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

DannyMeyer 02 GettyImages 624401698
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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The SEC is reportedly weighing stricter rules to rein in the wild projections made by SPACs as the blank-check craze slows

SEC
  • The SEC is considering new guidance to rein in growth projections made by listed SPACs, per Reuters.
  • Investor advocates say the wildly optimistic forward growth projections SPACs can make pose a risk to investors.
  • The reported SEC crackdown comes as the blank-check frenzy begins to lose steam.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

The US Securities and Exchange Commission is considering new guidance to curb growth projections made by listed special-purpose acquisition companies, according to Reuters, which cited three people with knowledge of the discussion.

If implemented, the guidance would rein in some of the wild projections blank-check companies can make.

In a traditional IPO, a company cannot use forward guidance projections to justify its valuation. But in a SPAC, a company can show projected revenue numbers and get valued off its future earnings, which can pose a risk to investors, Mike Murphy, Rosecliff CEO and managing partner previously told Insider.

SPAC sponsors argue that the projections are important for investors, especially when targets are unprofitable startups, but investor advocates argue they are frequently too optimistic or misleading.

Reuters said the SEC is also considering guidance aimed at clarifying when a key liability protection for such forward-looking statements applies to SPACs.

The reported SEC crackdown comes as the blank-check craze begins to lose steam. Last week Goldman Sachs noted that The Defiance Next Gen SPAC Derived ETF, which consists of more than 200 US-listed SPACs and de-SPACs, has underperformed the S&P 500 year-to-date. As of Wednesday, the ETF is down nearly 9% in 2021, compared to the S&P 500 which is up 11.68%.

The new guidance from the SEC follows an announcement from the US regulator earlier this month, when it suggested that warrants issued by SPACs should be accounted for as liabilities, instead of equity instruments.

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