Can Investors Recover After Poor SPAC Investment Performance in 2022?
2022 saw a dramatic increase in the number of Special Purpose Acquisition Companies (SPACs) on the market. Toward the end of the year, many SPACs entered liquidation out of concerns over potential tax consequences and a reduced number of suitable companies for mergers.
Over the course of the year, SPACs demonstrated their vulnerability to fraud and questionable management. The company they identify for a merger may mislead the SPAC, or the SPAC CEO may fail to consider the investors’ best interests. SPACs may also choose to merge with new companies with untested business models, which always pose a significant risk to investors.
What Are SPACs?
SPACs are shell companies that form with the intention of merging with a company that has not yet debuted on a public stock exchange. They create shortcuts that allow businesses to start offering shares more quickly than they would through a traditional IPO, with the added benefit of an influx of funding from SPAC investors.
Before acquiring a company, SPACs raise money from investors by selling units, typically for $10. Investors buy shares of SPACs in hopes that the stocks will perform well following the merger.
- SPACs must find a company to merge with by a specified deadline, usually within two years.
- Unitholders may or may not have any input into the selection of the target company.
- SPAC units may consist of stocks or warrants. Warrants allow investors to buy stocks at a particular price by a specific deadline.
- Regulators must approve the merger.
- If SPACs fail to find a suitable company to merge with by the agreed-upon deadline, they must return the money they raised to investors.
SPAC Risks for Investors
SPACs are speculative investments, and speculative investments are always vulnerable to unpredictable changes in the market. Critics of SPACs point out that they often rely heavily on celebrity sponsors, like Shaquille O’Neale or Donald Trump, to generate interest.