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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US IPO activity fell 59% in the 2nd quarter as SPACs dried up following a regulatory crackdown

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  • US IPO activity fell 59% in the second quarter as the SPAC frenzy cooled sharply in the wake of rule changes.
  • The number of SPACs plunged 87%, raising just $6.8 billion compared with $92.3 billion in the first quarter.
  • However, the IPO market remains strong, with more listings in 2021 so far than in the whole of 2020.
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The number of companies listing shares on US exchanges for the first time dropped almost 60% in the second quarter, as the boom in special purpose acquisition companies cooled sharply in the wake of a regulatory crackdown.

Data from FactSet published Wednesday showed that the total number of initial public offerings fell 59% quarter-on-quarter, although they were 128% higher than a year earlier.

The decline was more marked within SPAC IPOs. There were just 39 in the three months to June 30, down 87% from 292 in the previous quarter, financial data company FactSet said.

Overall, IPOs raised $50.9 billion in the second quarter, down 64% on the previous three-month period. Within that, SPAC IPOs brought in just $6.8 billion, compared with $92.3 billion.

Read more: The CEO of investment bank JMP Securities says once-overexuberant investor sentiment around SPACs has now turned irrationally bearish – and shares 2 undervalued companies he’s bullish on for big returns down the line, including one he thinks will jump 80%

Though IPO volumes slid sharply in the second quarter, 2021 so far has already seen more offerings than 2020, which was itself a bumper year.

Public listings have surged in 2020 and 2021, thanks in part to the huge amounts of fiscal and monetary stimulus supporting the US stock market. FactSet said there had been 582 US IPOs in the first half of 2021, compared with 355 for all of 2020. In 2019, there were 242.

But the numbers have also been driven up sharply by the Wall Street craze for SPACs – blank-check companies that list on the stock market to raise funds to find a target company to merge with.

However, the SPAC boom has slowed sharply since April after the US Securities and Exchange Commission tightened the rules around warrants – sweeteners that allow early investors to purchase shares in the future. The SEC issued guidance that would class warrants as liabilities, rather than equity instruments, making the financial reporting around SPACs more complex.

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Forbes is going public via $630 million SPAC merger with Magnum Opus Acquisition

In this photo illustration a Forbes logo seen displayed on a smartphone.

Forbes Global Media is going public through a blank check merger with Magnum Opus Acquisition in a deal that will value the combined entity at $630 million, according to an announcement on Thursday.

The business news organization, which publishes Forbes magazine, is expected to raise approximately $600 million of gross proceeds, which comprises around $200 million of cash held in Magnum Opus’ trust account and roughly $400 million private investment in public equity, or PIPE, the announcement said.

The transaction, which is expected to close in the fourth quarter of 2021 or the first quarter of 2022, will be used to further the digital transformation push at the company.

Forbes said it will also use its fund to “convert readers into long-term, engaged users of the platform, including through memberships and recurring subscriptions to premium content and highly targeted product offerings.”

The management team at Forbes will remain in place after the deal under the leadership of CEO Mike Federle, the announcement said.

Forbes is best known for curating lists of wealthy business icons and influential leaders around the world. The brand reaches more than 150 million people and covers 76 countries.

Magnum Opus Acquisition is a blank-check firm led by CEO Jonathan Lin. It is sponsored by L2 Capital, a private investment firm.

Forbes is just the latest media organization to go public. In June, Buzzfeed agreed to go public, also via SPAC acquisition.

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.

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 deal makers.

In 2020, a total of 248 SPACs raised $83.3 billion according to SPAC Analytics. Over halfway through 2021 alone, data already show 414 SPACs that have raised $121 billion, comprising 44% of initial public offerings.

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

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The SPAC boom is dying down as post-merger companies flounder. These are the 10 worst-performing SPACs of the past year.

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  • The SPAC boom over the past year is beginning to deflate, as scores of post-merged companies flounder below their $10 IPO price.
  • Even high profile names like 23andMe, Blade Air Mobility, and MetroMile have plummeted.
  • These are the 10 worst performing SPACs that completed their merger over the past year.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

The SPAC boom over the past year is beginning to deflate, as issuances slow down and investors sell-out of post-merged companies that are well below their $10 IPO price.

The Defiance Next Gen SPAK ETF is down more than 22% year-to-date, and down more than 37% from its mid-February high. High profile SPAC names like 23andME, Blade Air Mobility, and MetroMilehave plunged at least 25% from their $10 IPO Prices.

The broad decline in the stock prices of companies that went public via SPAC is partly due to poor fundamentals, with some being pre-revenue companies, and most not yet profitable. As these companies first quarterly earnings report as a public company begin to trickle in, investors are heading for the exits.

This trend could continue and ultimately spill over into SPAC listings that have not yet completed a merger, as they trade closer to the $10 IPO price.

That’s because the often 2-year deadline for hundreds of SPACs to complete a deal is not far away as management teams scramble to find a deal. Those deals will likely be of sub-par quality given the many hundreds of SPACs that are desperate to get a deal done and get paid before they have to return the funds raised to investors.

These are the 10 worst performing SPACs that completed their merger over the past year.

10. UpHealth

Ticker: UPH
Market Value: $601.2 million
% Below $10 IPO Price: -42%

UPH Stock chart

9. Romeo Power

Ticker: RMO
Market Value: $655.9 million
% Below $10 IPO Price: -52%

Romeo Power stock chart

8. Metromile

Ticker: MILE
Market Value: $538 million
% Below $10 IPO Price: -56%

Metromile stock chart

7. View

Ticker: VIEW
Market Value: $993.6 million
% Below $10 IPO Price: -58%

VIEW Stock chart

6. Play Studios

Ticker: MYPS
Market Value: $598.7 million
% Below $10 IPO Price: -58%

MYPS stock chart

5. ATI Physical Therapy

Ticker: ATIP
Market Value: $869.1 million
% Below $10 IPO Price: -60%

ATI Physical Therapy stock chart

4. CarLotz

Ticker: LOTZ
Market Value: $479.2 million
% Below $10 IPO Price: -61%

LOTZ stock chart

3. Gemini Therapeutics

Ticker: GMTX
Market Value: $155.4 million
% Below $10 IPO Price: -63%

GMTX stock chart

2. SOC Telemed

Ticker: TLMD
Market Value: $382.2 million
% Below $10 IPO Price: -74%

TLMD Stock Chart

1. UCommune International

Ticker: UK
Market Value: $90.8 million
% Below $10 IPO Price: -90%

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

Wall Street.
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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