What Happened
Special Purpose Acquisition Companies (blank check companies) surged in 2020-2021 as an alternative to traditional IPOs. The pitch: retail investors could get access to pre-IPO pricing through a publicly listed vehicle. Famous investors (Bill Ackman, Chamath Palihapitiya, various athletes and celebrities) raised multi-billion dollar SPACs.
The structural problem: SPAC sponsors received 20% of shares for free (the "promote") regardless of performance. This created an incentive to do any deal regardless of quality. With 600+ SPACs looking for targets simultaneously, they competed by paying higher prices. The targets that went public via SPAC were often earlier-stage, lower-quality companies that could not have achieved traditional IPO valuations.
By 2023, the average SPAC traded 50% below its IPO price. The SEC tightened regulations in 2022, requiring SPACs to treat redemptions as liabilities and adding liability for forward-looking statements. The market effectively closed. The retail investors who had not redeemed their shares before the deal closed suffered most.
The Mechanism
Structural misalignment between sponsors and retail investorsThe SPAC structure created a systematic conflict of interest: sponsors received 20% of shares for free, meaning any deal was profitable for them. Retail investors who did not redeem before the deal closed got the deal at a price set by parties whose incentives were misaligned with theirs. The retail investor was the last line of defense against bad deals and was systematically at the wrong side of the information asymmetry.
What the Consensus Believed
The prevailing view before the reckoning
SPACs democratized access to pre-IPO investing. The sponsors were experienced investors whose reputations guaranteed deal quality. SPAC investments got retail investors access to the same opportunities as institutional investors. The structure was regulated and therefore safe.
What the Record Shows
Structure determines incentives
The 20% sponsor promote guaranteed that any deal was profitable for the sponsor. This misalignment was the fundamental flaw. Good intentions of individual sponsors could not overcome bad structural incentives.
Retail is always the last buyer
Institutional investors who redeemed their shares before the deal closed got their money back. Retail investors who held were left with the deal. The structure consistently put retail at the wrong end of the information asymmetry.
Too many vehicles chasing too few deals
600+ SPACs looking for targets simultaneously drove up deal prices and lowered quality thresholds. The supply of SPACs vastly exceeded the supply of appropriate SPAC targets.
Celebrity endorsement is not due diligence
SPACs sponsored by Bill Ackman, Chamath, Shaquille O’Neal, and others performed no better than average. Celebrity names attracted retail capital and provided no analytical value.
↑ Cognitive pattern: Celebrity Capture — Brand association substituting for analytical due diligence
Key Voices
Called It Right
Michael Klausner
Stanford Law
“SPACs are a vehicle for insiders to dump bad companies on unsuspecting retail investors at inflated prices.”
June 2021 Right
Short sellers
Various
“Grab, Gores, and other de-SPAC companies are trading at massive premiums to intrinsic value. Short them all.”
March 2021 Right — down 50%+
Wrong
Chamath Palihapitiya
Social Capital
“SPACs are the superior alternative to traditional IPOs. They give retail investors access to pre-IPO pricing.”
2020 Average SPAC down 50%
Various celebrity sponsors
Multiple
“My SPAC will find the best companies and create value for retail investors.”
2020–2021 Uniformly underperformed