Special Purpose Acquisition Companies (SPACs) have gained significant popularity in the international business community and financial markets. Operating at the intersection of securities regulation and corporate law, SPACs are empty shell entities that raise capital through an initial public offering (IPO) to acquire a target business later. The primary goal of SPACs is to scout for a suitable target company within a limited timeframe and combine with it in a transaction known as “de-SPAC” in practice.
SPACs have emerged as a global investment trend across the US, Europe, and Asia over the past few years and have a prominent presence in the investment landscape. Initially, SPACs gained traction in the early 2000s, primarily in industries where financing was scarce and going public was challenging for entrepreneurs. However, the outbreak of the COVID-19 pandemic further fueled this trend, turning it into one of the hottest topics in business communities and financial markets worldwide. The media coverage of SPACs increased significantly in 2020, following a record-breaking $157 billion in global SPAC transaction volume according to Reuters. The SPAC frenzy continued in 2021-22, with US-based SPACs raising an impressive $156.7 billion through 612 transactions. Many companies, especially high-profile start-ups, began exploring the option of securing funding through a SPAC-style listing.
SPACs are attractive to maturing start-ups worldwide, as they offer the opportunity to obtain a listing on a major stock exchange (e.g., the New York Stock Exchange, Nasdaq, London Stock Exchange, and Singapore Exchange), providing deeper liquidity and an expedited procedure. While the US remains the most active market for SPAC listings, other jurisdictions such as the UK, Hong Kong, and Singapore have proposed new financial laws and regulations to compete as top financial hubs and business centers globally. These jurisdictions aim to accommodate the financing needs of local high-tech enterprises and satisfy the investment demands of institutional and retail investors, including ultra-high-net-worth individuals (UHNWIs), family offices, and sovereign funds.
In our recent paper, we provide an in-depth and comprehensive analysis of the latest corporate practices and regulations of SPACs, with a primary focus on the US, where most SPACs have been initiated and listed so far. We also consider the practices and regulations in other common law jurisdictions, including the UK, Hong Kong, and Singapore, which have been reforming their respective listing rules to welcome more SPACs. Additionally, we explain what accounts for the current SPAC frenzy and introduce how this novel corporate vehicle operates in practice. Finally, based on the latest materials, we analyze the potential future of SPACs and predict whether they are merely a fad.
What accounts for SPAC’s global popularity?
Global investors choose SPACs to park their money for two reasons. On the one hand, they value the ability and vision of SPAC sponsors, many of whom are high-profile business tycoons and can select promising investment targets that can lead to stock appreciation. Therefore, the management team’s experience plays a crucial role in attracting investors, and it must be disclosed in the IPO prospectus for any SPAC.
On the other hand, investors are attracted to SPACs due to their low-risk exit mechanisms, such as redemption rights. Except for restrictions during the lock-up period, SPAC shares offer relatively high liquidity, surpassing the investment exit cycle of traditional mergers and acquisitions. The celebrity effect has further amplified the upward trend of SPACs by attracting more investors to participate. In the United States, sports and entertainment stars have joined the SPAC boom by endorsing existing SPACs or launching their own, often resulting in exceptionally high market valuations. For example, in February 2021, baseball legend Alex Rodriguez’s SPAC, Slam Corp., raised $500 million in its IPO on Nasdaq. Some well-known fund managers have also ventured into the role of SPAC promoters, launching notable “star projects” that have further boosted market sentiment. Major investment banks and equity funds, such as Goldman Sachs, Morgan Stanley, Blackstone, and Softbank, have actively initiated SPACs.
SPAC investors enjoy certain benefits compared to alternative investments like PE funds. For instance, there is typically a time limit (usually within 18 to 24 months after the IPO) for SPACs to complete an acquisition. 4 If a deal is not closed by the deadline, the initial funds will be returned to investors. Additionally, investors benefit from appointing professional sponsors who utilize their experience and resources to screen high-growth business targets. Moreover, SPACs are publicly listed before the final merger transactions, so they must only meet disclosure requirements related to backdoor listing and other procedural rules when acquiring the targets. This presents fewer market and regulatory uncertainties than PE-backed start-ups seeking an IPO.
In addition, investors’ funds are held in escrow, enhancing their investments’ safety. The underwriting fees in the trust account are only released to the underwriters upon the successful completion of de-SPAC transactions. Even if the deal fails to materialize, most funds can be withdrawn from the trust account to redeem the public shares. Furthermore, SPAC shareholders benefit from the high liquidity of their investments, as they can liquidate their holdings when the acquisition occurs.
Are SPACs just a fad?
Despite the numerous benefits of this alternative listing route, SPACs also face several drawbacks, such as a lack of investor protection and the underperformance of long-term share prices in most cases. Several studies have indicated that the overall performance of SPACs has been significantly worse than that of average public companies over the long run. For instance, the average buy-and-hold return of SPACs is -51.9%, compared to 8.5% for investments in companies during their post-IPO period. This suggests that nearly half of investors’ funds in SPACs may ultimately be lost.5 It is evident that many businesses utilizing SPACs to go public are experiencing poor capital flow and management qualifications, and the average loss of half of the investors’ capital raises concerns about the long-term growth and sustainability of SPACs.
The ongoing SPAC investment frenzy has prompted global securities regulators to reconsider the necessity of promoting SPAC listings. If deemed necessary, regulatory changes should be introduced to support innovative enterprises’ financing needs while ensuring the protection of retail investors and maintaining market transparency and integrity. However, given rapidly changing investor appetites, market conditions, and regulatory attitudes, it remains uncertain whether the global popularity of SPACs will be sustained in the long term. Besides, the rising interest rates have a negative impact on the SPAC market’s performance, as investors are withdrawing their funds from SPAC deals to park elsewhere. As international capital markets are expected to return to normalcy after the pandemic, a firm conclusion on whether SPACs will become a mainstream financing method or remain an alternative listing option for modern corporations can only be drawn then.
Ci Ren is a Ph.D. candidate in international financial law at the Dickson Poon School of Law, King’s College London.
Lerong Lu is a Senior Lecturer in Law (Associate Professor) and the Director of LLM Law & Technology Program at the Dickson Poon School of Law, King’s College London.
This post was adapted from their paper, “Special Purpose Acquisition Companies (SPACs): The Global Investment Mania, Corporate Practices, and Regulatory Responses,” available through King’s College London’s Research Portal and published by the Journal of Business Law (2023).