Famed short-seller Carson Block raised the alarm on special purpose acquisition companies (SPAC) at the height of their activity, building his bets while warning retail investors about “a scam” in the market.
Now, the CEO of investment research firm Muddy Waters Capital is starting to see the reckoning.
Since raising a record $144 billion through 613 blank check IPOs last year, investors have begun to turn on these companies, in the face of poor returns and choppy market conditions. From sports betting company DraftKings (DKNG) to battery technology startup QuantumScape (QS) and electric vehicle maker Lordstown Motors (RIDE), former Wall Street darlings have seen their valuations slashed by more than half from their highs.
“You can’t look at it and say every company that’s gone public via SPAC is uninvestable,” said Block on Yahoo Finance Live. “But if you’re going to look at probabilities, the probabilities are much higher that something that went public via SPAC versus IPO should be deemed uninvestable.”
The structure of SPACs have allowed younger startups to come to market, without the scrutiny reserved for traditional IPOs. SPACs are shell companies set up by investors or sponsors to strictly raise capital through an IPO, to eventually acquire another company. They are sometimes referred to as blank-check firms because IPO investors often have no idea about the firm the funds raised will be used to invest in.
While SPACs have been around for decades, companies have increasingly turned to them during the pandemic, in part because of the speed with which the structure allows companies to come to market.
Block said that very structure has created inherent risks in financial markets.
“You’re generally giving 20% of the company away to the SPAC promoter, so these are not designed really to create wealth structurally. They’re designed more to transfer wealth,” he said. “The incentives to put a SPAC together are very strong to just do something, just close some transaction. And then you as the SPAC promoter get hundreds of millions of dollars in your pocket, and you can sell out of that.”
‘$700 million is the new zero’
Block has especially been critical of reverse mergers in the electric vehicle space. From truck maker Proterra (PTRA) to air taxi startup Joby Aviation (JOBY), roughly 20 companies have come to market through SPACs since 2020. All but a handful have seen their share price decline, by more than 40%.
Nikola (NKLA), which went public in 2020 through a reverse merger valued at $3.3 billion, has seen its stock plummet more than 80% since activist short-seller Hindenburg Research accused the carmaker of misleading investors and exaggerating their technology. Lordstown Motors, once valued at $1.6 billion, has followed closely behind on a similar report. Those firms, along with Canoo (GOEV) and Lucid Group (LCID) are now under investigation by the U.S. Securities and Exchange Commission (SEC).
“I think there’s a good chance that these businesses are essentially close to valueless when all is said and done. Yet, there’s still, real market cap there,” he said. “So, I’ve taken to joking for a little while that $700 million is the new zero. But, you know, when you look at those companies, the new zero is actually multiple billions.”
‘Our belief is in the long run’
QuantumScape CEO Jagdeep Singh says the criticism against SPACs is misplaced. Shares of his company declined more than 30% in January alone. His company now faces several class action lawsuits from shareholders who allege Quantumscape exaggerated the viability of its solid state battery technology.
“We vehemently disagree with any assertion that we haven’t been transparent or truthful. We’ve been more transparent than any other emerging battery company in terms of showing the data. The data is the data. It’s, it is what it is,” said Singh in an interview on Yahoo Finance Live, pointing to a recent study that showed its batteries successfully completed 15-minute fast charging cycles. “Our belief is in the long run. Even though in the short run stock market prices can be almost random, in the long run, prices do correlate with fundamental company performance.”
Sponsors are starting to cool on the idea. Fourteen SPACs withdrew their IPO paperwork last month, after filing at the height of the SPAC boom one year ago. That number is more than all of 2021, according to Renaissance Capital.
With SEC Chairman Gary Gensler now calling for tougher disclosures, Block expects the air to come out, even further.
“As SPAC promoters, you previously assumed that you could make whatever public projections you wanted that could have really little connection to reality. The SEC said in actuality, you might be liable for that,” said Block. “Now, that’s a legal gray area, but that has also dialed back the willingness of company managements and SPAC promoters to get out there and tell these fairy tales about, you know, like, sales growing 700 times in five years.”
Akiko Fujita is an anchor and reporter for Yahoo Finance. Follow her on Twitter @AkikoFujita
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