- This is the key which opens the door
for future growth, and stability.
- [Narrator] That's the CEO of Lucid,
a company you probably haven't heard of
even though it was valued at $24 billion last year.
- And the key he's talking about a SPAC
or a Special Purpose Acquisition Company.
- [Narrator] From mid-2020 to 2021,
SPACs were one of the hottest investments on Wall Street
making up the majority of US IPOs.
But by May of 2021, activity had sharply declined.
That month, there were about 125 fewer IPOs
than there had been three months before.
- It's really been stunning how quickly it's come
to an end in the past year and a half.
- [Narrator] So what went wrong?
A Special Purpose Acquisition Company or SPAC
exists to merge with a private company
and take it public.
It's an alternative to a traditional IPO.
Here's how they work.
First, founders raise money from investors
and set up a shell company,
which they then take public with an IPO
or initial public offering.
That's the SPAC.
Then they search for a private company to merge with.
But there is a deadline.
Usually two years.
From here, there are two possibilities.
If the SPAC doesn't find a company,
it's liquidated, shareholders receive their money back
and founders lose the millions it took
to set up a company.
If the SPAC does find a target,
they merge taking that company public.
The company replaces the SPAC in the stock market
and investors can now buy shares.
But why would companies want to skip a traditional IPO?
- You can make business projections,
you can communicate to the public
and do things that you normally can't
in a traditional initial public offering.
- [Narrator] The method gained popularity
and in December 2020 and January 2021,
many SPACs were raising billions of dollars.
They tapped into trendy business.
- [Announcer] We're going to space, Richard.
- [Narrator] Like electric vehicles,
satellites and flying taxis.
- And they were very attractive to individual investors
who looked out and said, "I want to own the next Tesla.
I want to find these startups
that are gonna make me a lot of money."
- [Narrator] The buzz was also fueled
by social media star founders
who posted their accomplishments online.
- So what happened is a SPAC would announce a merger
and then creators like Chamath Palihapitiya
or others would promote the merger on CNBC.
- It's a business that I think
will become extremely valuable.
- They would tweet about it
and individual investors would jump on the bandwagon
and these things would start trending.
- [Narrator] The hype helped fuel stock price gains
for companies like Lucid, Virgin Galactic and Nikola.
And SPAC founders generated average returns
of more than eight times their investment in 2020.
- There was a period in time that I tracked
where every single company that announced a SPAC merger,
shares of that SPAC went up.
- [Narrator] But the flood of fundraising
and IPOing didn't last.
After a record month
when SPACs raised $36 billion, things took a turn.
- Even academics, journalists, people like me
were writing articles saying like this won't end well
because we have a lot of data showing
this historically never ends well
but people weren't really listening in that moment.
So it just became like a firestorm.
- [Narrator] One of the two reasons
behind the fall was that a few electric vehicle startups
had promised success in their business projections,
misleading their investors.
Take Arrival, which sells electric buses.
It said it would go from zero revenue
to $14 billion in just three years.
Arrival's president explained the projections
by saying that 2021 was a turning point
for rapid adoption of electric vehicles.
- In many cases, what was under the hood was not very pretty
and not as bold and like spicy as people thought
at the time of the merger announcement.
So there is a lot of bad information frankly out there too
that was pushing people to jump on the bandwagon.
- [Narrator] This caught the eye of regulators
and led to the second reason behind the fall.
In April, the SEC warned that some SPACs
might have to restate their financial results.
- Because at the end of the day,
we need to ensure that investors are protected.
- [Narrator] Both reasons spooked investors.
Share prices declined
and many investors withdrew their money
rather than hold on to shares of startups
after they completed SPAC deals.
After the summer of 2021,
companies started to think twice
before going public with a SPAC.
- A lot of companies are really second guessing
whether they want to do SPAC deals as well.
So that kind of positive effect
that made SPACs boom is now working in reverse
where now the negative connotation
is making everyone second guess things.
- [Narrator] Activities stayed
at a relatively low consistent rate for the next year.
Then in March 2022, the SEC proposed a set of regulations
that would make it harder for SPACs
to raise money from investors and execute mergers.
- Ive' asked staff for recommendations
about how we might update our rules
so that investors are better informed
about the fees, the costs, the conflicts that may exist
with these SPACs.
- [Narrator] The goal of the regulations?
To make companies disclose information
more like a traditional IPO.
- But a lot of the damage had already been done
by that point.
That sentiment though that regulators
are stepping in and going to regulate these things more,
that's also had a chilling effect for sure
in the SPAC market.
- [Narrator] By May, about 90% of SPACs
that merged during the 2020 boom
were trading below their initial listing price.
Analysts estimate that if the current pace
of mergers continues, a large percentage
of the roughly 280 SPACs that have deadlines
in the first quarter of 2023 won't find a match.
Recently, SPAC activity is at a low.
- SPAC activity has basically drawn to a standstill.
In July, no new SPACs raised money.
Early last year, there were basically tens
of new SPACs every week.
The market, along with the broader stock market
and market for newly public companies
has definitely reversed a lot.
- [Narrator] After interest rates climbed in the spring,
speculative investments are losing favor
and valuations for companies
that went public through SPACs
may continue to come down from the highs of 2021.
(upbeat music)