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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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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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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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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SPACs could drive $900 billion of dealmaking over the next 2 years despite the boom slowing, Goldman says

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Southeast Asian ride-hailing app Grab is set to go public in a $40 billion SPAC deal.

The boom in special-purpose acquisition companies, or SPACs, may have slowed of late, but it could still drive $900 billion of dealmaking over the next two years, according to Goldman Sachs.

“We estimate $129 billion of SPAC capital is currently searching for a target,” Goldman analysts, led by David Kostin, said in a note on Wednesday.

“In spite of the issuance slowdown and sell-off, SPACs could drive a total of $900 billion in M&A enterprise value in the coming 24 months.” Enterprise value is the total value of a company, including its market capitalization, cash and debt.

A record 277 blank-check companies issued shares in the first quarter, raising $91 billion from investors. It helped power the strongest first quarter for dealmaking in 40 years, topping even the dotcom bubble of 2000.

A SPAC is an entity that exists solely to list on the stock exchange to raise money, in the hope of finding and merging with a target company to take it public. They can be incredibly lucrative for early supporters, and offer companies a less onerous and costly way of listing on the stock exchange.

On April 13, Asian ride-hailing company Grab agreed to go public through a $40 billion merger with the Altimeter Growth Corp SPAC. Trading platform eToro will also list through a $10 billion SPAC deal.

But the SPAC boom has slowed in recent weeks. Just six new SPACs have come to market so far in the second quarter, Goldman said, compared to 55 at the same point in the first 3 months of the year.

Goldman said signals from US regulators that they are concerned about various aspects of the SPAC frenzy, including the reporting, accounting and governance of SPACs, has been the key factor weighing on the market.

Nonetheless, there were 394 SPACs seeking companies to take public as of Wednesday, with $129 billion of equity capital, Goldman said.

The bank’s estimate that blank-check companies could drive $900 billion in dealmaking over the coming years assumed active SPACs find targets and close deals, and that future acquisitions are structurally similar to transactions announced so far in 2021.

Goldman Sachs itself has been a key driver of the SPAC boom. The blank-check phenomenon helped power record investment banking revenues in the first quarter.

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Legendary investor Bill Miller says the window is closing on the SPAC market, but singles out 2 names that remain attractive

Bill Miller

Legendary investor Bill Miller thinks the SPAC craze may be nearing the end.

Pushed by a frenzy of excitement from retail investors and a desire from many pre-revenue companies to take an easier path to public markets, SPACs have boomed in 2020 and 2021.

“I think that game is largely winding down now,” Miller told CNBC on Tuesday. “Many of the SPACs that came public came at extraordinarily expensive valuations. But now some of them have corrected.”

The billionaire pointed to some SPACs that now have more reasonable valuations, such as Desktop Metal, a 3D metal printing technology provider that famed investor Chamath Palihapitiya also backed. The company went public in a merger with blank check company Trine Acquisition. The stock peaked at $31.25 on February 1 before tumbling to $12.70 as of April 20.

Miller also said he likes Metromile, a US-based pay-per-mile insurance technology that merged with SPAC Insu Acquisition in February. The billionaire called it the “next wave of insurance company.” Metromile shares have tumbled 50% since their public debut.

Miller also named specific stocks including Amazon, Alphabet, Facebook, and Apple, which he said his fund no longer owns.

He also singled out online car dealer Vroom.

“That’s the name we think you could make multiple times your money in the next three or four years,” he told CNBC.

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 the fourth month of 2021 alone, 308 SPACs have raised $99.7 billion, comprising 65% of all IPOs.

Recently however, US regulators have said they will take a closer look at SPACs following the blistering pace of growth over the last year.

Paul Munter, the acting chief accountant at the Securities and Exchange Commission, in April cautioned SPAC investors about the risks and governance issues that come with raising capital through blank check companies.

In March, the SEC has begun an inquiry into the SPAC craze, seeking voluntary information from market participants.

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A major hedge fund warns of the ‘awful returns’ generated by SPACs – and says it’s ramping up short bets against blank-check companies

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CNBC’s Kelly Evans moderates the Global Stage panel with Paul Marshall, Chief Investment Officer and Chairman, Marshall Wace LLP at the CNBC Institutional Investor Delivering Alpha Conference in New York.

  • Paul Marshall, co-founder of hedge fund Marshall Wace, is sounding alarms over blank-check companies, which he said have delivered “awful returns,” Bloomberg reported.
  • Marshall also said his hedge fund is ramping up short bets against SPACs.
  • “The SPAC phenomenon will end badly and leave many casualties,” he said.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell

The co-founder of London-based hedge fund Marshall Wace is sounding the alarm over blank-check companies, which he said have delivered “awful returns,” Bloomberg reported. The British investor also said he is ramping up short bets against special purpose acquisition companies, or SPACs.

In a newsletter addressed to his investors, Paul Marshall said that the SPAC market is overrun with “perverse incentives”.

SPACs are shell companies seeking to merge with private companies with the intention of taking them public.

“The SPAC phenomenon will end badly and leave many casualties,” said Marshall, who, in the past has lost money betting on SPACs. He disclosed to Bloomberg that his hedge fund has around $1 billion of gross exposure to SPACs.

Marshall’s firm, which manages $55 billion of assets, owns or has owned “almost every SPAC” on the long side.

“We have increasing exposure on the short side as the SPACs go ex-deal and the low caliber of the deals, and even the potential for bezzle, becomes apparent,” he told Bloomberg. “Bezzle” refers to the period in which an embezzler has stolen money without the victim realizing yet.

The billionaire’s warning comes amid a SPAC boom that has dominated financial markets in 2020 and 2021.

In 2020, a total of 248 SPACs raised $83.3 billion according to SPAC Analytics. But by the fourth month of 2021 alone, 308 SPACs have raised $99.7 billion, comprising 65% of all IPOs.

Paul Munter, the acting chief accountant at the Securities and Exchange Commission, in April cautioned SPAC dealmakers about the risks and governance issues that come with raising capital through blank check companies.

In March, the SEC has begun an inquiry into the SPAC craze by seeking voluntary information. The agency requested details on how underwriting banks manage the risks involved with special-purpose acquisition companies.

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Bill Gates says companies have gone from staying private too long to going public too soon and that he’s avoiding ‘low quality’ SPACs

Bill Gates
  • Bill Gates believes some companies may be going public too soon amid a SPAC boom.
  • The billionaire said he will be sticking to “higher quality” SPACs in this environment.
  • Gates emphasized the need for “extreme” disclosures to protect investors from early-stage investing risks.
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Bill Gates said he believes companies have “flipped” from staying private too long to going public too soon, in an interview with CNBC on Friday.

The billionaire Microsoft co-founder added that he will be avoiding “low quality” special purpose acquisition companies (SPACs) that have flooded the market and sticking with “higher quality” options.

Gates sat down with CNBC’s Becky Quick and former US Treasury Secretary Hank Paulson to discuss his climate-related work for the economic club of New York on Friday. In the interview, the billionaire philanthropist was asked about the rise of SPACs and whether or not they would be a benefit to “green” startups.

SPACs have raised more money in the first quarter of 2021 than they did in all of 2020, raking in more than $97 billion in just three months, according to data from SPAC Research.

Gates emphasized the capital intensive nature of climate change solutions and green companies and said that if investors are willing to take the risk, cash from capital markets would allow “green product companies” to “improve their balance sheet and get capital for projects because the markets are saying this is important.”

On the other hand, Gates warned about the risks in early-stage investments, saying, “you’ve got to make sure your disclosure about the risks is really extreme.”

He also noted that “we’ve kind of flipped from a world where companies would probably stay private too long, to now where, unless you’re tasteful, some of these companies may be going public too soon.”

Gates added that “there will be quality companies that SPAC,” but emphasized there will also be “low-quality companies” that choose to take advantage of the SPAC boom. Gates said he will be looking to stay involved in the only higher-quality offerings.

After a meteoric rise in SPACs over the past two years, there’s been some evidence that the SPAC market is beginning to cool.

Specifically, SPAC IPO prices have begun to fall. In fact, some 93% of SPACs that went public in the last week of March traded below their $10 initial offering price, per Reuters.

SPAC ETFs are also taking a hit, the Defiance Next Gen SPAC Derived ETF (SPAK) has fallen 23% from February 17 record highs.

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