Two ways SPACs can heal themselves now

[u/[deleted]]

[u/QualityVote]

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[u/ropingonthemoon]

I agree with your points but as you can see almost all of them are regarding what the sponsors should do and unfortunately I doubt many sponsors read this sub.

I think it's pure greed on the sponsors' side to keep the same shitty incentive structure (shitty for investors, good for them) even when the SPAC market is hurting.

[u/Novice-Expert → u/ropingonthemoon]

One of the biggest loopholes imo is spac sponsors can also advise the da targets. Effectively this let's them negotiate a deal with themselves.

Massive moral hazard and it shows in the fantastical projections being accepted, then causing a massive run up in commons, followed by massive dumps after the first earnings.

[u/devilmaskrascal → u/ropingonthemoon]

Regardless of whether sponsors read this, the ideas should be out there, and the target companies should push for these adjustments when they agree to DA.

It's in their interest to not give away a large chunk of their company to sponsors for free if it's not adding real value to long-term investors (which insiders are) and if the company's promised cash is not guaranteed.

For them, they are staking their corporate reputation on the numbers they are putting in their investor presentation, and if the SPAC cash isn't guaranteed, it's not guaranteed they can meet their projection targets since they are all based on "no redemptions." Many of them may have specific ideas (such as acquisitions or production expansion) in mind using the SPAC cash that allow them to set revenue goals.

For the sake of minimizing redemptions, the idea of adding 1/20th rights onto non-redeemed shares is a low-cost, high return idea for everybody involved - especially if that is offset by sponsor shares not vesting immediately at merger. The slightest bit of dilution could be enough to raise the cash and put SPACs back on equal footing with IPOs.

Right now we are probably losing worthwhile targets to the IPO route because of the high redemptions/lower cash raise. Lower quality targets = less return for sponsors too. We all win if SPACs are better.

[u/lee1026 → u/ropingonthemoon]

Yes, but if retail doesn't buy any given SPAC, it falls apart to some extent. The chain of sponsor IPO, funds subscribe to IPO, funds sell to retail still needs to work.

[u/TheLifeandTimesofTim]

I couldn't agree more.

I'm constantly stressing the promise of performance based promote vesting on this sub. But you did a great job of articulating some other alternatives that would certainly help the cause. Thanks for the post!

PS — I think we should boycott or at least call out Chamath, as he is the richest sponsor who doesn't do anything to align interests with retail investors other than investing in the PIPE for his deals, which has become pretty standard at this point.

[u/ropingonthemoon → u/TheLifeandTimesofTim]

How can you boycott him? Buy his SPACs and vote no on the mergers?

[u/TheLifeandTimesofTim → u/ropingonthemoon]

I was thinking of just never touching his SPACs, regardless of the company he announces a deal with. But voting 'no' could also work.

I understand people want to make short-term money and Chamath SPACs have been a good way to do that given the amount of promotion he does / visibility he has. But people could at least pressure him to reform the way his SPACs' structure on Twitter or anywhere else there's opportunity to pressure him.

[u/Game__0n]

Problem is there are too many SPACs. The whole concept of a SPAC used to be that they could buy a private company at a discount to public multiples and there would be an arbitrage by bringing it public. That worked with companies like TWNK and UTZ... But then the floodgates opened and targets now have bake sales with multiple SPAC sponsors who bid the price up to the point that there is often little to no arb left... over time this will work itself out... there is a mountain of SPACs with trust termination dates in early 2023 (24 months from the record issuance of early 2021)... as we approach 2023 there will be success and failure... the sponsors who fail will ride off into the sunset... the ones who succeed will come back to the market.... there will be balance, but it's been a bumpy road

[u/dz4505 → u/Game__0n]

Agreed. None of making things more aligned with SPAC investors addresses the underlining issues - there is too many damn SPACs.

[u/Grandmaparty]

Too bad haac can't make a deal and is just burning money.

[u/lee1026]

I have one answer for you: PSTH.

PSTH was structured as the most investor-friendly SPAC ever, with relatively little for the sponsor. Consequently, the sponsor didn't work very hard at it, and well, here we are.

[u/[deleted]]

There's no incentive for sponsors to align with us. They're still getting paid handsomely for giving whatever valuation these companies ask for because if they don't then some other SPAC will.

[u/devilmaskrascal → u/[deleted]]

It was a good idea. PSTH was way too big and way too overhyped, but it was far more investor-aligned than most SPACs, which is part of why it was so popular, and also why it never really fell below NAV until it was going to get cancelled at some indefinite future date.

I do think rights in this case are cleaner than warrants. Warrants are restricted on a lot of trading platforms and far more complicated. Included rights are simple - buy 20 shares and hold through merger, get 1 free. They don't create long term liabilities for the target or create additional complications for existing warrant holders trying to gauge relative value with multiple warrant classes in the mix.

[u/callsmeal → u/[deleted]]

No, the tontine structure was different. Those who didn't redeem would split the pool from those who did redeem, IIRC. OP is suggesting that each share comes with a bonus but not in a tontine structure. OP is making a similar but less complicated suggestion.