Don’t think Star Trek when you hear SPAC, think “caveat emptor”

Douglas Cote

Douglas Coté, CFA

Senior Portfolio Manager, Head of Global Perspectives

Special purpose acquisition companies, or SPACs — not Spock as in Star Trek — are shell companies designed to raise capital in order to acquire unspecified target companies at some future time. SPACs are listed on the stock exchanges via initial public offerings (IPOs) of stock. When a SPAC buys a target company, the SPAC’s public listing, allows the target company to go public faster, and with fewer regulatory hoops, than going through a normal IPO process.

SPACs are pejoratively called “blank-check” companies because their stock shares represent no commercial business activity; rather they amount to shares in hope; specifically, the hope that the SPAC’s intention to “buy” a real company with real operations will work out and produce positive returns. Because of this, SPACs have a mixed reputation on the Street, and are considered speculative investment vehicles. Nonetheless, SPACs are having a banner year in 2020. According to data from Refinitiv, U.S. listed blank-check companies have already raised $38.6 billion YTD, a 270% increase over 2019.

I am writing this since currently, SPACs are hot on business talk shows such as CNBC, especially electric vehicle SPACs. High-profile investors and investment banks are backing a flurry of IPOs. The atmosphere around these deals is, well, electric, but the discussions seldom include any statements of caveat emptor, which means “buyer beware.” EV companies offer bold visions of the future of transportation, but so far little execution on that potential. Historical experience with introducing new technologies suggests that not all these companies will make it across the finish line. Hey, I don’t want to spoil the party, I just didn’t realize EV technology could give the stock market such a charge, and I hope it doesn’t turn into a shock.

https://www.cnbc.com/2020/09/21/nikola-saga-hits-three-speculative-areas-at-once-spacs-robinhood-traders-and-electric-vehicles.html

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