Saturday, September 18, 2021
There’s been so much interest in SPACs recently, I figured everyone should be aware of this new paper by Usha R. Rodrigues and Michael Stegemoller, SPACs: Insider IPOs. One of the main points the authors make is that de-SPAC transactions represent a kind of “empty voting” scenario, where you can both vote in favor of the deal and redeem your shares for $10 – which is in fact what overwhelmingly occurs; the actual funds for the merger typically come from the simultaneous PIPEs. As the authors point out, the regulations and practice governing SPACs did not always allow this; when SPACs first began to list on the NYSE, only shareholders who voted against the deal could redeem, and if redemptions exceeded a certain threshold, the deal would not close. Shortly thereafter, however, regulations and practice evolved to allow all shareholders to redeem and to eliminate the conversion threshold. The authors argue that the new practices are damaging to markets by allowing companies to go public on major exchanges before they are ready to do so.
Anyhoo, here is the abstract:
Proponents have hailed special purpose acquisition companies (SPACs) as the democratization of capitalism. In a SPAC, a publicly traded shell corporation acquires a private target, thereby taking it public in a manner that circumvents the rigors of a traditional initial public offering (IPO). Known as the “poor man’s private equity,” SPACs have been touted for giving the masses an otherwise rare chance to invest in private companies, and thereby reap the high returns usually reserved for the wealthy. Our original hand-collected data tell a different story.
We focus on two harms that SPACs present. First, they are singularly illiquid investments—even when nominally public, SPACs are generally owned and traded by the very few. Second, SPACs evolved to eliminate meaningful shareholder voice on the acquisition of a private target, using instead a species of “empty voting,” meaning that any such vote had no economic impact. By rendering the shareholder vote a nullity, SPACs can now virtually guarantee that a target will go public. This laxity of process creates the risk that subpar firms will trade side by side with quality public companies, tarnishing the market as a whole.
We are the first to examine this absence of liquidity and shareholder power, both of which are products of SPACs’ domination by insiders. This Article’s original data on SPACs’ empty voting, delinquent public filings, and thin-to-nonexistent trading provide empirical evidence that a small group of insiders use SPACs to manipulate the merger process, free of traditional IPO safeguards. We conclude with a reform proposal to reunite shareholders’ economic interest with voting power. This potential reform addresses the concerns of liquidity and lack of selectivity, while also providing a viable alternative to the traditional IPO.