A Sober Look at SPACs

Abstract

Special Purpose Acquisition Companies (SPACs)—touted as a better alternative to an IPO for taking a company public—have become the next big thing in the securities markets. This Article analyzes the structure of SPACs and the costs embedded in that structure. We find that costs embedded in the SPAC structure are subtle, opaque, higher than has been previously recognized, and higher than the cost of an IPO. Although SPACs raise $10.00 per share from investors in their IPOs, by the time a SPAC takes a company public, it holds far less in net cash per share to contribute to a merger. We find that SPAC costs are not born by the companies they take public, but instead by the SPAC shareholders who hold shares at the time SPACs merge. These investors experience steep post-merger losses, while SPAC sponsors profit handsomely. This Article concludes by suggesting that the SEC promulgate disclosure requirements specific to SPAC mergers that make clear SPACs' costs and sponsors’ incentives, and that equalize regulatory preferences that SPACs enjoy compared to IPOs.