Wall Street is in the grip of Spac-mania. Three weeks into the new year and 57 so-called “blank cheque” companies have floated on US exchanges, raising $15.7bn, according to Refinitiv. Goldman Sachs boss David Solomon this week questioned the incentives that inspire sponsors. He had a point.
The new year surge has dwarfed the total of $234.1m raised during the same period last year. The prospects of quick riches have prompted everyone from activist investor Bill Ackman to rapper Jay-Z to jump on the bandwagon.
Spacs — short for “special purpose acquisition companies” — sell shares publicly and use the money raised to buy something — usually within two years. The vehicles are touted as a way to invest in a hot company that they may otherwise miss out on. Proponents say they also offer private businesses a fast, cheap way to go public.
Snags abound. Spac founders are incentivised to buy something — anything — with the cash raised before their deadline (subject to investor approval). Founders are covered if investments sour. They typically receive a stake of 20 per cent for finding good targets. In theory, this looks a small price to pay should the purchase end up as the next DraftKings, a recent Spac success.
In practice, Spacs acquire companies of varying quality, taking them public with skimpier disclosure than a traditional initial public offering requires. A recent study found that most Spac share prices fell post-merger.
Costs can be high. While Spacs usually sell at $10 per share when they float, by the time the median Spac merges with a target, it holds just $6.67 in cash for each outstanding share.
If the chief executive of Goldman Sachs — a big Spac underwriter — has concerns about the incentive structures, regulators should have too. Spac founders should not get a big windfall of shares simply for doing a deal. Such awards should trickle out over the years that follow as progress milestones are met.
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