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Press

Boston Business Journal: Experts warn that the trendy route to the public markets has its downsides

Volition Press

By   –  Technology Reporter, Boston Business Journal

Read the full article here.

Short Excerpt: Investors, founders, analysts, private equity and venture capital firms, even celebrities: Their latest obsession are special purpose acquisition companies, or SPACs, the popularity of which smashed records last year and may well again in 2021.

But while so-called “blank-check companies” have advantages over initial public offerings in bringing a company public, regulators and investors are increasingly urging caution. While SPAC mergers require less paperwork than traditional IPOs, they may pose risks that are only now starting to emerge including built-in incentives for SPAC sponsors to overpay for acquisitions, and less-stringent financial disclosure obligations.

SPACs are shell companies that go public with the stipulation that they will merge with another, unspecified business within a set period of time, using the money raised from its IPO to fund the acquisition.

WeWork Inc., one of the Boston area’s largest office tenants, recently became one of the largest companies nationwide aiming to go public via SPAC deal. But Massachusetts has been a hotbed for locally-based SPACs as well as targets. This year, both Cambridge-based General Catalyst and Boston-based Summit Partners launched their own shell companies. Meanwhile, the list of tech firms slated to go public later this year through SPACs include Bedford robotics company Berkshire Grey, Watertown 3D-printing company Markforged Inc. and Waltham weapons-detection company Evolv Technology.

As of March 29, New York City-based market research firm SPAC Alpha reported a jump of 119% in the number of priced and pending U.S. SPAC IPOs. That’s up from last year’s total of 248 to 544 in just the first quarter of this year.

[…]

“Normally, you have these really high-profile companies that are growing fast, they want to pursue the capital market, so it’s a good company in search of money,” he said. “A SPAC is the exact opposite. It is a pool of money in search of a company.”

That, argues Cantwell, is a potential risk.

“You’re investing in this blind pool of capital, you don’t know the underlying asset that you’re ultimately going to be investing in,” he said.

That’s why SPACs are also known as “blank-check companies.”

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