September 29, 2022

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Why SPACS Are Flailing as Market Conditions Shift

2 min read

Matt Higgins, a former judge on the reality TV show “Shark Tank,” is an experienced investor whose firm, RSE Ventures, helps young companies build their businesses.

So it was no surprise that in November 2020, Mr. Higgins embraced one of Wall Street’s biggest recent obsessions by launching a SPAC. Special purpose acquisition companies — known by their acronym — are shell entities that sell shares to the public and use those funds to buy an operating business. Investors get their money back if the SPAC hasn’t found a business to buy within a two-year window.

Last summer, Omnichannel Acquisition, the SPAC backed by Mr. Higgins, agreed to buy Kin Insurance, a fintech company. But in January, the two sides called off the deal, citing “unfavorable market conditions.” In May, Mr. Higgins decided he’d had enough. He is liquidating Omnichannel and returning the $206 million his SPAC raised to investors.

“We did months and months of work to get Kin ready to go,” Mr. Higgins said. “But the market completely turned on us.”

Wall Street’s love affair with SPACs is sputtering.

After two hot and heavy years, during which investors poured $250 billion into SPACs, rising inflation, interest rate increases and the threat of a recession are fomenting doubts. Increasingly, investors are withdrawing their money from SPACs, which they’re allowed to do at the time of the merger. With stocks of high-growth companies recently getting clobbered, they have been less willing to bet that SPAC mergers — which often involve risky companies — will be successful.

At the same time, regulators are stepping up scrutiny of SPACs. The Securities and Exchange Commission has opened dozens of investigations into SPACs and is proposing tighter rules. Increased regulation would make SPAC deals less profitable for the big investment banks that arrange these transactions, because they would have to commit more resources to comply. They, too, have begun pulling back.

“You could…

Matthew Goldstein

2022-06-02 06:54:09

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