Recent Surge in Public Offerings Through SPACs Helps Fuel Market Speculation
2020 was a record-breaking year for special purpose acquisition companies (SPACs), with $80 billion in capital raised through SPACs in 2020 alone, with more than 175 SPAC transactions across various securities markets. Although SPACs have technically been around for decades as alternative investment vehicles, they have only recently come into their own as an alternative to the traditional initial public offering (IPO) as a means of raising capital. In fact, as recently reported in the Wall Street Journal, the frenzy is so pronounced that “SPACs have raised more equity in 2020 than over the entire preceding decade.”
A SPAC is simply a shell company, or a blank check company, that goes public and raises capital from investors in order to make an acquisition. Usually, SPACs don’t absorb an entire company, but rather acquire a stake in the acquisition. A SPAC is managed by a “sponsor” and once it goes public, the company has no operations. A SPAC simply holds cash, usually around $200-$400 million, and has a two-year period in which to find a private target company for acquisition to bring public.
If at the end of the two-year period no deal has been made, the sponsor of the SPAC must return the capital raised to its investors. And in exchange for managing the SPAC, a sponsor—often various hedge funds sometimes referred to in the financial services industry as the “SPAC Mafia”—will typically take a hefty 20% interest in the SPAC at a nominal price.
Unfortunately for many retail investors, the statistics on SPAC performance are less than rosy. For example, according to a study by Renaissance Capital, from 2015 through September 2020, less than one-third of all SPACs demonstrated a positive return. And in a recent study by Michael Klausner and Michael Ohlrogge, these law school professors suggest that the traditional 20% cut paid out to SPAC sponsors has made it nearly impossible for retail investors to actually net a gain.
As we look to put 2020 in the rear-view mirror, the SPAC frenzy continues unabated, at least for the time being. As reported in Forbes, a new SPAC was recently created for LMF Acquisition Opportunities (or, LMFAO) which filed on Friday, January 8 for a proposed offering of $75 million, or up to $86.25 million, if the underwriters’ over-allotment is exercised in full. LMFAO is being underwritten by Maxim Group, and will trade under the ticker LMAO, provided it can acquire its target company in the financial services industry, including a potential FinTech acquisition.
The attorneys at Giarrusso Law Group LLC have considerable experience in resolving disputes on behalf of investors including claims related to negligent portfolio management, securities fraud and other wrongdoing. Investors who wish to discuss a possible claim may contact us at (201) 771-1115 or info@gialawgroup.com for a no-cost, confidential consultation.