The SPAC market faced more bad news in January, as speculative stocks with little earnings took a dive at the beginning of the year, in the face of rising interest rates in an oversaturated environment.
A rising number of major deals have been abandoned so far this year.
SPAC stands for a Special Purpose Acquisition Company, which raises capital in an initial public offering and uses the funds to merge with a private company in order to take it public, usually within two years.
They are sometimes referred to as blank-check firms, as many IPO investors often have very little idea about the firm they are investing their funds in.
Several companies that have gone public as SPACs have been among those worst affected by January’s tech-driven sell-off, as speculators are pulling out due to rate hikes.
After raising a record $144 billion through 613 blank check IPOs last year, investors have begun to turn on SPACs.
Many sponsors have been forced to scrap their proposed deals due to increasingly unfavorable market conditions, sometimes before the SPACs were even listed.
“The SPAC bubble is bursting,” said Chris Senyek, senior equity research analyst at Wolfe Research.
“SPAC shares are extremely volatile due to their speculative nature.”
SPACs, like sports betting company DraftKings to battery technology startup QuantumScape and electric vehicle maker Lordstown Motors, have seen their valuations slashed by more than half from their early highs.
In January, clean energy player Heliogen, self-driving-related companies Aurora Innovation and Embark, and 3D technology company Matterport have all tumbled in value by more than 50 percent in a single month.
The planned merger of Fertitta Entertainment and the blank-check firm Fast Acquisition Corp was called off at the end of last year.
Other deals that have been abandoned include online grill retailer BBQ Guys, fintech firm Acorns, and cloud software platform ServiceMax.
SPACs, which have been around for decades, have allowed for younger startups to come to market, without the scrutiny reserved for traditional IPOs.
Many SPACs are shell companies set up by investors or sponsors to strictly raise capital through an IPO, with an objective to find a private company to acquire or merge with.
Start-ups have increasingly relied on them during the pandemic, in part because the structure of a SPAC allows new companies to quickly enter the market and achieve a listing.
The SPAC market enjoyed a record year in 2021, raising more than $160 billion on U.S. exchanges, nearly double that of 2020, according to data from SPAC Research.
Many investors were pouring money into these shaky start-ups with hopes of making quick earnings.
There are now almost 600 SPACs searching for an acquisition target, according to SPAC Research, and many of these deals are already collapsing after months of massive speculation.
There has been a growing number of SPAC listing withdrawals, which suggests that sponsors are deciding to pull the plug on their listings after filing the initial S-1, with nearly 20 such cases in the month of January.
SEC Chairman Gary Gensler had called for tougher disclosures and rules for SPACs by early next year in an interview with NPR in December.The chairman said he was increasingly concerned about the potential dangers of the SPAC craze sweeping through Wall Street.
He said that the tougher rules would aim to enhance investor protections by focusing on SPAC disclosures, by examining how the companies market themselves, and by ensuring that banks hired by SPACs would dig deeper and provide an appropriate level of scrutiny.
“I think we hopefully will propose something, subject to my fellow commissioners’ views, in the early part of next year,” said Gensler.
