Market volatility, particularly for financial-technology stocks and companies that merge with SPACs, was a major factor in Acorns ending its deal, people familiar with the decision said. The company, which counts celebrities like Kevin Durant and Ashton Kutcher among its backers, now plans to raise money from investors privately and eventually pursue a traditional IPO, they said.
The challenging market for companies combining with SPACs was a driver of Valo’s decision to end its deal, a person familiar with the matter said. The company is now exploring a private financing round, the person said.
While deals can be called off for a variety of reasons and the number of terminated deals is still small relative to the number that have been completed, it highlights the punishing market for SPACs, analysts and executives say. It also shows the risks of opening startup investing to the masses.
“I never thought this was possible,” said Alex Vogt, a 31-year-old physician assistant in Grand Rapids, Mich., of the swift share-price declines. His portfolio, which consists mainly of startups that combined with SPACs, soared to around $1 million a year ago but now sits at roughly $500,000. It is still higher than where it started several years ago. Mr. Vogt, who operates a Twitter account called “EV SPACs,” counts SoFi and many electric-vehicle and charging firms such as Proterra Inc. among his investments.
“I feel like I’m not having any green days this year,” he said, referring to days on which his portfolio rises.
Some companies that went public this way have undershot business projections they made to attract investors, triggering stock-price declines that have rippled to others tied to the space. Regulators have increased scrutiny of SPACs, worried that amateur investors are losing money at the expense of insiders who are protected even if shares drop.
A recent investor stampede out of many crowded pandemic trades and stocks linked to technology is adding salt to the wound. Many investors are betting that a rebounding economy and rising interest rates will make other areas of the market more appealing. Higher rates typically boost banks and other economically sensitive sectors while raising the amount of money investors make from holding cash or ultrasafe government bonds.
“It’s a precarious time,” said Evan Ratner, president of Levin Capital Strategies and a SPAC investor. “The market right now is pricing in only downside and no upside.”
Setting Records
SPACs have been around for decades—their predecessors were known as “blind pools” and associated with penny-stock fraud in the 1980s—but raised more than $80 billion in 2020, topping the amount raised in all other years combined. Last year, they raised over $160 billion, accomplishing that feat again.
The flood of money into the space prompted some skeptical investors to anticipate a return to earth. Short sellers, who bet on share-price declines, such as Hindenburg Research’s Nathan Anderson and Carson Block of Muddy Waters Capital LLC have bet against many deals. Short sellers borrow shares, sell them, then aim to buy them back at lower prices.
Hindenburg’s Mr. Anderson published a report in September 2020 alleging that electric-truck startup Nikola Corp.’s founder and one-time executive chairman, Trevor Milton, misled investors while taking the company public through a SPAC. Late last year, Nikola agreed to pay a $125 million fine to settle a regulatory investigation into Mr. Milton’s statements.
Shares of a few companies going public this way remain popular, such as electric-vehicle maker Lucid Group Inc. and Digital World Acquisition Corp., the SPAC that is taking former President Donald Trump’s new social-media venture public. Many analysts expect a continuing divergence between the small number of well-received deals and the many other SPACs that complete risky transactions.
The Securities and Exchange Commission has investigated or is investigating several SPAC mergers, including the Lucid and Digital World mergers. Digital World’s deal to take Trump Media & Technology Group public has yet to be completed. SEC Chairman Gary Gensler said last month he wants to level the playing field between SPACs and traditional IPOs by focusing on requirements around disclosure, marketing practices and liability for those who launch blank-check firms.
Low share prices mark a particularly acute threat to SPACs because they can trigger a negative spiral. Investors who put money into a SPAC before it announces a deal don’t know what type of merger it will do, so they are allowed to withdraw their money before a deal goes through. The amount they withdraw typically comes out to the SPAC’s listing price of $10, plus a tiny bit of interest.
If shares of a SPAC trade below $10 before a deal closes, many hedge funds and other professional investors automatically choose to pull their money out to eliminate the possibility of taking a loss on the trade or lock in a risk-free return.
