Shaq, Ciara and A-Rod have one, but are SPACs, the latest investment craze, right for you?
Craig Harris, USA TODAY
5 min read
Shaq, Ciara and A-Rod have one, but are SPACs, the latest investment craze, right for you?
NBA great Shaquille O'Neal is part of one. So are superstar singer Ciara, lifestyle guru Martha Stewart, rocker Sammy Hagar and retired baseball slugger Alex Rodriguez.
These celebrities and many others have become the public faces, part owners and in the case of A-Rod, the chief executive, of special purpose acquisition companies or SPACs – one of the hottest trends on Wall Street and an investment that has grown popular with the general public. SPACs, created to raise money in an initial public offering (IPO) to buy another company, are also drawing scrutiny from government regulators worried that all the buzz around SPACs blinds people to their risks.
Access to SPACS has become easy. Mom-and-pop investors can buy them through online trading sites such as Robinhood and Charles Schwab. At the relatively inexpensive cost of $10 a share, they have attracted tens of thousands of individuals who belong to online SPAC groups, including about a half-dozen on Facebook.
"SPACs for once allow the retail investor to feel like they have a chance to invest like an angel investor," says Travis Mrkvicka, a doctor in Minneapolis who is part of the 21,500-member SPAC Investing 2021 Facebook group.
Mrkvicka says SPACs allow people to "invest in companies they see promise in at the very earliest stages of their going public – before the IPO runs up like crazy and they’re left, as retail investors so often are, to pick up the leftover pennies."
SPACs, once a vehicle for mostly institutional investors such as big mutual funds, became a popular option for amateur investors roughly six months ago.
Some, including Bill Lyons of Saratoga Springs, New York, jumped into SPAC investing in summer 2020.
"The luster is perhaps starting to fade as the market is pretty flooded," says Lyons, who invested through his Schwab account and claims to have done well. "Last summer, you could pick a decent SPAC, and it could be up within a month or two at 100% or 200% ... which was wild. Now, it's really under attack."
SPACs, also called blank check companies, have less detailed information for investors than a traditional IPO, while both are used to convert a private business into publicly traded companies.
Ritter and others who monitor SPACs say the biggest winners are the sponsors who create the SPACs and typically award themselves 20% of the shares but invest only a portion of the cost of those shares.
For example, in a $200 million deal, a sponsor may award itself $50 million worth of shares but invest $7 million, Ritter says.
"This is great for the sponsor, and this is why celebrities are getting involved. For the celebrity, this is a great opportunity for them to make money," Ritter says, noting they could be part of the sponsorship group. Others say celebrities could get a flat fee like getting paid to pitch a product in a commercial.
Ritter says private companies can be big winners. They can increase the price of their firm because there are so many SPACs looking to invest in a small number of available targets.
They "have good bargaining power," he says.
COVID-19-fueled SPACs
Though SPACs have been around for a few decades, their popularity began to grow again around 2016 , according to Kristi Marvin, chief executive and founder of spacinsider.com.
By late 2019, Richard Branson's Virgin Galactic space company made headlines by going public through a SPAC.
"That captured people's attention," says Doug Ellenoff, a partner at Ellenoff Grossman & Schole in New York who has done SPAC deals for 20 years.
Marvin, a former banker who lives in Manhattan, says there were 59 SPAC IPOs in 2019 with $13.6 billion in proceeds. They really took off during the COVID-19 pandemic: 248 SPAC IPOs raised $83 billion in proceeds last year.
Tyler McClure, a former farm manager from Sunnyside in central Washington, says he wasn't familiar with SPACs until he lost his job last year during the pandemic and became a day trader.
He says he dabbled in about 10 SPAC stocks but gave up on them because he doesn't play the long-investment game.
He says SPACs are popular with amateur investors because it's relatively cheap to buy in and if an investor picks a good management group that merges with a solid company, the shares have the potential to skyrocket.
Marvin of spacinsider.com says the pandemic, which caused the market to plunge last spring, made it difficult for some private companies to get access to cash. She says that if a company wanted to tap the public markets, SPACs became a less risky way to raise funds.
Kristi Marvin is CEO and founder of spacinsider.com, an online startup that tracks special purpose acquisition companies. She was one of the speakers at the SPAC Conference 2020.
"It has grown so quickly and the worry is there will be some failures, but I don't think anyone will deny there will be failures," she says. "It's no different than a traditional IPO."
Marvin says traditional IPOs are inherently risky and flawed because a firm could take up to nine months to prepare to go public, then a major event could spook the market and derail the process. In a traditional IPO, a company doesn't know how much money it will be able to raise until the night of pricing.
Marvin says there also is a risk for a sponsor if the management group can't find a company to invest the funds and has to return cash to investors because they have lost their ability to make money.
Mohammed Elayan, an Irvine, California, lawyer who specializes in mergers and acquisitions, says he's made some small SPAC investments based upon the reputation of the sponsor.
"It's not like I have invested my life savings," Elayan says. "I just put in a little to see what's going on because it's interesting. It's definitely hot, but when it's hot it's inevitable a correction is coming."
Contributing: Jessica Menton
Have a tip on business or investigative stories? Reach the reporter at craig.harris@usatoday.com or 602-509-3613 or on Twitter @CraigHarrisUSAT
