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Banks made billions off SPACs. Those days are numbered

May 11, 2022, 6:11 PM UTC

When big banks are bailing on the SPAC business, you know the blank-check company craze—a mostly tech industry phenomenon—is officially coming to an end.

That moment appears to have finally arrived this week, with Bloomberg reporting that Goldman Sachs will stop working on most special purpose acquisition company, or SPAC, projects and Bank of America will reduce its exposure to them. 

The moves follow an indefinite SPAC pullback by Citigroup last month, which paused its work on such deals. The three banks oversaw roughly one-quarter of U.S. SPAC proceedings in the past 16 months, totaling $47 billion in deals, per Bloomberg. Barron’s also reported last month that Deutsche Bank and Credit Suisse are scaling back their SPAC business.

For banks, the tech-fueled SPAC market has been an unexpected cash cow over the past few years. Reuters, citing data from industry tracker Coalition Greenwich, reported Wednesday that banks pocketed an estimated $8 billion in SPAC-related fees from their work underwriting the deals in 2020 and 2021. 

But new rules proposed by the Securities and Exchange Commission have put underwriters on edge—albeit too late for investors stung by the recent SPAC crash. And it adds to the criticism that the SEC only closes the barn door after the horses have already escaped.

As a quick refresher: SPACs are essentially shell companies that raise money from investors, go public on a stock exchange, and acquire a private company. The process offers private firms a faster avenue for going public, helping them avoid the burdensome federal requirements for launching an IPO. SPACs flourished in 2020 and 2021, a period of lavish investment on promising but unprofitable companies. 

SPACInsider data showed about $245 billion plowed into 860 such transactions during those two years. The list of tech companies going public via SPAC includes electric automaker Lucid, digital entertainment and gambling outfit DraftKings, and Singapore-based ride-hailing firm Grab.

Compared with traditional IPOs, SPACs represent easy money for banks. They assume significantly less risk for any financial losses associated with the blank-check company or its acquisition target. They’re also not liable for overly rosy financial forecasts—which sometimes venture into illegal territory—issued by SPAC leaders.

The system has proved rife with wild speculation and technically legal shadiness, as Reuters’s report detailed Wednesday. Banks can offer their services to both the blank-check company and its acquisition target, raising conflict-of-interest concerns. Their fees are also untethered from SPAC performance, giving them less incentive to scrutinize potentially bad deals for investors.

That lack of accountability looms over the ongoing SPAC selloff, which coincides with a broader market slump and a reallocation of investor funds into safer investments. The De-SPAC ETF, the first exchange-traded fund composed of post-SPAC merger companies, is down 68% over the past six months. 

In response, the Securities and Exchange Commission issued proposed rules in March that brought SPACs more in line with IPOs. Most importantly, the SEC seeks to increase disclosure requirements and make banks liable for false information included in SPAC documents.

The rules aren’t yet final—that won’t happen until late spring or the summer, at the earliest—but they’re already enough to scare off big banks.

“Functionally, the SPAC target IPO is being used as an alternative means to conduct an IPO,” SEC Chair Gary Gensler said after the agency published the proposed rules. “Thus, investors deserve the protections they receive from traditional IPOs, with respect to information asymmetries, fraud, and conflicts, and when it comes to disclosure, marketing practices, gatekeepers, and issuers.” (Banks qualify as “gatekeepers” by SEC definition.)

The SPAC spree isn’t completely over yet. Grindr, a dating app company that caters to the LGBTQ+ community, and Getaround, a car-sharing company, both announced plans this week to go public through SPAC deals with a combined valuation of $3.3 billion. About 110 announced SPAC acquisitions remain in line to close in the next 12 months, per SPAC Research data, though most are expected to fall through given the hostile market conditions. 

As long as big banks stay on the SPAC sideline, though, the blank-check market will never be the same. Once the current stock downturn passes, it’s back to the old-fashioned IPO for most companies aspiring to go public.

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Jacob Carpenter

NEWSWORTHY

A crypto catastrophe. The value of stablecoin TerraUSD and related token Luna remained perilous Wednesday, as cryptocurrency watchers continued to worry about the viability of the two widely traded coins. The coins, which had a combined market cap of roughly $48 billion before the free fall, have crumbled over the past three days amid a massive liquidation rush. TerraUSD, which is supposed to be pegged to $1, plunged Wednesday morning to 30 cents before rebounding to 69 cents by the early afternoon. Luna, a separate coin designed to help keep TerraUSD pegged to the dollar, crashed to about $1.50 as of Wednesday afternoon, down from its $80 value last weekend.

No commercial breaks. Netflix could roll out an ad-supported version of the streaming service and launch a crackdown on password sharing in late 2022, a faster timeline than initially proposed by company executives, the New York Times reported Tuesday. In a message to employees, Netflix leaders said they aimed to begin both efforts in the final three months of the year, calling the target “fast and ambitious.” Netflix shares are down 70% year to date, largely owing to an unexpected slowdown in subscriber growth and weak revenue forecasts for the current quarter.

Going in reverse. Carvana, the nation’s largest online used vehicle dealer, plans to lay off 12% of its staff after falling well short of its growth targets, the Wall Street Journal reported Tuesday. CEO Ernie Garcia III told employees that the company’s practice of adding staff in anticipation of rapid sales growth had backfired in recent months, as used car sales slowed amid rising interest rates and inflation. Carvana shares surged in the throes of the pandemic, when buyers turned to online marketplaces for vehicles, but the Arizona-based company’s stock is 90% off its 52-week high as interest cooled.

Cooling on crypto. Coinbase shares plunged 27% in midday trading Wednesday after the cryptocurrency exchange’s first-quarter earnings report showed lower-than-expected revenue and a decline in user transactions. Trading volume on the exchange, the largest in the U.S., fell from $547 billion in the final quarter of 2021 to $309 billion in the first three months of this year. Coinbase also added an eye-catching disclosure to its latest regulatory filings, notifying users that their cryptocurrency could be seized as part of bankruptcy proceedings if the exchange collapses.

FOOD FOR THOUGHT

Lightning strikes gold. If you’re near the Ford headquarters today and catch a whiff of cigar smell, that’s probably CEO Jim Farley firing up his finest Cubans. The embargo broke Wednesday morning on media reviews of Ford’s F-150 Lightning electric pickup truck—hailed by company executives as one of the most important products in the automaker’s 118-year history—and the response appears overwhelmingly positive. Top Gear says it “looks familiar, it goes like a muscle car when you stomp on it, and it’s full of brilliant practical touches and features.” CNN heralds it as “a real turning point in America’s long love affair with pickups.” InsideEVs raves that Ford’s biggest problem may be building enough of them.

From MotorTrend’s review:

Forget early adopters, environmentalists, and technophiles. This truck has to convince construction workers, farmers, ranchers, surveyors, and everyday truck fans that electric pickups aren’t just viable but desirable. That an EV truck not only can do the work but also do it better. It does that.

To get to brass tacks, the Lightning is the best-driving, best-riding, and best-handling F-150 you can buy. The only reasons not to buy one over a gas- or diesel-powered F-150 are that you have nowhere to charge at home, you actually tow hundreds of miles at a time on a regular basis, or you simply don’t like—or won’t let yourself like—electric vehicles. All other reasons are invalid.

IN CASE YOU MISSED IT

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Bitcoin whale Michael Saylor tries to defuse fears over MicroStrategy margin call, by Christiaan Hetzner

Elon Musk says he’s “exactly aligned” with Europe’s new rules for online content. But the law may threaten his free speech ideals, by David Meyer

Elon Musk says he would allow Donald Trump back on Twitter, by Colin Lodewick

Using A.I. to repel hackers is complicated. But these tricks can help, by Jonathan Vanian

Bill Gates has tested positive for COVID-19 and is experiencing mild symptoms, by Jonathan Vanian

BEFORE YOU GO

Requiem for an iPod. As a not-that-angsty teenager growing up in suburban Detroit, I would often fall asleep to the dulcet sounds of terrible alternative rock fed through my iPod shuffle. When I prepared to head off to college, my parents gifted me a way-cool fifth-generation iPod classic that carried me across campus. When I returned home for three brutal months of postgraduation unemployment, I wore out my third-gen iPod touch while brooding in my bedroom. For a certain generation of millennials, the iPod represents that perfect synergy of youth and technology. Apple is finally bidding farewell to the long-outdated iPod, halting production after 20 years, but that brilliant little piece of hardware will always have a place in our hearts.

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