SPACs are SCAMS. No. Really. This is what has been publicised by the media since the 1990s.<\/p>\n
Warren Buffet: Stock Market :: Chamath Palihapitiya: SPACs ;<\/p>\n
The face of SPACs realm, Chamath Palihapitiya, saw all of his six-blank-cheque companies plunging more than the 23% average decline in SPACs, as measured by the IPOX SPAC Index. Hitting the news was — Virgin Galactic Holdings Inc. which went down more than 50%. Virgin Galactic Holdings Inc. is a space tourism business that\u2019s backed by Richard Branson.<\/p>\n
Special Purpose Acquisition Companies or SPACs are shell companies (non-operating companies that exist just on paper) that raise money through IPO and merge the raised capital in an existing company that needs funding. This process is known as a REVERSE MERGER.<\/p>\n
The minimum size of a target company is roughly 80% of the funds in the SPAC trust. It\u2019s typical for a SPAC to combine with a company that\u2019s two to four times its IPO proceeds in order to reduce the dilutive impact of the founder shares and warrants. So, where exactly is the catch? Since the SPAC is only a shell company, the founders or sponsors become the selling point when sourcing funds from investors. \u00a0These sponsors purchase warrants and put in a minimal amount in exchange of 20% of the company\u2019s equity for a nominal investment. Pretty darn attractive right?<\/p>\n
Shockingly, these sponsors can be pretty much anyone, even any random CEO who ran his company to the ground, who can persuade shareholders to buy its shares. More often than not celebs become the charming ingredient. The celebrities aren\u2019t so much the financial decision-makers but rather the promoters brought in to attract investors. And wait, if you were wondering they may be as clueless in this field as they want. No Compulsions. After all, they are there to charm the investors.<\/p>\n
Build any product, get someone from the celeb fraternity to advertise it, get your sales up ,and earn millions and billions. Sounds familiar, doesn\u2019t it?<\/p>\n
If a celebrity adviser had negotiated 1 percent of that deal and the SPAC raises $500 million in the public markets they are rewarded with a stake of $5 million in the company. Now, let\u2019s say the same SPAC also successfully merges with a company and the deal is done at $10 billion. The celebrity\u2019s 1 percent stake has netted them (on paper) a $100 million payday.<\/p>\n
Basically, celebrities are risking their reputations for, let\u2019s say, a few million dollars initially, but if it works out, it\u2019s $100 million. Good deal if you ask me!\u00a0So… Is it like the new age gold mine for the investors too?<\/strong><\/p>\n So, if you are up for getting an empty company\u2019s shares with zero track record and you\u2019re betting that these celebs will eventually find something. Some companies with zero revenue are rushing to market. History shows that has not been kind to investors. 138 of the 248 SPAC listings of 2020 are still hunting for targets. Furthermore, while SPACs are required to return money to investors if no merger occurs within two years, the fine print of several SPAC prospectuses reveals that certain clauses may prevent investors from receiving their money back.<\/p>\n Of the 267 articles published between 2001 and 2012, 148 were neutral, 113 were negative and only 6 were positive. By 2010, when reverse merger activity peaked, 70 percent of media articles on the phenomenon had a negative tone. Reverse merger firms\u2019 share prices plummeted to the extent that cumulative returns neared -45 percent. The following year, in 2011, reverse merger activity plunged by 35 percent. As it\u2019s popularity grew in the public domain, investors and media alike became skeptical about the practice. The negative bias further intensified as more and more reverse merger transactions involving high risk grew. All this led to discouraging reputed firms from adopting the practice… and three decades later similar dynamics have re-emerged<\/p>\n SPACs can be thought of as a backdoor entry for a private company to go public. Previously, they were considered the last resort but currently have become the hottest trend. Let\u2019s try to find out why.<\/p>\n In India, renewable energy producer ReNew Power agreed to merge with RMG Acquisition Corp II, a blank-cheque company, in what became the first involving an Indian company during the latest boom in SPAC deals. ReNew Power will get listed on Nasdaq with gross cash proceeds of around $1.2 billion. Grofers, an online grocery platform, is also reportedly in the advanced stages of exploring a SPAC deal. In recent times, SPACs, centered on India, were more successful and included on the more prominent exchanges like NASDAQ. All of this suggests that SPACs are increasingly accepted as another way of raising capital in India.<\/p>\n MAJOR HURDLES IN THE INDIAN MARKET<\/u><\/strong><\/p>\n The Securities and Exchange Board of India (SEBI) has formed an expert committee to investigate the feasibility of introducing regulations for SPACs in India, which could potentially boost the prospects of domestic listing of start-ups. Yes, SPACs are all the rage and some companies might end up benefiting the investors. But let\u2019s look at the median and average for the year<\/p>\n Mean returns for the year following merger announcements are\u00a0negative 12.3%<\/strong>\u00a0and\u00a0negative 34.9%<\/strong>\u00a0respectively over 6 months and 12 months respectively. And, I agree IPOs are often a bad deal too for public investors, but there\u2019s a big difference:\u00a0transparency<\/strong>. You know what you are getting into in an IPO. You have the company\u2019s audited financial statements, know about the risk factors and current shareholders information. Hence, SPACs are cool and all but for sponsors who earn millions even when the company suffers losses but the same can\u2019t be said for retail investors. For now, I\u2019ll continue my hunt to find authentic schemes which would make me a billionaire. See you again soon!<\/p>\n","protected":false},"excerpt":{"rendered":" SPACs are SCAMS. No. Really. This is what has been publicised by the media since the 1990s. Why are SPACs in news? Warren Buffet: Stock Market :: Chamath Palihapitiya: SPACs ; The face of SPACs realm, Chamath Palihapitiya, saw all of his six-blank-cheque companies plunging more than the 23% average decline in SPACs, as measured […]<\/p>\n","protected":false},"author":127,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[177],"tags":[],"class_list":["post-3860","post","type-post","status-publish","format-standard","hentry","category-investing"],"_links":{"self":[{"href":"https:\/\/www.reilsolar.com\/sp0m\/wp-json\/wp\/v2\/posts\/3860","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.reilsolar.com\/sp0m\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.reilsolar.com\/sp0m\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.reilsolar.com\/sp0m\/wp-json\/wp\/v2\/users\/127"}],"replies":[{"embeddable":true,"href":"https:\/\/www.reilsolar.com\/sp0m\/wp-json\/wp\/v2\/comments?post=3860"}],"version-history":[{"count":0,"href":"https:\/\/www.reilsolar.com\/sp0m\/wp-json\/wp\/v2\/posts\/3860\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.reilsolar.com\/sp0m\/wp-json\/wp\/v2\/media?parent=3860"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.reilsolar.com\/sp0m\/wp-json\/wp\/v2\/categories?post=3860"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.reilsolar.com\/sp0m\/wp-json\/wp\/v2\/tags?post=3860"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}THE BEGINNING<\/strong><\/h2>\n
BUT WHY SPACs?<\/strong><\/h2>\n
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WAIT…BUT WHAT ABOUT INDIA?<\/strong><\/h2>\n
ACCELERATION IN INDIA<\/u><\/strong><\/h3>\n
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