A Sober Look at SPACs

When: 26 Apr 2021, 18:00-19:15
Where: Zoom
Speaker: Michael Klausner

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Special Purpose Acquisition Companies (“SPACs”)— touted as a better alternative to an IPO for taking a company public—have become the next big thing in the securities markets. This paper analyzes the structure of SPACs and the costs embedded in that structure. Based on a sample of all SPACs that merged between January 2019 and June 2020, we find that transaction costs embedded in the SPAC structure are far higher than has been previously recognized—and far higher than the cost of an IPO. Although SPACs raise $10 per share from investors in their IPOs, by the time the median SPAC takes a company public, its shares have been so diluted that it holds just $6.40 in cash per share. From a social welfare perspective, we conclude that SPACs are inefficient; where necessary, the benefits of SPACs can be obtained by incorporating certain features into IPOs. We further find, however, that SPAC shareholders, as opposed to the companies they take public, tend to bear SPAC transaction costs and as a result experience steep losses. This explains the current attraction of SPACs to their targets, but it is not a sustainable situation. This paper concludes by suggesting that the SEC equalize certain regulatory preferences that SPACs enjoy compared to IPOs, and that the SEC promulgate disclosure requirements specific to SPACs that will facilitate SPAC shareholders’ analysis of a SPAC’s dilution and the extent to which they will bear the cost of that dilution in a proposed merger.