Laser sensor manufacturer$Quanergy Systems (QNGYQ.US)$, 3D Printing Company$Fast Radius (FSRDQ.US)$It took only 10 months and 9 months to go public and file for bankruptcy respectively. Enjoy Technology, an online retail startup, survived only eight and a half months before filing for bankruptcy protection.

What these companies have in common is the way they enter the market. Instead of selling shares through a traditional initial public offering (IPO), they are listed through a merger with a special purpose acquisition company (SPAC). SPAC is a publicly traded shell company with no business other than seeking to merge with another company, and many companies go public by wearing SPAC's "clothes".

Such trading was a fad on Wall Street during the epidemic, but now more and more companies listing in this way have gone bankrupt, highlighting the speculative nature of SPAC rules.

February 20, Internet service provider$Starry Group Holdings (STRYQ.US)$Become the latest company for creditors to seek protection, with at least eight bankrupt SPAC merged companies since June 2022. This trend may have only just begun. Data compiled by the media show that nearly 100 companies listed in this way do not have enough money on hand to maintain spending levels similar to the current levels next year. Currently, 73 companies are trading below $1 a share and are likely to delist from major exchanges such as the New York Stock Exchange and NASDAQ. Since the benchmark share price of most SPAC is $10 before the merger, a share price below $1 also means that investors who buy shell companies and hold them in anticipation of the deal have lost at least 90 per cent.

"the value destruction is staggering," said Dan Zwirn, co-founder of Arena Investors LP, a debt-focused investment firm. In Zwirn's view, troubled SPAC is usually one of two types: completely speculative enterprises or reasonable enterprises that are seriously overvalued. He said the former would go bankrupt or be quietly closed, while the latter could be sold at a low price. So far, at least 12 companies that have merged with SPAC have agreed to be acquired at a lower price than when they went public, according to data compiled by the media.

Although SPAC has been around for decades, they took off during the trading boom of 2020-2021. These companies, sometimes referred to as blank check companies, do not have any business, but raise money by going public and acquire another company within a specified period of time. SPAC is widely seen as a faster and easier way to take cutting-edge companies public and avoid some of the legal and regulatory hurdles faced by traditional IPO. However, the Securities and Exchange Commission (SEC) is currently considering stricter rules for SPAC.

SPAC shareholders can make a lot of money from SPAC because if they can close a deal, they can get a lot of shares in newly listed companies. At the same time, early investors, usually hedge funds and others, made good safe returns for some time. This is because before the merger, $10 per share of SPAC shares can be redeemed, usually at an interest rate of around 1.5 per cent. Another bonus: warrants give holders the right to buy more shares at a low price when things are going well.

But hedge funds' preference for low-risk trading is not what attracts retail investors to buy bad-check companies. First, the acquired companies usually make highly optimistic forecasts for revenue and profit growth, which may attract retail investors. Second, in order to participate in some popular "tuyere" as soon as possible, retail traders buy shares in SPAC before or early after the merger-sometimes for well over $10; for example, SPAC usually merges with loss-making electric car start-ups, early drug development companies and a range of other companies that promise to change the world.

Sometimes, if retail investors make the right choice, it works: a SPAC called Diamond Eagle Acquisition worked with an online sports betting company in early 2020$DraftKings (DKNG.US)$Before the merger, the share price exceeded $17. Subsequently, the combined company changed its name to DraftKings and soared to a peak of $74 the following year. (the share price is currently about $19.)

As the hype heats up, more and more money is pouring in. Well-known fund managers, former politicians and celebrities lined up to launch new blank check tools. Between 2020 and 2021, more than 850 SPAC companies raised about $245 billion to find deals. As the quality of the new target company declines quickly, SPAC investors can only choose more speculative acquisitions, or it is difficult to find valuable deals at all. Then interest rate hikes and the bear market of 2022 also hit the sector. Today, the vast majority of public companies formed as a result of SPAC acquisitions (sometimes referred to as "de-SPAC" on Wall Street) are trading well below the $10 mark and will take years to turn a profit.

Usha Rodrigues, a law professor at the University of Georgia and one of the top academic experts in SPAC, said: "A lot of the problem with de-SPAC companies is that they are relatively early capital-intensive companies and generally riskier. There are far fewer dynamic private companies ready to go public. "

Many companies have been affected by the wave of redemptions. When SPAC investors don't like the upcoming merger, or just want to get their money back, they can redeem their shares before the deal is completed. Data compiled by the media show that over the past year, SPAC has on average cashed out more than 80 per cent of its shares. By contrast, the ratio at the beginning of 2021 was in single digits. These redemptions mean that companies are raising less cash from IPO.

Starry Group, for example, hoped to raise up to $450 million when it merged with FirstMark Horizon Acquisition in March last year, provided SPAC investors did not get their money back. But when FirstMark shareholders approved the merger, they chose to cash out more than 90 per cent of their SPAC stake. Although other investors also invested, these redemptions reduced Star's new capital to just over $155 million, according to court documents. The company, which has been listed for about 11 months, now plans to sell itself out of bankruptcy or repay creditors by issuing new shares.

Greg Martin, co-founder of Rainmaker Securities LLC, said of SPAC: "this is just a cautionary tale. When something is too good to be true, it is doubtful. When you look at the valuations some of these companies get from SPAC investors, it's clear that this is unsustainable. "

Edit / ruby