If you've read any of my recent articles, there's probably a chance it was a SPAC update or announcement. In any case, it looks like that may be coming to a screeching halt. The Securities and Exchange Commission (SEC) just dropped a bomb (that frankly shouldn't come as a surprise, what with how ridiculous SPACs have become), and investors just don't seem as interested. What does this mean for the real estate industry that's been heavily involved with the SPAC trend?
What is a SPAC again?
A SPAC, also referred to as a "blank-check" company, is built to raise money to find a private company to help take public through a merger. If you're investing in a SPAC, you're really investing in the management team's ability to find a suitable company to take public in the near future. As mentioned, SPACs have become a very popular vehicle for taking companies public in the real estate industry, namely proptech companies.
A SPAC's sponsors front the costs needed to fund the SPAC's SEC filing and underwriting costs, equal to roughly 3% of the IPO amount they're seeking. The sponsors generally receive large amounts of cheap warrants in exchange for fronting the SPAC -- this is what the SEC has flagged, but we'll get to that. The sponsors are in for a big payday if a SPAC successfully acquires a target company.
The new SEC guidance
The SEC just dropped some new proposed accounting guidance on SPACs: Warrants are to be categorized as liabilities instead of equity. If this becomes law, all upcoming SPAC deals as well as existing SPACs would have to go back and recalculate their financials for SEC filings.
Anthony DeCandido, partner at RSM LLP, told CNBC: "SPAC transactions have essentially come to a halt...This is going to cost these companies a lot of money to evaluate and value those warrants each quarter rather than just at the start of the SPAC. Many of these groups lack the sophistication internally to do this themselves."
Not only will it cost time and money, but the proposed changes will make SPACs far less appealing for a couple of reasons:
- Incentives for the sponsors in the form of warrants could take a huge blow.
- A higher level of scrutiny toward SPACs will make them generally less appealing for companies to go public. To this point, DeCandido added: "It just further scrutinizes what's already been a very misunderstood exit plan in SPACs."
Diminishing investor appetite
Retail investors aren't as feverish about SPACs as they once were. For example, Bank of America's (NYSE: BAC) client flows in SPACs went from $120 million weekly net purchases at the beginning of the year to single digits by April. For context, there were 109 new SPAC deals in March alone. April will only see about 10% of that figure.
Real estate and SPACs
The real estate industry has participated in SPACs in two ways: as a sponsor and as a proptech company getting acquired to go public.
Here are some recent real estate sponsor transactions and announcements:
In addition, the following companies have announced they are going public through SPACs:
The Millionacres bottom line
The brakes got put on hard for SPACs. A lot of companies took advantage while it lasted. Let's see how the proposed changes from the SEC shake out. Regardless of that outcome, it seems like retail investors have moved on anyway.