SPACs (Special Purpose Acquisition Companies) are making headlines in 2020. While they have been around for decades, they have become increasingly popular in recent years. SPACs raised a record $13.6 billion in 2019, and at least 128 SPACs have been gone public in 2020, reportedly raising $49.04 billion to date.
SPACs are unusual. They have no operations, no technologies, not even a business plan. Their sole purpose is to raise capital through an IPO to acquire a currently existing company. They typically are formed with an acquisition target in mind, but that is not required when they are started. In fact, they often keep this information private to avoid disclosures during IPO. They simply must make a deal, typically within two years, or they must return the money to investors.
Wall Street is using SPACs in multiple industries including emerging electric vehicles. There are at least seven active SPACs in that space, including Diamond Peak Holdings Corp. (NASDAQ: DPHC), Gores Metropoulos, Inc. (NASDAQ: GMHI), Graf Industrial Corp. (NYSE: GRAF), Hennessy Capital Acquisition Corp. IV (NASDAQ: HCAC), Kensington Capital Acquisition Corp. (NYSE: KCAC), Tortoise Acquisition Corp.(NYSE: SHLL), and arguably the leading SPAC in 2020, Spartan Energy Acquisition Corp. (NYSE: SPAQ).
The Good: Spartan Energy Acquisition Corp.
Back in July, Spartan Energy made headlines to announce a merger with electric-vehicle maker, Fisker. Spartan stock doubled within days of the announcement but has since settled back down to a tidy 40% increase (year-to-date). Spartan shareholders are expected to vote on the merger within days. The merger will effectively make Fisker a public company.
Fisker has taken the out-sourcing approach to vehicle manufacturing, which significantly lowers enormous startup costs for plants and equipment. Their electric SUV, Ocean, is planned to begin production in 2022. Using this approach, Fisker can quickly ramp up production to compete with the 800-pound gorilla of the industry, Tesla (NASDAQ: TSLA).
The Bad & The Ugly: Nikola
Nikola Corp. (NASDAQ: NKLA) has also been making headlines recently, but not in a good way. Hindenburg Research accused Nikola of deceiving investors about its business prospects. They say Nikola created a misleading promotional video showing that their truck could be driven when it was actually rolled down a hill. Nikola countered that Hindenburg has a large short position and stands to profit if share prices drop. They also make the point that they could not trick their partners, major companies like General Motors Company (NYSE: GM) and Iveco, who would surely perform extensive due diligence before doing partnering with them. The SEC is conducting a preliminary investigation as to the merit of Hindenburg’s claims.
Regardless of Nikola’s response, these claims appear to have some merit. Nikola’s founder, Trevor Milton, has a history of tweeting contradictory statements compared to official company statements, which has confused investors. Milton resigned today as Chairman. The stock responded by falling $6.50 per share, or 23% on September 23. This development appears to give greater credibility to Hindenburg Research’s claims.
While SPACs are becoming increasingly popular among institutional investors, individuals should be cautious. Investing in a company with so many unknowns makes performing due diligence nearly impossible. They are known as “blank check companies” for a reason – you don’t know what company they will buy or how much they will pay when you invest. Given the two-year time constraint to acquire a company, SPACs may have extra pressure to offer premium prices to make a deal before the clock runs out.
That said, SPACs appear to be an innovative investment vehicle that allows an easier and less expensive IPO compared to the traditional slow, heavily regulated IPO process. Investing in SPACs is highly speculative at best with rewards going to the sophisticated investor. Recommendation: take a look at investing in SPACs, but tread carefully.
Article By: Gregg Killpack