The SEC says it’s looking closely at the wild earnings projections attached to many SPAC offerings

FILE PHOTO: The U.S. Securities and Exchange Commission logo adorns an office door at the SEC headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst
FILE PHOTO: The U.S. Securities and Exchange Commission logo adorns an office door

The US Securities and Exchange Commission issued a warning to blank-check companies presenting projections that only give an optimistic outlook of future growth. The agency added that it will “look carefully” at SPAC filings and disclosures as well as those of their private targets.

John Coates, the agency’s acting director for the corporation finance division, said on Thursday that a company would be on “shaky ground” if it only disclosed favorable projections and omitted “equally reliable but unfavorable projections.”

Special purpose acquisition companies or SPACs have been booming, enabling many pre-revenue startups to go public. SPACs are essentially shell companies seeking to merge with private companies with the intention of taking them public. SPACs are often considered a cheaper, faster alternative to a traditional IPO.

SPAC sponsors have also generally been allowed to more freely give projections of future growth than is allowed for companies going public via traditional IPO, which are not allowed to broadcast future sales or earnings.

Coates pointed to the Private Securities Litigation Reform Act safe harbor, a legal liability SPACs often refer to when making optimistic forward-looking statements.

“This…is the reason that sponsors, targets, and others involved in a de-SPAC feel comfortable presenting projections and other valuation material of a kind that is not commonly found in conventional IPO prospectuses,” he said, referring to the safe harbor.

This, he said, raises significant investor protection questions, and is why he is calling on the agency to treat SPAC deals with the same level of scrutiny as IPOs.

“Any simple claim about reduced liability exposure for SPAC participants is overstated at best, and potentially seriously misleading at worst,” Coates said. “Indeed, in some ways, liability risks for those involved are higher, not lower, than in conventional IPOs, due in particular to the potential conflicts of interest in the SPAC structure.”

Coates added that while projections are woven into the fabric of business combinations, they have to be fair. Forward-looking information, he said, can be “untested, speculative, misleading or even fraudulent, as reflected in the limitations on the PSLRA’s liability protections.” He floated the possibility of having guidance about how projections and related valuations should be presented.

SPACs have attracted a number of high-profile investors including famed fund manager Bill Ackman and billionaire Chamath Palihapitiya. Celebrities have also joined the bandwagon, with icons such as baseball star Alex Rodriguez and tennis legend Serena Williams backing recent SPAC offerings.

Regulators have recently turned their eye to the soaring market. On March 11, acting SEC Chair Allison Herren Lee said that SPAC returns don’t warrant the “hype” they’re getting.

Last year, a total of 248 SPACs raised $83.3 billion according to SPAC Analytics. But by the fourth month of 2021 alone, data already show 306 SPACs that raised $98.3 billion, comprising 79% of all public offerings.

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SPAC Thoma Bravo Advantage agrees on $11 billion deal to take mobile-marketing firm ironSource public

ironSource

The SPAC Thoma Bravo Advantage said on Sunday that agreed to merge with the mobile-marketing firm ironSource in order to take it public. The deal will give the combined entity a pro forma equity value of $11.1 billion.

The transaction is sponsored by a $1.3 billion Class A ordinary share private investment in public equity (PIPE), as well as $1 billion of cash held in the trust account of Thoma Bravo Advantage. Overall, the merger is expected to provide $2.3 billion in cash proceeds for the combined firm.

The PIPE is led by an affiliate of Thoma Bravo who put $300 million into the transaction and also includes investments from Tiger Global Management, Morgan Stanley, Nuveen, Hedosophia, Wellington Management, Baupost Group, funds managed by Fidelity Investments Canada, and other institutional investors.

Orlando Bravo, the founder and managing partner of Thoma Bravo, will also join the board of ironSource.

The Tel-Aviv, Israel-based ironSource provides an app designed to help businesses scale, monetize, and advertise their company online. In 2020, ironSource’s revenue hit $332 million, up 83% year-over-year. The company also turned in $104 million in adjusted EBITDA on the year.

In a statement, Tomer Bar Zeev, CEO and co-founder of ironSource, said the deal with Thoma Bravo will bring “the next level of growth” that his company needs.

Thoma Bravo Advantage was one of more than 400 SPACs looking to find a merger partner in 2021 before the SPAC convinced ironSource to abandon the traditional IPO route in order to go public via a merger.

“Despite our previous progress pursuing a traditional IPO, when we met with Thoma Bravo Advantage we found an alignment of vision and shared conviction about the long-term growth we can drive at ironSource that made them the perfect partner as we take this next step in growing our company, and the market as a whole,” Zeev said.

ironSource’s decision to go public via a SPAC merger instead of an IPO could be called a sign of the times as the SPAC market continues to boom.

Shares of Thoma Bravo Advantage climbed as much as 5% before paring gains on Monday, the first day of trading after news of the ironSource deal broke.

TBA chart
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The number of public listings by zero-revenue companies valued above $1 billion currently exceeds the dot-com era

SPACs and hedge funds 2x1
  • There are now more zero revenue public listings valued at over $1 billion planned for 2021 than there were in any year during the dot-com era.
  • 16 zero-revenue companies either have or are set to go public with a valuation of over $1 billion in 2021.
  • Much of the boom is due to a SPAC explosion. 170 SPACs have already gone public this year.
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The number of public listings by companies without revenues valued above $1 billion has exceeded what was seen in the dot-com era, according to data from the Wall Street Journal.

In 2021, 16 companies either have or are expected to go public with a valuation of over $1 billion despite having zero revenues. That’s more than double the number in 1999, three more than in 2001, and two more than in the year 2000, during the height of the dot-com bubble.

The rise in public companies with zero revenues of late is an illustration of a boom in special purpose acquisition companies, or SPACs. 

Over 90% of zero revenue companies that plan to go public with over a $1 billion valuation in 2021 thus far intend on using a SPAC to do so.

SPAC is a “blank check firm” that exists solely to list on a public stock exchange, raise money, and then find a merger partner to take public. There’s been an incredible surge in SPAC popularity over the past two years.  

In 2020, just shy of 250 SPACs went public versus only 59 in 2019. And in the first two months of 2021, there have already been 170 SPAC initial public offerings which raised some $52.8 billion.

Additionally, according to data from the investment firm Accelerate, “if the current pace continues, we could see over $300 billion of capital raised in over 1,000 SPAC IPOs in 2021.”

A prime example of the SPAC boom is Churchill Capital Corp. IV (CCIV). The SPAC is one of seven blank check firms backed by former Citigroup executive Michael Klein.

When the company said it was looking for a partner in the red-hot EV space, investors started paying attention. Then, on Jan. 11, Bloomberg reported CCIV was in talks with the EV maker Lucid Motors and shares went on a run. CCIV’s stock rose nearly six-fold despite warnings from institutional investors about stretched EV stock valuations.

Yet when reports of the Lucid Motors deal were confirmed, shares fell sharply. Still, Lucid was able to go public with a valuation well in excess of $1 billion despite being a pre-revenue firm. And CCIV and Lucid are just one example of the incredible rise of SPACs in the markets.

SPACs have become so popular even celebrities are getting involved. Both A-Rod and Colin Kapernick have taken part in SPACs in 2021, and the list of celebs entering the market continues to grow.  

All this growth has some investment firms concerned. Data from the firm Accelerate shows SPACs are trading at a significant premium to their net asset value.

The firm said in a February 24 report that “SPAC NAV premiums remain disconcerting” and noted SPAC NAV premiums reached 26.9% in February before dropping to 20.9% after the SPAC market went through a correction.

Accelerate said it “believes that high average SPAC premiums have brought elevated risks to the current market environment.”

Of course, that hasn’t stopped hedge fund managers and other institutional investors from entering the fray with SPACs of their own. From William Ackman’s $4 billion Pershing Square Tontine Holdings Ltd. to Chamath Palihapitiya’s growing field of SPAC offerings, the industry continues to boom.

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Legendary investor Jeremy Grantham made an accidental $265 million profit on a SPAC deal after previously criticizing blank-check companies

Jeremy Grantham
  • Jeremy Grantham’s early stake in battery producer QuantumScape has surged following the firm’s merger with a special-purpose acquisition company, but Grantham still isn’t sold on the blank-check IPO trend.
  • Grantham invested $12.5 million into the company seven years ago. That stake now stands at roughly $278 million thanks to a SPAC merger and QuantumScape’s subsequent stock rally.
  • The position is “by accident the single biggest investment I have ever made,” Grantham told the Financial Times.
  • Still, the investor sees SPACs as a “reprehensible instrument, and very very speculative by definition,” largely due to their lack of listing requirements and overall regulation.
  • Visit the Business Insider homepage for more stories.

The very kind of dealmaking that Jeremy Grantham previously deemed “reprehensible” netted the famous investor a $265 million profit.

Grantham, who founded investment management firm GMO and serves as its long-term investment strategist, invested $12.5 million in battery producer QuantumScape seven years ago as one of several stakes in early green-tech companies, according to the Financial Times. The position swelled after Kensington Capital Partners announced plans to merge QuantumScape with a special-purpose acquisition company, or SPAC, in September.

The deal valued QuantumScape at $3.3 billion, and shares traded at more than four times their listing price when the acquisition was completed on November 30. The company’s stock rallied another 31% on Tuesday alone, valuing Grantham’s stake at roughly $278 million.

Yet the legendary investor isn’t convinced Wall Street’s SPAC frenzy will last. The QuantumScape position is “by accident the single biggest investment I have ever made,” Grantham told the FT, partially fueled by the so-called blank-check companies’ lack of regulation.

“It gets around the idea of listing requirements, so it is not a useful tool for a lot of successful companies. But I think it is a reprehensible instrument, and very very speculative by definition,” he added.

Read more: We spoke with Wall Street’s 9 best-performing fund managers of 2020 to learn how they crushed the chaotic market – and compile the biggest bets they’re making for 2021

Grantham’s profit stands to climb even higher. QuantumScape soared as much as 37% in early Wednesday trading. Should the rally hold into the market close, it would add another $100 million to his total gains. 

SPAC firms raise capital through an initial public offering with the intention of using the cash to acquire a firm and take the merged entity public. The last two years have seen market favorites including Virgin Galactic, DraftKings, and Nikola go public through such deals.

Blank-check IPOs exploded in 2020 as firms looked to take advantage of a surge in participation from retail investors and hopes for an economic recovery. More than $74 billion has been raised across 218 SPAC debuts in 2020, according to data from SPACInsider.com. That compares to just $13.6 billion raised across 59 deals in 2019.

Wall Street’s obsession with the vehicles could be a sign of unsustainable market optimism, Grantham told the FT, rivaling the overwhelming bullishness seen during the 1920s and the late-1990s tech bubble.

Tesla’s meteoric rise through the year has made electric-vehicle SPACs – and any SPAC related to the EV market – particularly popular. QuantumScape lands in that basket. The firm produces solid-state batteries used in electric cars and has backing from industry giant Volkswagen.

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