Great SPAC Crash of 2022 Deepens as Investors Cash Out

The great SPAC crash is bringing the year to a close in dramatic fashion, as more shareholders prepare to exit the speculative-investment industry for good.

Source: Bloomberg | Published on December 15, 2022

New SEC rules for SPACs

The great SPAC crash is bringing the year to a close in dramatic fashion, as more shareholders prepare to exit the speculative-investment industry for good.

At least 80 special-purpose acquisition companies, which have raised a total of $24 billion, face a wall of investor meetings, giving clients the opportunity to exit ahead of a new US tax that could reduce their returns. According to Bloomberg data, at least 32 SPACs worth approximately $18 billion are planning to close their doors and return capital in the next two and a half weeks.

A potential 1% excise tax on stock repurchases and buybacks as part of President Joe Biden’s Inflation Reduction Act is the latest headache for the blank-check industry.

Meanwhile, rising interest rates and falling stock prices are clouding the outlook for acquisitions and mergers, putting companies with weak balance sheets at risk.

Since October, SPACs, including those backed by Wall Street titan Ken Moelis and former NFL quarterback-turned-activist Colin Kaepernick, have included the excise tax in accelerated liquidation filings.

On average, 96% of shareholders chose to redeem their stock in companies that went public in December. According to data provider Boardroom Alpha, this is on track to be a record number of redemptions.

“The combination of incredibly high redemption rates combined with a virtually nonexistent PIPE market makes it really tricky,” said Keith Townsend, a partner in King & Spalding’s capital markets practice, referring to a financing option known as private investment in public equity, which has traditionally backed a number of SPAC deals.

All of this threatens to accelerate the industry’s demise at a rate faster than even its most ardent critics predicted just months ago, reversing the cheap-money era that has created more than 900 firms since 2019.

SPACs are known as blank checks because they raise funds through IPOs with the intention of merging with an unidentified company. They give themselves a limited time to buy something or return the cash to investors, and shareholders can redeem their investment if they don’t like the deal. Management teams can be given short extensions to find and close deals, but they must usually obtain shareholder approval and pay to do so.

Now, high redemption rates are impeding the industry’s ability to close deals because firms are left with far less money than they anticipated. Meanwhile, a new tax threat included in Biden’s sweeping tax, climate, and health legislation has prompted dozens of blank-check sponsors to liquidate early or provide investors with an opportunity to exit ahead of the law’s implementation.

SPACs were caught up in the law’s attempt to slow the frenzy of share repurchases used by public companies to boost their value rather than investing the extra revenue in the business or paying higher dividends. Other types of shares, such as preferred stock with built-in redemption features, appear to be affected by the new legislation, which takes effect in 2023.

Things could get a lot worse. More than 50 SPACs with nearly $15 billion in cash are seeking investor approval for more time to complete a deal in the coming weeks, via votes that also allow holders to withdraw their money.