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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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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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.
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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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US SEC official warns SPAC dealmakers of the risks and complexities tied to blank-check mergers

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A US markets watchdog official on Wednesday cautioned blank-check company dealmakers about the risks and governance issues that come with raising capital through special-purpose acquisition companies (SPACs).

Paul Munter, the acting chief accountant at the Securities and Exchange Commission, said timelines of such transactions are part of the challenges for private companies that merge with SPACs. That is because their development may still be in early stages.

“Many SPAC acquisition targets may be at an earlier stage in the entity’s development compared to companies that pursue a traditional IPO,” he said in a statement, adding target companies should have a plan to address the demands of becoming public on a speedy timeline.

Munter urged market participants to carefully consider risks, complexities, and challenges in the space, including the consideration of whether target companies are prepared to go public.

SPACs have raised $97 billion across 298 IPOs so far this year, exceeding the previous year’s record of $83 billion raised, according to data from SPACInsider.com.

But March was a rough month for companies in the space as firms and individual investors grew increasingly cautious over SPAC investing. 93% of SPACs that went public in the last few weeks of the month were trading below par value, or $10 per share. JPMorgan said SPAC acceleration may be hitting a peak and could slow for the rest of the year.

Munter made his statement about a week after the regulator wrote to Wall Street banks to seek voluntary information on their SPAC dealings.

“Given the explosion in popularity of SPACs, it’s no surprise that enforcement is asking questions – this is the beginning of what I expect will be heightened scrutiny of trading and disclosures to investors arising from the surge of these transactions,” Doug Davison, partner at law firm Linklaters, said.

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Billionaire investor Bill Ackman is eyeing a second SPAC deal even though he will miss his own Q1 deadline to find a first target

Bill Ackman
Bill Ackman.

  • Pershing Square chief Bill Ackman is already planning a second SPAC, but hasn’t yet found a first target.
  • Airbnb, Stripe, and Bloomberg LP were previously said to be among his blank-check firm’s first targets.
  • Ackman said he believes his SPAC will be an important contributor to his hedge fund’s performance.
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Hedge fund billionaire Bill Ackman is already planning a second blank-check company, although he expects to miss his own first-quarter deadline to find a first target.

The legendary investor had hoped his special purpose acquisition company (SPAC) would find a target by the end of the first quarter, but now admits this might not happen. Prior targets on the list of his Pershing Square Tontine Holdings SPAC included Airbnb, Stripe, and Bloomberg LP, according to Reuters.

“While we previously believed that we would be able to announce a potential transaction by the end of this quarter, we will not be in a position to do so,” Ackman said in a letter to investors on Monday. “We do not intend to make any announcements about PSTH’s transaction progress until we enter into a definitive agreement.”

Ackman said he believes his SPAC will be an important contributor to the hedge fund’s performance and he will likely launch a second one after completing a first merger. Investors in his first SPAC should have the right to invest in the second one “without paying a premium to its cash-in-trust value,” he wrote in the letter.

Ackman’s PSTH was the highest-profile SPAC among hedge funds in 2020, when SPACs raised $83 billion across 248 IPOs, smashing the previous record of $13.6 billion, according to SPACInsider.com. His SPAC raised a record-breaking $4 billion via proceeds from investors in July last year, along with an added $1 billion commitment from Pershing Square.

While he has not told investors which companies he was looking to take over, a previous filing stated he is drawn to “high-quality, venture-backed businesses” that could be classified as “mature unicorns.” Unicorns are privately-held startups with a valuation of more than $1 billion.

The SPAC has until July 21 next year to sign a letter of intent and six months after that to close a signed deal, according to Bloomberg.

Shares in Pershing Square Tontine fell 1.3% in pre-market trading on Tuesday.

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The red-hot SPAC market is cooling off as first-day trading spikes evaporate

SPACs and hedge funds 2x1

The red-hot SPAC market looks to be cooling off as first-day trading spikes that were common in the space earlier this year begin to evaporate.

93% of SPACs that went public over the last week are trading below par value or $10 per share, per Dealogic data compiled by Reuters, That’s 14 out of 15 SPACs this week alone trading below their IPO price.

The biggest first-day jump of a SPAC this month was just 3.5% for Supernova Partners Acquisition Co II Ltd on March 1.

That’s compared to January’s largest first-day pop of 32.5% for Altimeter Growth Corp II and February’s best first-day jump of 24.9% for CM Life Sciences II, per Reuters.

SPACs are “blank check” firms that go public with nothing but cash on their balance sheet. Their sole goal is to merge with or acquire a private company allowing that business to skip the traditional IPO process to make its public debut.

There’s no doubt the SPAC market is booming. SPACs have raised $87.9 billion so far in 2021, according to data from SPAC Research. That’s already more than all of 2020 when SPACs raised $82.1 billion, per Dealogic.

The incredible rise of SPACs means the blank check firms now have over $1 trillion in spending power.

Unfortunately, the rise in SPACs hasn’t always led to great returns for investors, especially retail investors.

According to data from “A Sober Look at SPACs” by Klausner, Ohlrogge, and Ruan 2020, average returns for SPACs 12 months after their merger were negative 34.9% between January 2019 and June 2020.

Billionaire investor Barry Sternlicht told CNBC on Wednesday he believes the SPAC market is “out of control.” These days “if you can walk, you can do a SPAC,” Sternlicht said.

The CEO and Chairman of Starwood Capital, which operates six SPACs of its own, warned about the lack of due diligence done by SPAC sponsors. Sternlicht also said the recent poor performance of SPACs is partly a result of a tech sell-off, because a lot of SPACs are tech-focused.

“People are also beginning to question the euphoria and retail investors are unable to keep up with all these names,” Sternlich told Reuters.

Sternlicht isn’t the only one questioning SPACs recent rise either.

UBS barred financial advisors from making SPAC pitches to clients due to limited availability of research on SPACs before their mergers with private companies. All of this bearish news may be weighing on SPACs’ first-day results.

Read more: Hedge funds are ramping up bets against Chamath Palihapitiya’s SPACs and have already taken home $40 million this year. Here’s a detailed look at the wagers they’re making.

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Short-sellers have tripled bets against SPACs since the start of 2021 amid fears the blank-check frenzy has gone too far

Stock Market Bubble
  • More and more short-sellers are beginning to turn their attention to SPACs, which have experienced a boom in 2021.
  • They’ve more than tripled their bets against SPACs to $2.7 billion since the beginning of the year, according to data from S3 Partners.
  • Recent SPACs that have been targets of high profile short-sellers include XL Fleet and Lordstown Motors, among others.
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SPAC IPOs have been all the rage since the COVID-19 pandemic began, and the trend has only accelerated in 2021. Now short-sellers are beginning to take notice.

The group of investors has tripled bearish bets against SPACs to $2.7 billion, from $724 million at the start of the year, according to data from S3 Partners first reported by The Wall Street Journal.

Short-sellers have a lot of SPACs to sift through, given that the $166 billion raised by SPACs in the first quarter of 2021 exceeds all of the SPAC deals formed in 2020. But high-profile short-sellers seem to be having no problem finding their targets.

Muddy Water’s Carson Block released a report earlier this month on XL Fleet, a recent SPAC IPO that, according to Block, misled investors on an inflated revenue backlog for its retrofitted hybrid vehicles. The share price of XL Fleet has yet to recover from Block’s short report.

Short-seller firm Hindenburg Research, which rose to fame last year after it released a damaging short-report on Nikola, has also had success targeting SPAC firms. Hindenburg released a report on Lordstown Motors last week, alleging that the SPAC-merged company has “no revenue and no sellable product.” Shares of Lordstown dipped more than 20% and have yet to recover from the decline.

Even the SPACs led by billionaire investor Chamath Palihapitiya have been unable to avoid the scrutiny of short-sellers. Palihapitiya’s recent Social Capital SPAC merger with fintech firm SoFi has more than 20% of its share float sold short, according to data from Finviz.

Besides the underlying business concerns raised by short-sellers for SPACs, underlying trends in interest rates could be helping their bets against SPAC mergers. A majority of the companies going public via SPAC merger are not profitable, and don’t forecast profitability until years down the road.

The dearth of profits hasn’t jived well with investors as interest rates have risen over the past few months, sparking a rotation out of high-tech growth companies and into cyclical stocks in the energy and financial sectors.

Read more: ‘It’s been a motherf—ing rocket ride’ : A top NFT artist who’s sold over $60 million worth of crypto art breaks down how he’s capitalizing on the sudden boom – and shares how he positions his own portfolio

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Billionaire Richard Branson’s Virgin Orbit has reportedly hired bankers to go public via SPAC merger

Virgin Orbit Boeing 747

Billionaire Richard Branson has reportedly hired bankers to take his aerospace company Virgin Orbit public through a special purpose acquisition company merger, aiming for a $3 billion valuation, The Wall Street Journal reported Friday.

This move is consistent with the billionaire’s strategy of taking his companies public via blank-check listings amid the explosion of SPACs in recent years. SPACs are essentially shell companies seeking to merge with private companies with the intention of taking them public.

The entrepreneur in 2019 took his space-tourism company Virgin Galactic Holdings public via SPAC and enlisted billionaire investor Chamath Palihapitiya as the chairman. Palihapitiya in early March, however, cashed out his entire personal stake for $211 million.

More recently, VG Acquisition, a SPAC sponsored by Branson’s Virgin Group, announced in February that it has merged with DNA testing startup 23andMe in a deal that would put the company famous for its at-home kits at an enterprise value of $3.5 billion.

Virgin Orbit has hired Credit Suisse Group and LionTree, according to The Wall Street Journal, and is currently looking for a SPAC merger partner.

Branson’s company owns 80% of South Carolina-based Virgin Orbit. Mubadala Investment and the United Arab Emirates sovereign-wealth fund own the remaining stake.

The valuation is not guaranteed but the billionaire is banking on Virgin Orbit’s January test launch, which successfully sent its first rocket to successfully reach Earth orbit, eight months after its previous attempt failed.

SPACs have been around for more than a decade but have since recently boomed. Just three months into 2021, data from SPAC Analytics already show 246 SPACs that raised $76.7 billion versus the 248 in 2020 that raised $83.3 billion.

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