A Sober Look at SPACs

A Sober Look at SPACs

Michael Klausner, Michael Ohlrogge, Emily Ruan

Series number :

Serial Number: 
746/2021

Date posted :

April 02 2021

Last revised :

April 02 2021
SSRN Share

Keywords

  • SPAC • 
  • Securities Law

A Special Purpose Acquisition Company (“SPAC”) is a publicly listed firm with a two-year lifespan during which it is expected to find a private company with which to merge and thereby bring public. SPACs have been touted as a cheaper way to go public than an IPO. This paper analyzes the structure of SPACs and the costs built into their structure.

We find that costs built into the SPAC structure are subtle, opaque, and far higher than has been previously recognized. Although SPACs raise $10 per share from investors in their IPOs, by the time the median SPAC merges with a target, it holds just $6.67 in cash for each outstanding share. We find, first, that for a large majority of SPACs, post-merger share prices fall, and second, that these price drops are highly correlated with the extent of dilution, or cash shortfall, in a SPAC. This implies that SPAC investors are bearing the cost of the dilution built into the SPAC structure, and in effect subsidizing the companies they bring public. We question whether this is a sustainable situation. We nonetheless propose regulatory measures that would eliminate preferences SPACs enjoy and make them more transparent, and we suggest alternative means by which companies can go public that retain the benefits of SPACs without the costs.

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Published in

Published in: 
Publication Title: 
Yale Journal on Regulation , Forthcoming

Authors

Real name:
Emily Ruan