(fireworks crackling)
- [Narrator] There's a big trend right now in the IPO world.
- Be latest company to go public through a SPAC IPO.
- SPACs for many, many years had a very bad name.
- [Narrator] Over the last two years,
companies like Nikola, DraftKings and Virgin Galactic
have all entered the market through something called SPACs,
or Special Purpose Acquisition Companies.
These controversial entities
also known as blank-check companies offer private businesses
a fast track to going public
that bypasses the traditional IPO process.
And they're growing more popular.
You can see activity has almost quadrupled so far in 2020.
Some investors see a big opportunity in SPACs
and say they're a more efficient way
for companies to go public.
But critics say they allow for backdoor deals
and that they're not worth the risk.
- One criticism of the SPAC process is that
investors can get into a company and then get burned,
they won't have the time to figure out
if it's really a legitimate company
and there is even risk of fraud.
- [Narrator] To understand why investors are rushing
to blank-check companies despite the potential risks,
first, you need to understand how they work.
(gentle music)
SPACs are public shell companies
that exist for a single purpose,
finding a private company and taking it to market quickly.
In order to take a company public,
a SPAC will merge with it.
The company then gets a spot on the exchange
and a new ticker.
The SPAC transforms into the target company
taking on its name.
Once the deal closes, investors who own shares
in the blank-check company now own a piece of the new entity
and the founders of the SPAC get a large part of it too,
often at a very good price.
Blank-check companies are primarily owned
by veteran corporate leaders and big investors,
like private equity firms.
Usually it's a smaller amount of shares that are available
to the public.
- Ideally, a SPAC gives you an opportunity to invest
in a good management team or in a good entrepreneur,
where you have a good feeling about them
doing some sort of profitable deal
that increases the value of the investment.
But it is writing a blank-check, you're taking a risk,
you don't know if they're gonna do a good deal
and have the stock go up
or if they're gonna do a bad deal
and the stock will go down.
- [Narrator] For the companies going public,
SPACs offer a different approach than traditional IPOs,
where the private company works with underwriters
or investment banks to work out a deal
and then takes the company public.
The process can take months,
and under traditional IPO rules,
the private company must stay quiet
and refrain from promoting its shares
until they start trading.
This is where SPACs have a big advantage.
- With a SPAC deal, companies can actually talk about
themselves and promote themselves to investors
in a way that they can't with an IPO.
- [Narrator] Analysts say growing mainstream acceptance
of SPACs, help fuel this year's boom,
but it was also the coronavirus pandemic.
- We are looking at another day of extreme volatility,
stocks opened just moments ago
with the Dow down more than 600 points.
- [Narrator] This is because during volatile markets,
a company's valuation can crash overnight.
- The main advantage to going public through a SPAC
has been definitely true this year
is there's more certainty of execution.
You know earlier on in the process
they'll get the deal done.
IPOs get derailed at the last minute all the time.
Because the markets are volatile,
they're falling, nobody wants to go public.
- [Narrator] And this year, many of the companies
going public through SPACs are seeing big valuations.
In September, United Wholesale Mortgage agreed to go public
in the biggest SPAC deal ever with a $16 billion valuation.
This is a sharp change from the early days in the 1980s
when the precursors of today's SPACs
were called blind pools.
These had a shady reputation tied to Penny-Stock frauds.
But in the decades since, new laws and regulations
helped add credibility and bolster investor confidence.
Now as SPACs gain momentum, more blue chip institutions
and veteran investors are buying in.
- For instance, Goldman Sachs
never used to underwrite SPAC IPOs.
A few years ago, it did its first SPAC IPO.
The New York Stock Exchange now lists a lot of SPAC.
For a long time it did not.
- [Narrator] And with SPAC funds getting larger,
the size of blank-check deals are expected to grow as well.
- This year Bill Ackman launched the biggest SPAC ever.
It could potentially take a very, very large company public.
- Our thesis here is by having a $5 million dollar cash pile
in a public company.
It's really, it's our own version of a unicorn.
- [Narrator] Still, some critics remain concerned that
companies going public through SPACs
aren't getting as much scrutiny
as those using traditional IPOs.
- Exhibit A for that might be the situation with Nikola,
which went public through a SPAC a few months ago,
and has turned out to be the center
of a firestorm of fraud allegations.
- Nikola shares are tumbling after a short seller
called the company quote,
"An intricate fraud built on dozens of lies."
- The people who don't like SPACs
and prefer traditional IPOs would tell you
that if it had gone through a traditional IPO,
there would have been more time for investors
to kick the tires and to scrutinize the company for fraud
before it went public.
- [Narrator] Federal regulators are raising concerns
as well.
The SEC is now examining how blank-check companies
disclose their ownership,
and how compensation is tied to an acquisition.
- [Clayton] We wanna make sure that investors
understand those things.
And then at the time of the transaction, when they vote,
that they're getting the same rigorous disclosure
that you get in connection with bringing an IPO to market.
- [Narrator] Critics also say,
SPACs have often been a bad deal for companies going public.
- The founders of the SPAC,
when they do a deal, they get to have a 20% stake
in the company that results from the deal
without having to pay very much for it.
And so essentially a way they can line their own pockets.
- [Narrator] But this is starting to change.
Akckman's blank-check company
is one of the largest to not include this feature.
- If Bill Ackman SPAC succeeds
in getting a large multibillion dollar private company
and taking it public,
I think it'll be the best proof of concept yet
for the SPAC idea.
- [Narrator] But right now,
the future of blank-check companies remains unclear.
Investors say SPAC deals are here to stay,
while critics argue that the blank-check boom is just that
a trend that isn't destined to last.
(gentle music)