SPACs appeared to be a booming phenomenon during the early phases of the global pandemic, from late 2019 through to early 2021. However, with experts predicting a SPACs bubble and many large-scale SPACs now losing value, many sources suggest that a decline could be on the horizon. SPACs have also been impacted by new regulatory measures that seek to address the prevalence of fraud among these private investment funds.
SPACs have been increasing in popularity across certain sectors for the past few years. One of these sectors is the growing space industry that has recently been galvanized by the promise of new developments, such as commercial space travel. With the potential decline of SPACs in mind, we look at what this might mean for the space industry and how SPACs overall have performed on the market.
What are SPACs?
SPACs stands for Special Purpose Acquisition Companies, which are another form of an IPO or Initial Public Offering. A Special Purpose Acquisition Company is a company that is designed to facilitate a merger with or purchase of another, pre-existing company. Investors in SPACs do not know which company the IPO intends to merge with before they invest.
Sometimes the plans for a merger are vague and are industry-based, rather than targeted at a specific company. Due to the fact that the investors have limited knowledge about what they are investing in these companies are also often referred to as Blank Cheque Companies. The lack of transparency is also one of the reasons that SPACs are often considered risky investments and are sometimes associated with long-term underperformance.
The rise of space SPACs
One industry that has recently experienced a large rise in the popularity of SPACs is the space sector. However, despite this being a popular investment choice for supporters of the industry, some managers and investors are now starting to see prices fall. For instance, SPACs space companies like Momentus Inc are down around 65% on their original projections.
Other space SPACs are also mirroring this trend. For example, Farmer’s Edge is down around 85%, Virgin Galactic is down around 81%, AST SpaceMobile is down around 55%, and Planet Labs is running around 59% below projections. Other space companies, such as Redwire, Astra, AST SpaceMobile, and Virgin Orbit are also running below the expected value. These figures represent SPACs holdings and trends over a 52-week period.
What are the main risks of SPACs?
So, why all the risk and speculation surrounding SPACs? Experts say that there are a few things that make SPACs riskier than other types of investment. Here’s our top three:
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Weaker requirements for going public and lack of solid due diligence
SPACs are often seen as a shortcut through due diligence and legal processes that go into opening a company. Some stringent measures are placed on SPACs (money invested in the company cannot be spent on anything but a merger and the merger must be completed in two years). However, they can often bypass other legal processes. While new regulatory measures have been announced to combat this, rates of fraud among SPACs remain high.
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Sponsored by celebrities
Celebrity sponsorship can undermine the legitimacy of SPACs. By buying into a specific company, celebrities can make the company seem more appealing to their audience. When the SPAC becomes public, this may influence people’s decision to invest in this company, even if it is at risk of underperforming.
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Unsustainable history and significant losses in price
SPACs are considered unsustainable because of the shortcuts they take around due diligence. Having biased or celebrity underwriters also potentially distorts the value of the SPAC, effectively turning it into a bubble. If there is no true public demand for what the company ultimately produces, however, this bubble will burst, and as has historically happened, the SPAC will lack longevity.
Why do some SPACs lead to litigation?
SPACs have also recently drawn negative press attention because of the rising number of litigations against SPAC companies. A key reason for this is the potential for investors to be misled about the company’s projections or the results of the acquisition. Cases brought against SPACs are generally brought by dissatisfied investors who feel that they have not been given sufficient information before the acquisition. One well-known case involved PureCycle Technologies, which was accused of misleading investors with inaccurate projections.
What’s the situation with space companies?
Another example of a SPACs litigation case is the case brought against AST SpaceMobile space company. Investors, in this case, were dissatisfied with their inability to participate fully in decisions surrounding the final acquisition funded by the SPAC. It was also suggested during the case that the lack of information presented to investors may have amounted to fraud in some cases.
Recent litigation reports against several other space companies have also highlighted these issues. Astra, for instance, has been accused of exaggerating demand for its services based on inaccurate projections, which may have misled investors. Similarly, Redwire has been accused of failing to disclose financial inaccuracies in its firm accounts before recruiting investors.
What can we say in the end?
Despite the upswing in popularity among SPACs during the early stages of the pandemic, litigation cases and disappointing results mean that these companies could now start to decline. In general, the lack of due diligence and transparency in the development of SPACs can put investors at risk of fraud or of making an unrewarding purchase. Space SPACs are also likely to be riskier than other types of investments because commercial space travel is a totally new industry.
This means that it is currently unclear whether the enthusiasm for commercial space travel will translate into real-world demand. It is also unclear whether commercial space travel will be affordable enough to generate widespread interest. As with any investment decision, investing in SPACs requires a deep understanding of the market and market conditions. Follow the markets in real-time and look to historical cases before making any investment decisions.
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