CEO of.

The new company will be led by Vivid Seats CEO Stan Chia. Boehly, chairman and CEO of the SPAC, will join the Vivid Seats’ board of directors.

“Vivid Seats has built an impressive technology platform, as well as a substantial customer base,” Boehly, who is also the founder of Eldridge Industries, said in a statement. “Vivid Seats is a scaled, growing and highly profitable marketplace that will be well-positioned to drive continual long-term growth.”

Vivid Seats is a live portal that connects fans with ticket sellers across. The Chicago-based company is poised to take advantage of consumers’ pent-up demand – after being locked in their homes due to the pandemic – to attend sports, concert, and theater events as Covid-19 restrictions worldwide ease.

The online ticket marketplace currently supports over 12 million customers and 3,400 sellers across more than 200,000 listed events. Founded in 2001, the company counts ESPN and The Rolling Stones as its partner, among others.

Evercore is acting as financial and capital adviser to Vivid Seats, while Credit Suisse, Deutsche Bank Securities and RBC Capital Markets are advising Horizon on the deal.

SPACs, shell companies seeking to merge with private companies with the intention of taking them public, have boomed.

In 2020, a total of 248 SPACs raised $83.3 billion according to SPAC Analytics. But by April of this year, 308 SPACs have raised $99.7 billion, comprising 65% of all IPOs.

While the boom in SPACs has slowed recently, Goldman Sachs said these could still drive $900 billion of dealmaking over the next two years.

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