Investment banks have raked in billions of {dollars} by feeding the frenzy for blank-check firms, they usually have executed so largely with out risking any of their very own cash on tons of of offers which have left many buyers with punishing losses.
A take a look at certainly one of these offers exhibits how.
In late 2020, Acies Acquisition Corp tapped into investor demand for blank-check firms – formally often known as particular objective acquisition firms, or SPACs – with an preliminary public providing that raised $215 million. Among the funding banks Acies signed as much as underwrite the IPO had been JPMorgan Chase & Co, Morgan Stanley and Oppenheimer & Co.
When the providing closed, Acies, basically a shell firm, adopted the SPAC template. With the money it had raised, it had two years to seek out and merge with a non-public firm searching for a inventory market itemizing, or return the cash to buyers. Acies’ administration crew introduced it was on the hunt for a enterprise within the “experiential entertainment industry.”
The crew didn’t must search for very lengthy. Hours after the IPO closed, bankers advising Playstudios Inc contacted Acies managers to inform them the Las Vegas-based maker of cellular on line casino video games was on the market, regulatory filings present. Those bankers had been additionally with JPMorgan. In early 2021, the 2 firms introduced plans for a merger that valued Playstudios at $1.1 billion.
In the run-up to the merger and the itemizing of the mixed firm’s shares, Playstudios touted a rosy future. It forecast that surging advert gross sales, a brand new role-playing sport and cross-marketing choices to sport gamers would convey a 20% rise in income in 2021 and a 33% bounce this yr.
Since then, the corporate has scrapped the brand new sport, and income fell far in need of predictions. Retail buyers suffered the implications. The inventory is down greater than 50% since shareholders accredited the merger final June.
“Playstudios is one that looks like crap right now,” Dan Ushman, a 37-year-old Chicago-area entrepreneur, mentioned earlier this yr. He put about $26,000 into Acies after it introduced its cope with Playstudios and shortly noticed his funding drop greater than 35%.
Investment banks concerned within the deal fared a lot better, having risked none of their very own cash, primarily based on a Reuters assessment of regulatory filings.
JPMorgan, particularly, pocketed hefty charges for its twin function as an underwriter for the Acies IPO and as an adviser to Playstudios – completely authorized, regardless of the obvious battle of curiosity, if the financial institution discloses its function, as JPMorgan did.
The financial institution has not disclosed its charges, however monetary information supplier Refinitiv estimates that JPMorgan earned $4.7 million in underwriting charges and $14.2 million as a sell-side adviser. It additionally acquired $1.6 million for serving to Acies increase further capital by means of a maneuver often known as non-public funding in public fairness, or PIPE, in accordance with monetary analysis agency Morningstar Inc and a Reuters evaluation. PIPEs, which faucet large institutional buyers, are sometimes crucial to shut a SPAC merger.
Morgan Stanley earned about $5.9 million and Oppenheimer about $1.2 million in underwriting charges, in accordance with Refinitiv estimates. Each financial institution additionally bought about $1.6 million in PIPE-related charges, in accordance with Morningstar and a Reuters evaluation. LionTree Advisors, one other Playstudios adviser, earned $6.2 million on the deal, in accordance with Refinitiv estimates, plus $1.6 million in PIPE charges, in accordance with Morningstar and a Reuters evaluation.
JP Morgan, Morgan Stanley and LionTree declined to remark. An Oppenheimer spokesman mentioned the financial institution had a minor function within the Acies IPO.
Playstudios famous that the JPMorgan groups it and Acies labored with got here from separate divisions of the financial institution. The firm mentioned it has “a robust framework for evaluating, approving, executing and optimizing its game initiatives,” and that it’s regularly “revisiting the conditions and decision to either advance or suspend an initiative.”
A CURIOUS PATTERN
The disparate outcomes of the Acies-Playstudios deal – large bucks for the funding banks that bought it and massive losses for retail buyers who purchased into it – are typical of many SPAC offers.
For this text, Reuters analyzed tons of of SPACs spanning roughly two years, reviewed banks’ inside paperwork and regulatory filings, and interviewed greater than two dozen bankers, buyers, SPAC managers, attorneys and company executives. The examination discovered that funding banks turbocharged to their profit what turned out to be a speculative bubble in firms which have typically didn’t stay as much as their pre-listing hype.
The SPAC market has sagged for the reason that collapse of some high-profile blank-check listings amid total grim market situations. And in March, the U.S. Securities and Exchange Commission (SEC) proposed new guidelines that will improve disclosure necessities and potential authorized legal responsibility for SPACs and their banks. Facing these market and regulatory challenges, some banks have been pulling again from the enterprise.
Whatever occurs to the SPAC market, the Reuters examination reveals intimately for the primary time how, over the previous couple of years, Wall Street banks have enriched themselves by aggressively selling the offers within the absence of the authorized guardrails and monetary dangers related to conventional IPOs.
Credit Suisse summed it up final yr in a confidential consumer presentation reviewed by Reuters: SPACs “bend the rules” of the IPO market. The Swiss financial institution has had a task in 136 blank-check offers for the reason that starting of 2020 by means of the top of March, in accordance with a Reuters evaluation of SPAC Research information.
A Credit Suisse spokesperson mentioned the language within the presentation pertains to SPAC “market conventions” that give firms and buyers extra flexibility than in conventional IPOs. The financial institution is dedicated to “recommending strategies that conform to all applicable rules,” the spokesperson mentioned.
In a standard IPO, underwriters will be held accountable beneath securities legislation for any deceptive forecasts, projections or different statements made to buyers. To shield themselves towards legal responsibility, banks carry out rigorous due diligence on firms whose IPOs they underwrite, and people firms typically don’t challenge public forecasts about their efficiency. Banks additionally purchase large chunks of an issuing firm’s new shares, risking losses if they’ll’t resell the inventory for greater than they paid.
With a SPAC, a financial institution’s function as underwriter ends as soon as the blank-check firm completes its IPO, however the financial institution receives a portion of its charge solely after the SPAC makes an acquisition. By the time the SPAC declares a merger, SPAC underwriters aren’t accountable for forecasts and different claims in regards to the efficiency of the corporate to be acquired and publicly listed. And as a result of blank-check IPOs are usually priced at a nominal $10, banks don’t run the chance of getting to promote new shares that fall in worth.
For funding banks, blank-check offers create “moral hazard” – an incentive to tackle threat due to little publicity to it – in accordance with Usha Rodrigues, a legislation professor on the University of Georgia who research SPACs. That’s as a result of they “don’t have the same liability with a SPAC that they have with a traditional IPO, but banks do get to collect fees if they can get a deal done,” she mentioned. The “companies that merged with SPACs … don’t have the same level of vetting,” which most retail buyers don’t understand.
Shares of firms that obtained a inventory market itemizing in a SPAC merger from 2019 by means of the start of March had been down roughly 36% on common from when their offers closed, in accordance with information offered by Jay Ritter, a professor of finance on the University of Florida. That’s even worse than the 14% decline in shares of firms that went public by means of conventional IPOs throughout the identical interval, in accordance with Nasdaq Inc. All instructed, in accordance with Vanda Research, retail buyers misplaced $4.8 billion, or 23%, of the combination $21.3 billion they plowed into SPACs from the start of 2020 to the primary week of April 2022.
Yet the offers that introduced these shares to market have yielded a bonanza for funding banks. Industry tracker Coalition Greenwich estimates that banks booked about $8 billion in SPAC-related charges in 2020 and 2021. That represents roughly 6.5% of whole U.S. funding banking charges that main banks collected in that interval, in accordance with Coalition Greenwich.
“The bank has an incentive to push the deal to get closed, at any price, because they want their 3.5% of the SPAC IPO proceeds,” mentioned Mike Stegemoller, a professor of banking and finance at Baylor University, referring to the charges underwriters obtain solely after a SPAC merger closes. “I think the conflict is with retail investors who are buying common shares of stock … Do you really think banks care about these retail investors? I think there are good incentives not to.”
Many banks amped up their take by working for either side of offers, as JPMorgan did with Acies and Playstudios. Reuters recognized roughly 50 such circumstances from early 2020 to November 2021.
SOURED SENTIMENT
As the SPAC bubble has deflated, debate over accountability for investor losses has targeted on the executives of blank-check firms. These founding buyers – known as sponsors – threat shedding all of their funding if they’ll’t discover a firm to take public by means of a merger throughout the two-year window.
However, founders purchase their shares at deep reductions to the standard $10 providing worth, due to preferential therapy and charges that may dilute retail buyers’ holdings. Likewise, the hedge funds and different institutional buyers that account for lots of the cash behind SPACs typically receive their shares in an IPO or subsequent PIPE beneath favorable phrases that put them better off relative to retail buyers.
The SEC put SPACs on discover final yr with a number of enforcement actions towards particular firms and their sponsors for allegedly deceptive buyers about their prospects. Then, in late March, the regulator introduced its proposed guidelines, which might, amongst different issues, set up that funding banks that underwrite SPACs might be held legally answerable for false or deceptive forecasts or statements about blank-check offers. The SEC will vote on the principles after the public-comment interval ends later this spring.
The SEC declined to remark. In a March 30 assertion on the proposed guidelines, SEC Chair Gary Gensler mentioned “gatekeepers” corresponding to underwriters “should have to stand behind and be responsible for basic aspects of their work” and “provide an essential function to police fraud and ensure the accuracy of disclosure to investors.”
In its proposed guidelines, the SEC mentioned that the charges underwriting banks obtain when a SPAC closes a deal may point out participation within the merger, and that banks even have a “strong financial interest” in ensuring a SPAC inks a deal. For these causes, the regulator mentioned, it’s proposing rising banks’ legal responsibility.
To date, buyers haven’t sought to carry main Wall Street banks accountable for false or deceptive data alleged in any of the 47 SPAC-related class motion shareholder lawsuits filed since 2021, in accordance with a Reuters evaluation of a public database maintained by Stanford Law School and legal professional Kevin LaCroix, who follows the circumstances. None of these circumstances have but succeeded in court docket.
One facet of SPACs that has already drawn regulatory scrutiny is undisclosed dealings between blank-check firms and their targets earlier than a merger is introduced. That’s as a result of buyers might be misled if a SPAC privately shakes palms with an acquisition goal whereas publicly stating it’s nonetheless searching for the absolute best merger accomplice.
Communications between a SPAC and its acquisition goal are a part of an SEC investigation of former U.S. President Donald Trump’s $1.25 billion deal, introduced final October, to record his new social media enterprise on the inventory market.
In a December submitting, Digital World Acquisition Corp, the SPAC that’s merging with the previous president’s Trump Media & Technology Group, disclosed that the SEC had requested for paperwork regarding communications between Digital World and Trump Media and conferences of Digital World’s board, amongst different issues. The SEC said in its request that its investigation didn’t imply the company had concluded that anybody violated the legislation, Digital World mentioned.
Trump Media has since launched the Truth Social platform to lackluster impact.
Trump Media and Digital World Acquisition Corp didn’t reply to requests for remark. The SEC declined to remark.
In the Acies-Playstudios deal, pre-existing relationships increase the query of whether or not the 2 firms already had a merger in thoughts, doubtlessly precluding higher offers for buyers.
Acies instructed buyers when it launched its IPO that it had not recognized an organization to merge with and that it will pursue the perfect alternative it may discover. However, Andrew Pascal, chief government officer of Playstudios, co-founded Acies with Jim Murren, who was chief government officer of MGM Resorts Inc when that on line casino operator invested in Playstudios, as was disclosed in a securities submitting.
Playstudios mentioned it “considered all viable SPAC proposals and eventually made the decision it believed was the best of the available options for the company.” Responding to Reuters inquiries on behalf of Murren and Pascal, Playstudios famous that MGM Resorts, not Murren personally, invested within the firm, and that Pascal recused himself from “all Acies deliberations concerning Playstudios” as soon as talks started and “forfeited his economic interest in Acies to avoid even the appearance of having conflicting interests.”
BACKWATER TO BONANZA
For many years, SPACs had been a backwater of Wall Street, connecting speculators with firms that had no different technique of going public. That modified in late 2019 and early 2020, when shares of Richard Branson’s spaceflight supplier Virgin Galactic Holdings Inc and sports activities betting operator DraftKings Inc surged greater than 600% after going public by means of SPAC mergers. Investors caught at dwelling in the course of the COVID-19 pandemic and flush with money from authorities stimulus funds helped drive these beneficial properties, they usually clamored for extra.
Wall Street banks had been comfortable to oblige and commenced aggressively selling the enterprise. In consumer shows and different paperwork reviewed by Reuters, they repeatedly acknowledged the contaminated status of SPACs and boasted of their potential to convey high quality firms to market by means of blank-check offers.
In a 2020 presentation, Morgan Stanley mentioned there was a “historical perception of lower quality companies picking (the) SPAC route, although views have improved somewhat.” For its half, Morgan Stanley mentioned it related “only with the highest quality partners.”
Some of its previous companions embody Acies, the SPAC that introduced Playstudios to market. Shares of the 51 firms that Morgan Stanley has helped take public by means of SPACs both as an adviser or by elevating cash to shut the deal for the reason that starting of 2020 had been down 28% on common by means of late March, in accordance with a Reuters evaluation.
Morgan Stanley declined to touch upon the presentation and the efficiency of shares in firms that went public by means of its SPACs.
Citigroup, in a 2019 presentation, mentioned that whereas SPACs traditionally had been thought of a “four-letter” phrase, synonymous with poor outcomes, that notion was altering as buyers’ urge for food for brand new options grew.
Companies that Citi helped convey to market by means of SPACs since 2020, both as an adviser or by elevating cash to shut the deal, had been down 38% on common initially of May, in accordance with a Reuters evaluation of SPAC Research information.
Among its many offers, Citi was an underwriter for the IPO of a SPAC referred to as Spartan Acquisition Corp II and an adviser to the corporate Spartan subsequently acquired, Sunlight Financial Holdings Inc, a financier of photo voltaic vitality methods. The financial institution helped Spartan decide its valuation of Sunlight at $1.3 billion, primarily based on Sunlight’s personal revenue estimates, securities filings present.
Sunlight later slashed its revenue estimates. The shares, after peaking at about $14.33 in early 2021, at the moment are buying and selling at lower than $5.
Citi and Sunlight declined to remark.
Credit Suisse, in a fourth-quarter 2020 presentation to company purchasers, identified that the latitude firms get pleasure from when issuing enterprise forecasts in SPAC offers can “help improve investor perception of the company.” That can be notably useful, it mentioned, for firms that “may have struggled to go public via a traditional IPO.”
In the identical presentation, Credit Suisse highlighted the “creative marketing tactics” it used within the Virgin Galactic deal. These included flying buyers and analysts to tour Virgin Galactic’s manufacturing unit and Spaceport America complicated, which the financial institution mentioned added “a ‘wow’ factor that a regular-way IPO process could not have provided.”
When Virgin Galactic went public, it wasn’t producing any income. Its shares soared within the months after the itemizing, peaking at $62.80. They subsequently tumbled amid delays in some product testing and at the moment are buying and selling beneath $10.
In a 2021 presentation, Credit Suisse asserted that the surge in blank-check offers was being pushed by “high quality sponsors” that “seek to partner with blue-chip assets.” Quality apart, share costs of the 56 firms Credit Suisse helped convey to market by means of SPACs previously two years had been down on common about 32% on the finish of March, in accordance with a Reuters evaluation of information from SPAC Research.
A Credit Suisse spokesperson mentioned the financial institution is “very selective when it comes to choosing SPAC clients,” and that it treats SPAC mergers “much the same way as regular IPOs” when it comes to the financial institution’s inside approval course of. When working for an organization that might merge with a SPAC, the financial institution evaluates options and helps establish the “most suitable course of action,” no matter whether or not Credit Suisse underwrote the blank-check agency’s IPO, the spokesperson mentioned.
Virgin Galactic declined to remark.
Another firm Credit Suisse helped convey to market is Paysafe Ltd. The on-line funds platform was valued at $9 billion in a March 2021 merger with a SPAC. Credit Suisse had underwritten the SPAC’s IPO and acted as an adviser to Paysafe on the following merger.
The $9 billion valuation was primarily based partly on Paysafe’s forecast that its digital wallets enterprise would see double-digit development from 2020 to 2023. Securities filings present that banks had been concerned in discussions on establishing the valuation.
After Paysafe went public, it needed to write down its digital wallets enterprise and make technological enhancements to it. The shares are down greater than 80% from their January 2021 peak.
Paysafe determined to go public by means of a SPAC as a result of it was the “best route to take to public markets,” and employed Credit Suisse as a result of it had labored with the financial institution on prior offers, in accordance with an organization spokesperson. Paysafe has put in place a turnaround plan for its digital wallets enterprise that’s “well underway” to “deliver on a new growth trajectory,” the spokesperson mentioned.
A consultant for Foley Trasimene Acquisition Corp II, the SPAC that acquired Paysafe, declined to remark.
WAITING IN THE WINGS
The deal that took automobile retailer CarLotz Inc public underscores the aggressive ways banks adopted of their pursuit of SPACs.
The Richmond, Virginia-based firm, which sells used automobiles on consignment on-line and thru shops, started searching for a purchaser by means of a traditional sale in late 2019 however failed to seek out one on the $1 billion worth it needed, a supply accustomed to the matter mentioned.
Several months later, Deutsche Bank pitched itself as a sell-side adviser to CarLotz, pledging to discover a SPAC purchaser, in accordance with an individual accustomed to the state of affairs. The financial institution sought SPAC consumers that will worth CarLotz at a minimal of $750 million, primarily based on the $730 million paid for rival Shift Technologies Inc in a latest SPAC merger, and probably as a lot as $2 billion, a supply accustomed to the matter mentioned.
And Deutsche Bank already had a bidder ready within the wings, a SPAC referred to as Acamar Partners Acquisition Corp. Deutsche Bank had suggested Acamar as an underwriter on its launch greater than a yr earlier, and the blank-check firm was operating out of time to safe a merger. Less than a month after CarLotz employed Deutsche Bank, the financial institution recommended to Acamar that it make a suggestion for CarLotz, in accordance with regulatory filings.
Acamar made a profitable provide of $827 million, lower than CarLotz had hoped for, however beating out two different bidders, the filings present.
In anticipation of its inventory market itemizing, CarLotz began wooing buyers with glowing forecasts. It projected it will have nearly $1 billion in gross sales in 2022, almost 9 occasions its estimated 2020 income. It may meet demand, it mentioned, from a various provider base of used automobiles from company fleets.
About seven months later, a provider representing greater than 60% of CarLotz’s automobiles bought within the prior quarter paused its relationship with the corporate. Sales dried up. Revenue for 2021 got here to solely $259 million.
CarLotz shares are down greater than 90% since they had been listed, giving the corporate a market worth of lower than $100 million.
Deutsche Bank did much better. It acquired charges of roughly $6.7 million as an underwriter and $14.1 million as an adviser, in accordance with Refinitiv estimates.
CarLotz and Acamar didn’t reply to requests for remark.
In an interview, Eric Hackel, head of fairness origination options at Deutsche Bank, declined to touch upon the CarLotz deal particularly. In normal, he mentioned, the financial institution’s due diligence for a standard IPO is “a little bit more thorough” than for a SPAC, however it does “a tremendous amount of diligence on companies we underwrite.”
On offers for which the financial institution is advising the non-public firm and has additionally underwritten the SPAC buying it, “there’s usually another bank advising,” Hackel mentioned. Ultimately, he mentioned, “it’s up to the company” in the event that they rent the identical financial institution that underwrote the SPAC to advise them on a deal.
He famous that retail buyers get pleasure from among the protections institutional buyers have – corresponding to the precise to redeem shares for $10 earlier than a deal closes. However, as soon as a deal is finished, Hackel mentioned, retail buyers “have to make their own decisions. They have to do their own diligence.”
Kyle Brown, a 30-year-old accountant in Groton, Connecticut, invested in CarLotz. “We lost the totality of our investment with the exception of $35,” he mentioned. “It was about $11,000, $12,000.” Brown had hoped his funding would assist pay for a brand new home, however he ended up having to seek out different methods to fund a down cost.
Source: www.financialexpress.com”