Those businesses that have been going public via a SPAC, or special purpose acquisition company to give it the proper title, will now find themselves under more scrutiny from the Securities and Exchange Commission as a result of revenue and profit projections.

Many critics of SPACs suggest that young companies can’t possibly have such revenue so as to exist as an entity that presents lofty growth projection to the public.

In particular, electric vehicle tech companies that have gathered market capitalisation of some £60bn without a pound in revenue, will see serious questions asked.

FT Analysis

Indeed, analysis by the Financial Times of nine car tech groups who listed a SPAC in 2020 purported to uncover £139m of expected revenue by the end of last year, and yet they projected a combined £26bn by 2024.

Inflated valuations surrounding what is, in effect, unproven technology, is almost certainly a sign that investors are being misled.

A de-SPAC is when the SPAC merges with an operating business that wants to be publicly listed, but an SEC spokesman said that this must be subject to “the full panoply of federal securities law protections. A de-SPAC transaction gives no one a free pass for material misstatements or omissions and if we do not treat the de-SPAC transaction as the ‘real IPO’, our attention may be focused on the wrong place, and potentially problematic forward-looking information may be disseminated without appropriate safeguards.”

There has been a growing trend of celebrity-sponsored SPACs rearing their heads too, with the SEC issuing multiple statements to warn investors not to get carried away by the hype.

Even those SPAC sponsors that are not so well known in the public domain, such as Chamath Palihapitiya and Michael Klein, have amassed huge fortunes as a result of receiving shareholdings on very favourable terms, something that’s also troubling the SEC.

Despite this, $172bn worth of ‘de-SPACs’ in the first quarter of 2021 has meant that these types of deals have accounted for more than a quarter of the total value of all merger and acquisition transactions, and are clearly here to stay.

PIPE financing

PIPE (Private Investment in Public Equity) financing is still ensuring a route to the public markets for businesses, and PIPE investors have been overwhelmed by the volume of transactions – 117 in total so far in 2021.

It’s worth noting that only 25 perecent of SPACs since 2019 have completed, and it’s believed that a backlog of PIPE is to blame.

“The pendulum has swung to where if you’re in the market with a PIPE right now, it’s going to be really hard and painful. A Spac goes back into the ocean if you can’t get a PIPE done,” one respected senior bank executive noted.

With PIPE investments being ‘illiquid,’ that essentially means the funds are tied up until a deal closes at the earliest – and there could well be a lock-up period after that.

Investors get in before the public and can buy SPACs at a lower listing price, with PIPE investors all over deals at the back end of last year.

Now, the slowdown is bad news for them and for banks. The latter are unable to collect their advisory fees if investors don’t see value in any deal.

Consequently, SPAC launches are slowing with just four going public in April so far compared with 28 in the first week of February and 41 during the first week of March.

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