A Sober Look at SPACs

Details

Author(s):
Publish Date:
January 24, 2022
Publication Title:
Yale Journal on Regulation
Format:
Journal Article Volume 39 Issue 1 Page(s) 228-303
Citation(s):
  • Michael Klausner, Michael Ohlrogge & Emily Ruan, A Sober Look at SPACs, 39 Yale J. on Regul. 228 (2022).

Abstract

Special Purpose Acquisition Companies (SPACs)—touted as a better alternative to an IPO for taking a company public—have become the next big thing in the securities markets. This Article analyzes the structure of SPACs and the costs embedded in that structure. We find that costs embedded in the SPAC structure are subtle, opaque, higher than has been previously recognized, and higher than the cost of an IPO. Although SPACs raise $10.00 per share from investors in their IPOs, by the time a SPAC merges with a private company to take it public, the SPAC holds far less in net cash per share to contribute to the combined company. For SPACs that merged during our primary sample period of January 2019 through June 2020, mean and median net cash per share were $4.10 and $5.70, respectively. Between June 2020 and November 2021, net cash per share was somewhat higher but far below $10. We find that SPAC costs are not borne by the companies they take public, but instead by the SPAC shareholders who hold shares at the time SPACs merge. These investors experience steep post-merger losses, while SPAC sponsors profit handsomely. This Article concludes by suggesting that the SEC promulgate disclosure requirements specific to SPAC mergers that make clear SPACs’ costs and sponsors’ incentives, and that equalize regulatory preferences that SPACs enjoy compared to IPOs.