SPACs traditionally don’t have any guaranteed primary capital. 100% of their investors can redeem. So you are guaranteeing the sponsor their rake but they are not guaranteeing that you’ll get any money from the listing. Plus this article doesn’t mention the warrant coverage, which cannot be negotiated down, and IPO fees (when SPACs go public, the bankers defer their fees until the SPAC completes a transaction). I think this article researched the inefficiencies of the IPO process to the last detail, but somehow forgot to do the same on the SPAC process. Door #3 is just as rigged as door #1.

Source: invested in several SPACs transactions and PIPEs

> Source: invested in several SPACs transactions and PIPEs

You sound very credible.

Would you have some time to elaborate more on your experience with SPACs? No need to name names; just more details on the critical aspects you highlighted.

Thanks. There is one aspect of SPACs that is completely unmentioned in this write up that’s actually the most important - valuation. While it reads like Bill believes the goal of a “SPAC-off” is to negotiate the sponsor take, that’s not the primary goal. Each SPAC completes an acquisition, with a PRICE. That price is not set as $/share - that’s fixed at $10.00 - but in the number of shares the “seller” gets. I was involved in one transaction where a SPAC was desperate to complete a deal before it expired, and it vastly “overpaid” for a crappy business. I put quotes around that because not a single investor except for the Sponsor rolled into the deal at $10.00. They ended up having to raise outside equity at $8.00 per PREFERRED share, and even that wasn’t enough. Then they went to the bankers and issued them more shares in lieu of their IPO fees and then the sellers ended up contributing more money with a complex security. So the problem in those situations is the company is put into a bind - if they pick the SPAC that’s paying the highest price, then most likely there won’t be any new capital raised at all while the sponsor will still get their rake. If they pick a low valuation, then they can assure capital and negotiate down the rake, but then you are giving a below market valuation and incurring a rake plus paying IPO fees so why not just do the IPO to begin with. And because the sponsor’s rake is in shares (with a lockup), even if the shares go from $10 to $3, they will still get paid. Think about this incentive - the sponsor can announce the crappiest deal - buy WeWork or whatever - wait 6 months, watch investors lose 70% of their capital, and still make a profit by selling their sponsor shares (which are issued for effectively ~$1/share as the sponsor contributes 1-3% of the initial capital at $10/sh but then gets 10-20% rake at $0/share).

The bigger question is why it has come to that, that door #1 is such a joke.

Is competition not supposed to drive down the bargaining power of the investment banks in terms of fees and IPO discount? Apparently not.

Are institutional investors who are part of the 30x oversubscribed and not getting allocations not really upset with this process as well? Why would they not want to pay a higher price and benefit from a smaller IPO "pop" than the 30% build in the system?

There is probably a massive business opportunity to get IPO investors and IPO'ing companies connected in a much more structured and technology based way.

IPOs are the way they are because of a lot of historical reasons. Before everybody and their uncle had a stock trading account, the investment banks and their moneyed clients were often the only way to get access to capital in meaningful quantities. The biggest investment banks hoarded these contacts. It was therefor hard for other banks to compete. Obviously if you were going to IPO, you’d want to go to the biggest bank with the most moneyed contacts. That caused a concentration of power.

If the fundraising rules for direct listings are changed, and it looks like that may happen, then there are fewer reasons to go the IPO route (there are still benefits, such as the investment bank and their customers taking all the risk should the IPO be a flop, but that seems to not happen a lot anymore).

My understanding is that its a shift in the SPAC model that's making them take off recently.

In the traditional SPAC model, if the SPAC shareholders choose to redeem their shares, the acquired company gets less money, or the deal just doesn't go through. This actually decreases the certainty to the company of any deal. See the case of Far Point, where COVID hurt the company and the SPAC was able to get out of the deal (in fact, management urged shareholders to vote against the deal they had put together!).

Recently, however, SPACs are tending to have small amounts of capital (or at least, few investors), and rely on the PIPEs to make up the difference. As the article points out, the PIPE process isn't too far off from the typical IPO process: your bankers (SPAC management in this case), market the deal to potential investors, and build orders.

In my view, as this approaches its limit, SPACs become very similar to IPOs, with one key difference: regulations. They're not required to file S1s and many other restrictions around marketing to investors no longer exist. In other words, as this trend continues, it seems that the main value that SPACs provide is just a way to do IPOs while skirting many of the SECs requirements.