SPAC Ship Is Sinking. Investors Want Their Money Back

By Amrith Ramkumar WSJ Jan. 21, 2022 5:30 am ET

Wall Street’s favorite pandemic bet is taking on water.

SPACs, or special-purpose acquisition companies, burst onto the scene in 2020 as the hip way to take Silicon Valley’s hottest startups public. Unlike traditional initial public offerings, SPACs were seen as modern and accessible, allowing any investor to put money into the companies of the future at the same time as professional money managers.

SPACs—sometimes called blank-check firms—begin as shell companies. They raise money from investors, then list on a stock exchange. Their sole purpose is to hunt for a private company to merge with and take public. Because the company going public is merging with an existing publicly traded entity, it can make business projections and skirt some of the other regulations associated with IPOs. After regulators approve the deal, the company going public replaces the SPAC in the stock market.

Upstart companies of all stripes clamored to participate, enamored with the pool of eager investors who were ready to back them, and enticed by celebrity SPAC creators and bankers who mint money when they complete deals. The company behind dog-toy subscription service BarkBox did a SPAC merger. So did the personal-finance app SoFi Technologies Inc. Office-sharing company WeWork Inc. found a SPAC after its planned IPO infamously blew up. Electric-vehicle battery makers, flying-taxi startups, self-driving car companies and a seemingly never-ending parade of biotech names all jumped into the fray.

Now, the hype is giving way to reality. Like so many investment fads, what at first seemed like a way to earn easy money has revealed itself to be full of potential perils. The threat of tighter regulation is looming, and high-profile stumbles by some companies that went public via SPACs have taught investors some harsh lessons. It turns out investing in unproven upstarts isn’t for everyone, and with interest rates looking likely to rise in coming months, all sorts of speculative investments from technology stocks to bitcoin are getting hit.Performance since end of 2020Source: FactSetNote: SPAC ETF includes some pre-merger SPACsAs of Jan. 212021’22-90-60-3003060%Russell 2000Defiance Next Gen SPAC​Derived ETFDraftKingsQuantumScape

Shares of half of the companies that finished SPAC deals in the last two years are down 40% or more from the $10 price where SPACs typically begin trading, erasing tens of billions of dollars in startup market value. Losses top 60% from the peak about a year ago for many once-hot names like the sports-betting company DraftKings Inc. and space-tourism firm Virgin Galactic Holdings Inc., founded by British billionaire Richard Branson.

Fitness company Beachbody Co. now trades under $2, nearly a year after it said it was merging with a home-fitness bike company and a SPAC that counted NBA legend Shaquille O’Neal among its advisers. Electric-scooter company Bird Global Inc., private-jet company Wheels Up Experience Inc. and the company behind BarkBox all trade below $4.

A number of companies are now withdrawing from previously announced SPAC deals, even though they sometimes have to pay millions of dollars to the SPAC for backing out. Savings and investing app Acorns Grow Inc. was the latest to do so, ending its roughly $2.2 billion SPAC agreement on Tuesday and becoming the 10th company to terminate a SPAC deal since early November, according to Dealogic. There were 13 SPAC-deal terminations in the first 10 months of last year.