In October 2020, Chamath Palihapitiya raised $2.4 billion from investors for three blank-check companies. He used a previously obscure financial vehicle known as a SPAC. All he had to do was find startups to buy, and he stood to make hundreds of millions of dollars. The Facebook-executive-turned-venture-capitalist loves high-stakes poker, and it looked as if he’d found a can’t-lose bet.
Other financiers agreed, and for two years it seemed as if anyone with some name recognition—including Shaquille O’Neal and Paul Ryan—had a SPAC. The same Reddit investors who made Dogecoin and GameStop Corp. soar earned huge returns by buying shares of almost any SPAC. Palihapitiya called it “IPO 2.0” and reserved the ticker symbols IPOA to IPOZ, one SPAC for each letter of the alphabet. In November 2020 he told Kara Swisher on her podcast that he was “all in.”
But on Sept. 20, Palihapitiya said he was closing two SPACs and returning $1.6 billion. He said he couldn’t find any companies to buy for good prices. It was as if he were folding his cards and walking away from the table. The SPAC king was saying the SPAC boom is over.
In hindsight, maybe SPACs were too good to be true. The term is short for special purpose acquisition companies, but you can think of them as big piles of money that trade on the stock market. For every $10 someone invests, they get a unit. Then deal sponsors such as Palihapitiya take the pile and typically have two years to find and buy companies. They generally get to keep 20% of the shares for themselves.
Blank-check companies date to the 1980s, but they developed a bad reputation after some deal sponsors simply pocketed the money. Then Palihapitiya used one in 2019 to take Richard Branson’s space tourism venture public. Although the company had yet to bring any customers to space, its stock promptly tripled. The SPAC boom was on. Sports-betting company DraftKings Inc. and electric-truck startup Lordstown Motors Corp. went public through SPACs the next year, and financiers raised $83.4 billion for the blank-check companies. Even former President Donald Trump got in on the action, creating a social network and striking a deal last year to take it public through a SPAC.
Palihapitiya said SPACs were democratizing finance by allowing regular investors to get in early on hot companies. “Using the language of inequality, it evens the playing field,” he said in a February 2021 interview with Bloomberg Television. “SPACs are here to stay.” For a time, it seemed as if he was right. The share prices of his six SPACs had more than doubled on average by then. Investors were so eager for his deals that his SPACs started soaring even before they acquired companies. Some investors were paying $18 for a $10 share of the money pile, merely because Palihapitiya was managing it.
Perhaps understandably, this attention went to Palihapitiya’s head. He bought a $75 million jet, tweeted a selfie showing his sweaty torso, and hinted at a run for governor of California. In the February 2021 interview, he implied that he would be the next Warren Buffett. “Nobody’s going to listen to Buffett,” Palihapitiya said. “But there has to be other folks that take that mantle, take the baton, and do it as well to this younger generation in the language they understand.”
One of the biggest perks, as far as the promoters were concerned, was that SPACs had much looser rules around what one could say when hyping a company. Lying still wasn’t allowed, but some of the things boosters were saying weren’t exactly true.
Many of the companies were startups that had yet to sell much of anything, yet they routinely projected billions of dollars of revenue. Another electric-truck maker that went public through a SPAC, Nikola Corp., saw its stock crash after short seller Hindenburg Research said the company had, among other things, faked a truck demonstration by rolling a nonworking prototype down a hill. (Nikola’s founder, who’s denied misleading investors, is now on trial for criminal fraud.) About 65% of SPACs missed their revenue projections, according to a January 2022 study that looked at performance from 2004 to 2021. Digital World Acquisition Corp., the SPAC merging with Trump’s Media & Technology Group, said its social network would rival Walt Disney, Facebook, and Netflix—then unveiled a Twitter clone that gets only a few thousand downloads a day.
Palihapitiya talked up his SPAC companies, too. On Twitter and business television, he said whatever company he was taking public was about to revolutionize its field. When he took Virgin Galactic Holdings Inc. public, he pitched it on CNBC as a sure thing, saying the business was “largely now de-risked and ready to commercialize and monetize.” The company, which projected $210 million in revenue for 2021, has still yet to make a commercial flight. Its stock is down 91% from its February 2021 peak, to about $5 a share.
The ecosystem depended on SPACs and their targets going up to keep buyers eager to buy shares in the next one. But when the Federal Reserve started raising interest rates this year and the stock market started to fall, SPAC companies fell harder. Since its peak in February 2021, the De-Spac Index of 25 companies that went public by SPAC was down more than 80% as of the Sept. 20 close. Stocks that went public through Palihapitiya’s SPACs have fallen 60% on average over the past year. That made startups nervous about using him to go public.
Some high-profile investors have dropped plans for SPACs, including Paul Singer’s Elliott Management Corp. Still, there’s a glut of SPACs that have yet to find targets. The good thing for investors is that they have a built-in self-destruct mechanism: If they don’t find a company to buy in time, they have to give investors their money back. More than 500 SPACs sitting on a total of $150 billion are looking for companies to buy, according to data from SPAC Research. Many of them will likely end up returning the money as Palihapitiya is doing.
In typical government timing, now that the party is over, the US Securities and Exchange Commission is coming to mop up. In March the SEC proposed rules that Chairman Gary Gensler said would treat SPACs the same as regular initial public offerings, requiring more disclosure and enforcing the same liability for false projections. In a statement, Gensler said SPAC underwriters “should have to stand behind and be responsible for basic aspects of their work.” Hester Peirce, the lone Republican commissioner, protested, saying the changes would likely kill the SPAC market.
The last merger that Palihapitiya orchestrated was in August, when he used one of his SPACs to take public a company developing a video game cure for attention-deficit/hyperactivity disorder. “@AkiliLabs is creating a new class of medicine,” he tweeted when the deal was announced. The stock has already fallen 70%. Palihapitiya likely made out just fine, though. He sold more than $300 million in stock in Virgin Galactic alone before its price crashed. A spokesman for Palihapitiya said that he and his company, Social Capital Holdings Inc., had invested hundreds of millions of dollars in his SPACs and roughly doubled it, earning $750 million.
Palihapitiya still has two smaller SPACs looking for deals with biotech companies. But in the letter to investors about the SPACs he was closing, he didn’t sound like he still believed in his revolution. “Our view on SPACs remains consistent since our first deal—SPACs are just one of many tools in our toolkit to support companies,” Palihapitiya wrote. He said in a recent interview that his biggest investment is now in a rooftop solar company and that he might take it public in the next few years. He didn’t mention using a SPAC. —With Bailey LipschultzRead next: Crypto-Tracer Chainalysis Busts Bitcoin Anonymity
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