Why SPACs Hacked the Stock Market in 2020

During 2020 the stock market has also experienced evolution in a short-period. New speculative investors (who game the market), Robinhood, the inheritance of Baby boomer money, massive stimulus, a low interest environment and a massive SPAC & Bitcoin onslaught have warped the markets beyond recognition. In this article we'll try to unpack what a SPAC is and why they have come into fashion especially in 2020-2021.

This has been a year where Tesla went up 700%, and is now worth nearly 800 Billion dollars. The environmental press of Covid-19 has created huge opportunities and new incentives for SPACs and IPOs to emerge. It is the greatest hack of wealth in our generation, perhaps in our lifetime.

The Great Hacks of the New Investors 

At a time when we have been at our most vulnerable, the stock market and technology companies are at their least regulated.

This has created tremendous opportunism and a real incentives for people like Donald Trump to let Covid-19 run amuck. This is a story of incredible greed at the heart of Capitalism and how SPACs are the perfect vehicle.

We'll look back on 2020 and 2021 as some of the most interesting years in the history of the stock market and the emergence of new companies.

A SPAC is a Special Purpose Acquisition Companies, the quick and dirty route to an IPO for a fast-growing small company or more speculative future orientated company.

A new wave of investors in 2020 have popularized them even more, including several EV companies in 2020. In a twist of fate on the stock market, 2020 was a surprisingly good year for IPOs, but it was an even better year for Special Purpose Acquisition Companies (SPACs). 

What happens when fundamental indictors of serious investors breaks down into a speculative gamification of day traders? SPACs rise like dark nights in a cyberpunk stock market reality.

The Perfect Storm for SPACs to Prosper

While they are traditionally considered more risky, Fed stimulus, low interest rates and a new wave of liquidity created unusual trends. There were 194 traditional IPO deals that raised $67 billion, the best year since 2014, according to Renaissance Capital. But it was an even better year for SPACs, which raised just about the same amount: 200 SPACs raised about $64 billion. 

SPACs are companies with no commercial operations that are established solely to raise capital from investors for the purpose of acquiring one or more operating businesses. This is done via shell companies.

Typically a SPAC IPO is an attractive option for:

• Smaller companies,
• Fast-growing early-stage startups,
• Companies with no or minimal revenue,
• Struggling older companies.

It's not pretty but if direct listings were the most-talked-about way to go public in 2019, SPACs are the new direct listings. Robinhood users have popularized them in an age of speculative and sentiment investing. They were a small part of the investing landscape until very recently, but their popularity has exploded in the last couple of years.

SPACs have very particular pros and cons for investors as well as risks for the companies doing them. But it's not all ugly. What might be the benefits of a SPAC in 2021?

Full transparency.  SPACs must file an S-4 when announcing a company they are seeking to buy that contains much of the same disclosure and risk outlines that is in the S-1 that an IPO must file.

Sponsors with expertise.  Bill Ackman, Michael Klein, Chamath Palihapitiya and private equity firms like Apollo Global, Solamere Capital, TPG Capital have all come into the space recently, lending credibility to the SPAC enterprise.

Ability to use forward-looking guidance.  Because the SPAC is a public company, when it announces the company it is buying, the SPAC is able to provide forward-looking guidance on the company. “Investors get to see even more information about the target company than they would in an IPO,” Ottensoser told me.

An easy exit. Investors unhappy with the target acquisition can get out by selling their shares before the acquisition is finalized.

SPACs have also been juiced in 2020. But again, what is it? A special purpose acquisition company (SPAC) is a “blank check” shell corporation designed to take companies public without going through the traditional IPO process. Though SPACs have been around for decades, the financial maneuver has gained traction in recent months as more private companies eye exit opportunities and as the Covid-19 pandemic creates uncertainty in the IPO market. 2020 has been such an unusually good year for the stock market; the SPAC bubble is partly to blame.

 IPOs and SPACs are both subject to the same rules of the game when going public: much of it depends on market conditions. With so much added liquidity going into the stock market in 2020, both got a major boost. As of October 28, a total of 165 SPAC IPOs have raised $61.3 billion in 2020, according to SPACinsider.com. That’s up from $13.6 billion raised in 59 deals in 2019. The average IPO size is $371.6 million thus far in 2020 compared with an average of $230.5 million in 2019. This reflects the bullish sentiment on the stock market in 2020 in the middle of a global health crisis.

According to CNBC, assuming the markets hold up and the economy improves, the sheer number of SPACs currently seeking acquisitions (210, according to BTIG, all with time limits of 18 to 24 months maximum) implies that 2021 will be at least as strong as 2020. However 2020, we must note, was one of the best years ever on the stock market. To match it would be fairly difficult but a "Covid-19 recovery" might be enough to boost sentiment even higher.

SPACs are more simple generally speaking. A few high-profile SPACs have shown investors and companies that there are other, simpler ways to go public rather than a traditional IPO, especially during uncertain times like the COVID-19 pandemic.

Capitalism is now Hacked via a System of Wealth Generation via Speculative Companies

Last month, hedge-fund manager Bill Ackman raised a $4 billion SPAC, the largest ever. Who can forget Nikola, the Tesla clone? SPACs have enabled newly minted billionaires who didn't always get there the honest way. But during a pandemic, capitalism isn't necessarily about legit companies based on strong fundamentals. With Tesla up 600% in 2020, you get the idea there's something inflated going on.

“SPACs have grown up over the past few decades, as improved governance and great sponsors have made the SPAC listing a route that any company considering accessing the public markets is taking seriously in 2020. Along with Chinese companies that aren't audited properly and the emergence of Bitcoin and crypto as mainstream investing routes, the stock market has more shades of grey in 2020 and moving forwards than ever before.

A new wave of retail investors is changing how we invest and changing how markets react. Massive Fed stimulus saved money for the richest Americans and enabled wealth inequality to accelerate with its sister, digital transformation. I still view SPACs with caution since for serious investors, they represent much more risk and typically exhibit a kind of showboating that doesn't bode well for sustainable growth. Still we must consider why SPACs are on the increase:

• Traditional IPOs have faced scrutiny lately, mostly because of how they’re priced.
• Traditional IPOs are how many companies choose to go public, but it’s an expensive and extensive process.
• Of 223 SPAC IPOs conducted from the start of 2015 through July, 89 have completed mergers and taken a company public, offering the chance to examine their performance, according to the report from Renaissance Capital, a provider of IPO ETFs and institutional research. 
•  SPAC offerings keep many money-losing stocks out of the regular IPO market, making it a better quality structure. 

So it seems we are stuck with SPACs and crypto, like weird new monsters of financial regulation. From Virgin Galactic to Draftkings, it's a new horizon of what investing means. As the U.S. dollar plummets, people are re-balancing their portfolios as we are heading into 2021. Crypto, Cannabis, SPACs, it depends on your preferred flavor of investing.

SPACs raise money in an IPO, and then place it in a trust while the sponsor searches for a business or businesses to acquire, usually within a two-year period. A lot of flashy startups do SPACs enabling them to quickly raise money in order to grow fast. A SPAC therefore is slightly less likely to succeed.

Since a SPAC IPO is quicker to complete and involves less red tape than a traditional IPO, keep in mind that success is not assured. According to a Goldman Sachs analysis of 58 SPAC deals since January 2018, the average SPAC underperformed the S&P 500 and the Russell 2000 three, six, and 12 months after a merger.

I hope this gave you a sufficient intro into what a SPAC is and the risks that might be involved. You have to be a special kind of speculative investor to invest in Virgin Galactic, Luminar (LAZR) or Nikola (NKLA). So to summarize SPACs are, in one sense, just a means of enabling companies to trade publicly faster. Unfortunately, the historic data on SPACs is not encouraging.

As a team of Futurists, we are always looking at stocks and business projections to come up with a future look on industries, innovation and technological progress.

On another level, SPACs are also furthering wealth inequality because they are a shortcut to becoming a billionaire for many of these founders who may or may not have real business models. SPACs are in that sense one of the more exploitive methods of capitalism and a mechanism that prospers during times of corruption. 

2020 brought us the next Elon Musk, who is Austin Russell but also brought us a lot of fraudulent SPAC companies as one might expect.

We write about stocks and new industries all the time on The Last Futurist.