How the SPAC Boom and Bust Worked

There's a video. A silver eighteen-wheeler gliding down a desert highway. No engine noise, because it's electric. Gorgeous shot. Except the truck wasn't driving. It had been towed to the top of a hill and let go.

It was ROLLING? Like a shopping cart?

Rolling downhill. Prosecutors later played that video to a jury in Manhattan federal court. And the company that made it had just become worth more than Ford... using a financial structure almost nobody could explain.

SPAC. I nod when people say it. I have never once known what it means.

Blank-check company. No product, no customers, no revenue. It exists only to raise money from the public so it can go buy a private company and take it public. Someone respected, a former executive, a fund manager, raises a few hundred million. There's nothing to analyze. You're buying a promise that this person will find something good.

My favorite asset class. Promises.

The money sits in a trust, usually ten dollars a share. The sponsor gets about two years to find a target. And here's the part people miss: if you hate the deal they find, you can redeem. Hand the shares back, take your ten dollars, walk.

Hold on. That sounds safe. Where's the catch?

The catch is who's still holding when the music stops. Keep one question in your head for the next ten minutes. Who actually made money here? Because it is not who you'd guess.

Okay. So what does the sponsor get out of it?

The sponsor puts in a relatively small amount of their own cash. In return they typically receive an equity stake equivalent to twenty percent of the IPO proceeds, and commonly warrants for more shares on top. It's called the promote.

Twenty percent. For finding a deal.

For finding ANY deal. A bad merger still pays the sponsor. Walking away and liquidating pays them nothing.

So they'd rather buy something terrible than buy nothing at all.

And that twenty percent doesn't come from thin air. It dilutes everyone who stays. Michael Klausner at Stanford studied this and found the costs buried in the SPAC structure are far higher than a traditional IPO, because they eat the actual cash per share the SPAC brings to the merger. You bought ten dollars. By the time the deal closes, the real cash behind your share is a lot less.

So the ten dollars is... a costume.

Nice word for it. And then twenty twenty happens. Lockdown, stimulus checks, trading apps on everybody's phone. SPACs raised more than eighty billion dollars that year. Then six hundred and thirteen of them in twenty twenty-one, raising a hundred and sixty-two point five billion. More than every previous year combined.

Out of the whole IPO market, how big is that?

About forty-nine percent of all US IPO money that year.

Half the IPO market was empty boxes?

Half the IPO market was empty boxes. And empty boxes need glamour, so they hired it. Shaquille O'Neal. Alex Rodriguez. Colin Kaepernick. Jay-Z. The astronaut Scott Kelly.

An astronaut. That's just marketing with a helmet.

It got strange enough that on March tenth, twenty twenty-one, the SEC issued an investor alert. The line was blunt: never invest in a SPAC based solely on a celebrity's involvement.

When the regulator has to say that out loud, you're already late.

They added that celebrities can be lured into a risky investment like anyone else... or may be better able to absorb the loss than you are.

That's brutal. They can afford it. You can't.

Now, the mechanism under all the noise. A traditional IPO is very cautious about forward projections. But a SPAC deal was treated as a merger. So a company with no product and no revenue could put up slides forecasting revenue five years out.

Science fiction with a spreadsheet.

Which brings us back to the truck. Nikola merged with a SPAC called VectoIQ in June twenty twenty, at a twenty-nine billion dollar valuation. That September, Hindenburg Research called the company a fraud. The founder left. The company took a hundred and twenty-five million dollar penalty from the SEC.

And the founder. Trevor Milton?

Guilty. October twenty twenty-two, three counts of fraud over statements he made to drive up Nikola's stock. Four years in prison, a one million dollar fine, with the judge saying the jury got it right.

Did he serve it?

No. He was pardoned by President Trump before he was incarcerated, with his appeal still pending. Which could wipe out hundreds of millions in restitution prosecutors were seeking for defrauded investors.

And Nikola wasn't the only one, was it.

Lordstown Motors, another electric truck company, filed for Chapter Eleven bankruptcy on June twenty-seventh, twenty twenty-three. By then the whole market had deflated. Annual SPAC IPOs that year: thirty-one.

From six hundred and thirteen to thirty-one. That's not a slowdown, that's a light switch.

Then the rules caught up. January twenty-fourth, twenty twenty-four, the SEC adopted final rules for SPACs and de-SPAC deals. New disclosure obligations, expanded liability for the people running them, and they stripped the safe harbor for forward-looking statements.

So the science fiction slides are dead.

Mostly. But they stopped short of the big one. They did not adopt the proposed rule making SPAC IPO underwriters legally liable as underwriters of the merged company. The banks lobbied. The banks won that round.

Okay. So who actually made money?

The sponsors, with their twenty percent. The institutions who bought in at ten dollars, kept the warrants, and redeemed before the merger closed. And the banks. The losers were the people who bought AFTER the deal closed, at the moment of maximum excitement, holding a share whose real cash backing had quietly been shaved away.

And technically nobody stole anything. It was all in the documents.

That's the uncomfortable part. Most of it was disclosed. In a place nobody reads, in language built to be boring. So when someone tells you there's no downside, ask one question. No downside for WHO?

Because somebody in that room already knows.

They always do. The truck looked like it was driving. And for a while, that was worth twenty-nine billion dollars.