SPAC SPAC SPAC
A popular and approximately true thing to say about special purpose acquisition companies is that a company that goes public through a SPAC can tell investors its financial projections, while a company that goes public through an initial public offering can’t. If you merge with a SPAC, the thinking goes, you can market yourself to investors based on projected future revenue and income; if you do a regular IPO (or a direct listing), you can only tell investors about your past financial results.
Lots of companies would like to go public but don’t have much in the way of past financial results. If you are, say, an electric-vehicle company with some good ideas and smart engineers but no actual revenue, or cars, it is much more pleasant to tell investors how much money you plan to make in 2024 (lots) than it is to tell them how much money you made in 2020 (zero, or realistically a very negative number 1 ). And so certain types of companies — relatively immature pre-revenue companies, and particularly electric-vehicle startups — prefer to go public via SPACs, and the extreme boom of SPACs in 2020 and 2021 has been very good for taking those sorts of companies public.
Why is this? The rough theory, in U.S. securities law, is that it is good for companies to tell investors their plans for the future. Shareholders ought to be well informed, and it is easier for them to evaluate companies if those companies can explain their plans, talk about their goals, and give guidance for future earnings. But this is a risky thing for a company to do, because U.S. shareholders love to sue companies if anything goes wrong. If a company says “we’re introducing a new product this quarter and we hope to sell a million units and add 3% to our revenue,” and then it sells 990,000 units and adds 2.9% to its revenue and the stock goes down, shareholders will sue. They’ll say “you lied to us, about the million units and the 3%, and we were deceived and lost money.” And then the company will have the expense and risk of defending the lawsuit, and might lose, so better not to mention any projections at all. Shareholders want forward-looking information, but shareholders’ lawyers, left to their own devices, would make it too risky for companies to disclose that information.
To address this tension, Congress in 1995 passed a law called the Private Securities Litigation Reform Act, which contains a “ safe harbor for forward-looking statements”: If a company says something about the future in its public disclosure, and if it includes some standard boilerplate saying “be careful, our statements about the future might not come true,” 2 and then the statements don’t come true, investors generally can’t sue. (Well, they can sue, but only if they can prove that the company knew the statement was false or misleading; making ambitious projections and then failing to hit them is not enough.) “Everything is securities fraud,” I like to say, but weirdly, it’s not securities fraud for companies to say things about their future earnings that turn out not to be true.
There are exceptions to the safe harbor, though. Companies with fraud convictions and penny-stock companies don’t get the safe harbor, for instance. 3 The goal is to let regular established public companies tell their shareholders their plans for the future without too much fear of getting sued, but not to let shady companies take advantage of the rule to spin wild tales and sucker people into investing. Similarly, some transactions aren’t subject to the safe harbor, because there is a view that they carry too much risk of fraud or conflicts of interest. Tender offers and going-private transactions don’t get the safe harbor; if you make projections about the future in a tender offer you have to make sure they’re right.
And statements “made in connection with an initial public offering” don’t get the safe harbor, for the same basic reason. If any dodgy little company could go public saying “we are going to make a zillion dollars next year,” without fear of being sued if that turned out to be wrong, every dodgy little company would do that, and a lot of small investors would get swindled into investing in bad IPOs based on ridiculous projections. And so it is very risky for a company to include projections in an IPO, and so companies often don’t.
SPACs are a sort of regulatory arbitrage around that rule. The way a SPAC works is that the SPAC’s sponsor does an IPO for the SPAC, raising a bunch of money and putting it into a pot. The SPAC has no business and makes no projections. Then the SPAC goes out and hunts for a private company to take public; when it finds one, it signs a merger agreement, under which the private company will get the money in the SPAC pot and the newly merged company will get the SPAC’s public listing. The private company goes public and raises money, much as it would in an IPO, but by means of a merger with the SPAC. (This is usually called a “de-SPAC merger.”)
The private company still has to market itself to public investors, because the SPAC’s public shareholders have to approve the deal, and because the company wants its stock to trade well. There are still investor meetings and presentations in which corporate management (and the SPAC sponsor) tell the story of the private company and try to convince investors that it’s a good investment. But because the SPAC is already public, and because the deal is technically a merger rather than an IPO, they can rely on the safe harbor. They can safely include projections in their public filings; if the projections turn out not to be true and the stock drops, the investors will have a hard time suing.
I just said a couple of paragraphs ago: “If any dodgy little company could go public saying ‘we are going to make a zillion dollars next year,’ without fear of being sued if that turned out to be wrong, every dodgy little company would do that, and a lot of small investors would get swindled into investing in bad IPOs based on ridiculous projections.” If you swap the word “SPACs” for the word “IPOs” there, then, uh … maybe you get an accurate description of SPAC mania? Certainly that is a concern that a lot of people have: The SPAC boom has made it too easy, they worry, for pre-revenue companies to attract investor interest by making outlandish projections that they won’t be held to. Last month, for instance, the Wall Street Journal pointed out that at least five electric-vehicle companies have projected they’ll have $10 billion of revenue within seven years after earning their first dollar; the current record is eight years, held by Google. Presumably at least one of those five companies will not break the record for fastest-ever time to $10 billion of revenue; when that happens, though, investors will have a hard time complaining.
It is very clear that the Securities and Exchange Commission does not like this state of affairs, and there have been rumors for a while that it would change the rules to crack down on SPAC projections. On Thursday, though, John Coates, the acting director of the SEC’s Division of Corporate Finance, gave a speech about “ SPACs, IPOs and Liability Risk under the Securities Laws,” in which he suggested: What if this whole theory is wrong? What if SPACs are actually IPOs?
Lest the safe harbor swallow the entire securities disclosure regime, the PSLRA specifically excludes from the safe harbor statements made in connection with specified types of securities offerings. Three of those exclusions are of note: those made in connection with an offering of securities by a blank check company, those made by a penny stock issuer, and those made in connection with an initial public offering. The statute refers to the Commission’s rules defining “blank check company” and to the Exchange Act’s definition of “penny stock.”
By contrast, however, the PSLRA’s exclusion for “initial public offering” does not refer to any definition of “initial public offering.” No definition can be found in the PSLRA, nor (for purposes of the PSLRA) in any SEC rule. I am unaware of any relevant case law on the application of the “IPO” exclusion. The legislative history includes statements that the safe harbor was meant for “seasoned issuers” with an “established track-record.”
What is the upshot of this? In simple terms, the PSLRA excludes from its safe harbor “initial public offerings,” and that phrase may include de-SPAC transactions. That possibility further calls into question any sweeping claims about liability risk being more favorable for SPACs than for conventional IPOs.
“Initial public offering,” Coates suggests, is not a technical term in the securities laws; it doesn’t have to refer to what we usually think of as an IPO. A de-SPAC merger is clearly a close substitute for an IPO, so why shouldn’t the SEC and the courts treat it as an IPO? Why shouldn’t companies that go public through a SPAC, and include projections in their marketing materials, get in trouble if those projections turn out to be wrong? Coates suggests that the SEC could change its rules or guidance to make it clear “how or if at all the PSLRA safe harbor should apply to de-SPACs,” but he also sort of implies that it doesn’t have to: Even if the SEC does nothing, some enterprising shareholders’ lawyer could sue a SPAC whose projections don’t pan out, and argue that the de-SPAC merger was really an IPO and so there’s no safe harbor for the projections.
(He also suggests that, even if the safe harbor does apply, some SPACs could get in trouble anyway: “Even if the safe harbor clearly applies, its procedural and substantive provisions do not protect against false or misleading statements made with actual knowledge that the statement was false or misleading. A company in possession of multiple sets of projections that are based on reasonable assumptions, reflecting different scenarios of how the company’s future may unfold, would be on shaky ground if it only disclosed favorable projections and omitted disclosure of equally reliable but unfavorable projections, regardless of the liability framework later used by courts to assess the disclosures.”)
By the way, it is not at all clear to me that the IPO regime is “right” and the SPAC one is “wrong.” In general, if you are trying to evaluate a young company that wants to go public, you will be more interested in information about its future earnings than about its past earnings. With an established mature company, historical financial results are generally a good guide to the future; with a relatively new company they are less useful. 4 People — including at the SEC — frequently complain that it is too hard for companies to go public in the U.S., that companies now go public later in their lives than they used to, and that the result is that ordinary investors miss out on a lot of growth. A securities-law regime that makes it harder for companies to tell stories about their futures, and that places a focus on historical financial results, probably doesn’t help with that problem.
SPACs are a workaround to that regime; they let companies without much of a track record go public. That probably does help to bring young, innovative, fast-growing companies to the public markets where regular people can buy them and get rich. Of course it also probably helps to bring young, bad, fast-at-losing-money companies to the public markets where regular people can buy them and get poor. That is kind of the deal: If you want more high-return investments, you have to live with more high-risk investments, and those don’t always work out.
Elsewhere in SPACs:
Advisers to special purpose acquisition companies, which float on the stock market and then go hunting for a company to buy, say they are struggling to find so-called Pipe financing to complete their planned acquisitions. Pipe is short for private investment in public equity.
In general de-SPAC mergers are less about the pool of money raised by the SPAC before finding a deal, and more about the PIPE money raised from institutional investors at the time of the deal. If a company wants to go public by merging with a $500 million SPAC, it will often do something like a $1 billion PIPE deal at the same time. If there’s no PIPE money, the de-SPAC merger is a lot less attractive.
One thing I sometimes say is that SPACs are a way to accelerate the IPO market: SPACs raise money now, while the raising is good, and they give it to companies later. If there’s a hot IPO market now, you can use it to raise money for companies going public later when the IPO market isn’t so good. But this isn’t quite right, because the actual de-SPAC merger relies so much on PIPE investments. If the market cools and no one wants to buy new companies, SPACs will have a hard time spending the money they raised in happier times.
Bitcoin contango
In Bloomberg’s Five Things newsletter, Joe Weisenthal writes about “the extreme contango in the Bitcoin futures curve”:
So for example, at the close of trading on Friday, Bitcoin spot was just over $58,300, whereas the December 2021 CME contract was over $63,000.
What this means is that in theory (I stress, *in theory*) you could go long spot Bitcoin, while shorting the December future, and if you just wait for the two to converge then that's an easy 8% return in 12 months. That's a lot in a world where risk-free trades pay you nothing these days. You can amplify it even more if you have leverage. And in fact the closer months offer even more juice.
Anyway, this is clearly starting to get the attention of some on Wall Street. It was a topic of conversation I heard about last week and then on Friday JPMorgan's rate derivatives strategist Josh Younger put out a report on the steepness of the Bitcoin futures curve. He calculated that as of last week the June CME contract was offering a 25% annualized yield relative to spot.
So then of course the question is, if this is just sitting there, why hasn't the spread been arbed away. … Of course Bitcoin doesn't have carrying costs, but it has all kinds of other issues. The biggest, as Younger notes, is that there's still not a great way for a regulated, big institution to just go long spot Bitcoin. How many shops can hold their own Bitcoin keys? How many are really in a position to trade on Coinbase? And even if you have a way of going long the spot in size to make the trade worth it, it's not easy to get leverage to really exploit the arb in a big way.
Cboe Global Markets Inc. and CME Group Inc. launched Bitcoin futures contracts in December 2017. That month, I wrote very similar things about the difference between spot and futures prices, and about the premium for futures being due to the difficulty of arbitraging the difference by holding physical Bitcoins. “The arbitrage spread suggests,” I wrote, that “there are a lot of people who want to be long bitcoin without owning bitcoin,” by getting economic exposure via futures instead of messing around with private keys or Coinbase. “Perhaps the cost of bitcoin storage — keeping your private key in a vault, worrying about hackers, etc. — is so high that arbitrageurs need to charge $1,000 for a month of it,” I wrote, back when the difference between front-month futures and spot was about $1,000, as it, uh, still roughly is today. 5 And:
Everything I read about bitcoin storage is utterly exhausting. "A private key printed out on a sheet of paper, cut into pieces, and distributed among family members who don’t know how to put it back together; an encrypted file loaded on a USB stick and buried in the backyard; a password committed only to memory;" a private key engraved on a metal plate and stored in a safe; a safe deposit box at a bank; an account at an exchange that gets hacked and loses its customers' bitcoins. Buying bitcoin futures is a way to get exposure to bitcoin and avoid the bitcoin-storage problem: You never have to store bitcoins because you never own bitcoins; you just get paid dollars for the amount that bitcoin goes up. But the storage problem doesn't go away; you just offload it to the arbitrageur who provides you the bitcoin exposure. Maybe the arbitrageur needs to charge you $1,000 to cover her storage costs. If you think these markets are efficient, then the gap between the futures and the spot is telling you how much — in out-of-pocket expenses, in theft risk, in psychic pain — it costs to store bitcoin.
The gap is still telling you the same thing. I don’t mean to suggest that Bitcoin futures have consistently been in steep contango since they launched three and a half years ago (they haven’t been), or that it hasn’t gotten easier and more accepted for institutions to own Bitcoin directly (it has). We have talked a number of times about improving institutional custody solutions for Bitcoin, which allow institutional investors to own Bitcoins without worrying about forgetting their private keys. Coinbase is going public this week, a big event in the institutionalization and normalization of Bitcoin trading. You can buy Teslas with Bitcoins now.
Still it is striking how long this basic story has been true: When Bitcoin futures trade higher than spot Bitcoin prices, no one steps in to arbitrage away the difference, because that would be exhausting in a way that arbitraging, like, stock-index futures is not. Or rather, some people do step in to arbitrage the difference, but they are relatively specialized niche players, and they are not big and levered enough to make the difference go away, so the trade remains fairly juicy for them. Eventually the Bitcoin market will be fully domesticated, and a crowd of electronic traders will compete to arbitrage prices for pennies of profit. But, despite years of institutionalization, that hasn’t happened yet.
GameStop Blockchain Crypto NFT
Reddit forum r/WallStreetBets’ favorite stock, the video game store GameStop, placed an ad Friday for a security analyst skilled in blockchain, NFTs, and crypto—indicating that the company may soon venture into the wild world of decentralized finance.
Here’s the job listing and honestly it is a normal and boilerplate information-security-analyst job description; the title is “Analyst, Security,” and the list of “roles and responsibilities” and “required skills and experience” are totally normal and about keeping GameStop’s data secure. But, yes, way down in “additional skills and experience,” it does say “blockchain, cryptocurrency, or non-fungible tokens,” in a bullet list with other somewhat relevant buzzwords (“machine learning or artificial intelligence,” “eSports or competitive gaming”). I do not think it is fair to interpret this ad as “indicating that the company may soon venture into the wild world of decentralized finance.”
On the other hand, if I ran GameStop, I would absolutely do all the meme-iest things I could think of, because being a meme seems to be working out well for them so far. Convert all the GameStop retail locations into NFT stores, sell NFTs of video games on the blockchain, just embrace all the nonsense of this moment. Surely all the things reinforce each other; if you love GameStop and crypto and NFTs, you’ll love a crypto GameStop NFT even more.
Wrong Goldman
I don’t understand why there isn’t more of this (from 2017):
Following the release on April 1 of a news release titled “Goldman Small Cap Research Publishes New Research Report on RocketFuel Blockchain, Inc.,” the penny stock surged by as much as 335% in four days. Several lines down is a notice that the research firm, which accepts payment for reports, “is not in any way affiliated with Goldman Sachs & Co.”
And the report’s subject, formerly known as B4MC Gold Mines Inc., and before that as Heavenly Hot Dogs Inc., doesn’t appear to have any revenue and maybe not even a product, based on litigation about a patent that expired. The report was written by an analyst who, while he appears not to have lit the world on fire at more-established firms, has an auspicious name: Rob Goldman.
There are 9.8 million users on Reddit’s Wallstreetbets forum. There are about 40,000 Goldmans in the U.S., or about one for every 9,000 Americans; if Wallstreetbets were exclusively U.S.-based you’d expect it to have about 1,100 Goldmans. It’s not, but even if it were only 10% U.S. you gotta figure at least 100 Goldmans. If you’re a Goldman picking stocks and publishing your “due diligence” on Wallstreetbets, why not write it up as a “Goldman Equity Research Note” instead? Won’t that make the stock go up more? Guess what, there are over 12,000 Sachses in the U.S.; find one and team up!
We talked a few years ago about a trader named Morgan Stanley who worked at Morgan Stanley until he left in 2018. “What if he left to found his own boutique advisory firm,” I asked. “What if he's calling it Morgan Stanley & Co.?” He could probably make some stocks go up!
We talk all the time about ticker confusion, in which a stock goes up because it has a name or ticker that sounds like another company or product. You can extend that arbitrarily: A stock can go up because it is endorsed by a person or firm that sounds like another person or firm. Change your last name to Musk, have a son, 7 name him Elon, buy some Dogecoin for his college fund, put out a press release saying “Elon Musk puts 100% of his net worth into Dogecoin,” who can say you are lying?
The purest arbitrage
As the current bull market gets more and more frothy, this newsletter spends less and less time on, like, complex derivatives, and more and more time on simple goofy nonsense that creates money out of thin air. (I am sad about this too.) If your name is Goldman, you can create free money! If you mint an NFT, you can create free money! If you are a company and say you’re getting into blockchain, free money! If you are a company that is GameStop, free money! I try, but there is just not that much to say about any of these things; there is no interesting structure or deep analysis here. People have too much money and want to do silly things with it, and if you position yourself on the other side of their desires, the money will flow in.
I am not sure that financial domination is actually a symptom of a bubble — I imagine that it flourishes in bear markets too, and is perhaps especially arousing then — but the timing here is perfect:
Welcome to the lucrative world of financial domination, a form of B.D.S.M. that has flourished during the pandemic, when many sex workers and their customers have migrated online because of social distancing precautions. The concept is simple, even if the allure is not immediately self-evident: “finsubs” (short for “financial submissives”) send monetary “tributes” to a financial dominatrix, who could be any gender, in exchange for being humiliated and degraded.
“It’s controlling someone through their wallet,” said Mistress Marley. (The Times agreed to identify her only by her professional name to prevent stalkers from finding her.) “I love waking up every day realizing that submissive men pay all my bills and I don’t spend a dime.” ...
In its purest form, financial domination is not transactional. Sending money is the kink, and finsubs offer tributes without expecting anything in return. “The arousal is in the act,” said Phillip Hammack, a professor of psychology at the University of California, Santa Cruz and the director of its Sexual and Gender Diversity Laboratory. “It’s about that loss of control.”
And:
“Please take all of my money for your trip, I don’t deserve it,” wrote Betaboy10, who gave $500, according to screen shots she provided to The New York Times. Another, named SubMike00, sent $250. A user who goes by Peter Zapp sent $400, along with the message: “I’d do anything to be owned by you.”
People are out there running Ponzi schemes, concocting elaborate fake financial statements and business deals to get suckers to send them money. Or they are making non-fungible tokens and talking about the value of immutable blah blah blah on the blockchain. But Mistress Marley has it right: She has tapped into suckers’ pure desire to send her money; she has dispensed with all of the pseudo-financial trappings and reduced it to “you don’t deserve this money, you worm, so send it to me.” Honestly an investment bank should try that move.
Things happen
Microsoft to Buy Nuance for $19.7 Billion in Health-Care Bet. US put off derivatives rules for a decade before Archegos blew up. Cameron admits mistakes as he breaks silence on Greensill. Ant to Be Financial Holding Firm in Overhaul Forced by China. What Sort of a Business is Investment Banking? CEO Pay Surged in a Year of Upheaval and Leadership Challenges. Alibaba shares jump after record antitrust fine. Defaults Fall Again, Aiding Rally in Low-Rated Debt. Singapore Dealer Prepares Vault for 15,000 Tons of Silver. Goldman Sachs Says Bankers Beat Algorithms When It Comes to ESG. “Bitcoin, the world's first honest & fungible chain letter.” Atomic Superyacht to Offer $3 Million Eco-Tours With Scientists. Russian official admits staging bogus yeti sightings to attract tourists to Siberia. Slavoj Žižek on Odd Lots.
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Zero *revenue* though.
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Here’s an example of that boilerplate, from pages 52-53 of the proxyfor the merger between Churchill Capital Corp IV (a SPAC) and Lucid Motors (an electric-vehicle company). “There can be no assurance that future developments affecting Churchill and/or Lucid will be those that Churchill or Lucid has anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond either Churchill’s or Lucid’s control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements,” etc. etc. etc.
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There’s another exception for “blank check companies,” but that is a technical term in U.S. securities law that does not apply to most SPACs. See footnote 15 to John Coates’s speech.
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As Coates says: “Forward-looking information can of course be valuable. Modern finance and valuation techniques focus on risk and expected future cash flows. Investors and owners commonly view forward-looking information as decision-useful and relevant. That is true for companies being acquired, as well as for companies going public. But forward-looking information can also be untested, speculative, misleading or even fraudulent, as reflected in the limitations on the PSLRA’s liability protections, even when the safe harbor applies. Reflected in the PSLRA’s clear exclusion of ‘initial public offerings’ from its safe harbor is a sensible difference in how liability rules created by Congress differentiate between offering contexts. Private companies that combine with SPACs to enter the public markets have no more of a track record of publicly-disclosed historical information than private companies that are going through a conventional IPO.”
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As of 9:30 a.m. today, the front-month CME contract (BTCJ1) was at about $61,000, according to Bloomberg, while the spot rate (XBTUSD) was about $60,400. That front-month contract expires April 30, so call it two and a half weeks of Bitcoin storage for $600, still pretty close to $1,000 per month.
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On Twitter, Paul Glenn anticipatedthat this would be my response. Sorry to be so predictable, but onreflection I find that I cannot have any other response.
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Or adopt a dog?
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the editor responsible for this story:
Brooke Sample at bsample1@bloomberg.net
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