Wednesday, June 29th, 2022

SPAC: a bubble in the making?

“Bull markets are born on pessimism, rise on skepticism, mature on optimism, and die on euphoria,” the famous quote by Sir John Templeton, one of our adored investors. There is no question that some segments of the industry are experiencing “euphoria” at the moment.

Some examples include EV, penny stocks, and SPACs. Hong Kong and Singapore are attempting to capitalize on the surge in blank check company listings while protecting investors from a potential bubble. Authorities in Asian financial centers are considering stricter mechanisms for the listing of special purpose acquisition firms than in the United States. Despite the fact that the US-led dealmaking boom has generated around $100 billion so far this year,despite the fact that it is now showing signs of fizzing due to increased regulatory scrutiny.

Hong Kong is reportedly aiming to have its regime in place by the end of the year, despite government pressure. The proposal, which is still being worked out, will impose special requirements on SPACS sponsors, such as having a track record of handling money and requiring SPAC acquisitions to meet the existing criteria for initial public offerings.

It’s in a sprint with Singapore, which has advanced since publishing a consultation paper on its strategy last week. The regulatory arm of Singapore Exchange Ltd. is proposing a market capitalization of at least S$300 million ($225 million). There is no such limits in the United States. It also proposes tighter requirements for warrants and stock redemptions. Both cities’ investors and dealmakers are now wondering whether the increased scrutiny would hurt their ability to attract SPACs.

From the Peak to the Trough According to research, as more people follow a technique, it becomes more common due to increased recognition and legitimacy. But only for non-controversial topics. When it comes to contentious procedures like SPACs and reverse mergers, things get a bit more complicated, as third-party interest and distrust increases as the technique becomes more commonly used. In the midst of global stock market turmoil, SPACs raised $83 billion last year, which was six times the amount raised in 2019 and almost equaled the amount raised by IPOs. Even David Solomon, the CEO of Goldman Sachs, a big SPACs underwriter, cautioned in January 2021 that the boom will not be “sustainable in the medium term.”

Negative media opinion and regulatory concern are two additional red flags. SPAC reports are mostly negative and cautionary. A headline in the Financial Times in December warned, “SPACs are oven-ready deals you should leave on the shelf.” Similar reservations have been expressed by SEC Chairman Jay Clayton.

In September, he stated that the SEC was closely monitoring SPACs in order to ensure that SPAC shareholders were receiving “the same robust disclosure that you get in connection with bringing an IPO to market.” SPACs must recognize firms with which they can combine within 24 months of raising funds, otherwise they will be wound up and the IPO proceeds returned to investors, according to the rules regulating them.

SPAC: a bubble in the making?
More than 300 SPACs must accomplish this this year or face liquidation. However, since there are only so many quality goals to go around, and SPAC founders have a strong incentive to close deals — even if it means sacrificing shareholder value — SPACs can find themselves in a downward spiral of low quality/bad press/tighter regulation. And we all know how reverse mergers turned out.

Have you invested in SPACs? What are your thoughts?

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