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The Weirdest Market Development of 2020… SPACs?

This piece was written by new contributor Jack Raines. Follow him on Twitter @Jack_Raines.

2020 has been a rollercoaster for equities, and it has been fantastic for FinTwit.

Between oil hitting -$37 a barrel, Tesla gaining, losing, and regaining $100s of billions in market capitalization in just a few months, and r/wallstreetbets loading up on SPY $190 4/17 puts only to be melted by the fastest market rise in history, SPACs may still take the cake as the craziest development this year.

If you lived under a rock, you may be asking, “What is a SPAC?”

SPAC stands for Special Purpose Acquisition Company. SPACs are shell companies with hundreds of millions of dollars in a trust account waiting to be used to bring a private company to the public market. Essentially, they offer a quicker path to the public markets than a traditional IPO.

These SPACs offer private companies a lump sum of money for a certain percentage of equity in the company, and then the private company “merges” with the SPAC to create a new public entity. 

CEO of Social Capital Chamath Palihapitiya, the “Sultan of SPAC” kickstarted the SPAC movement by taking Richard Branson’s Virgin Galactic public last year. Lucky investors degenerate option gamblers made hundreds of thousands on $SPCE when it rocketed from $7 to $45 in January, before crashing back down to earth in February and March.

A few months later, sports betting icon DraftKings IPO’d through a SPAC.

However, Nikola Motors takes the cake as the King of crazy SPACs.

Founded by renowned snake oil salesman Trevor Milton, Nikola Motors claims to be building a series of electric and hydrogen powered semi trucks along with a network of H2 fueling stations. Trevor, who many revered as the next Elon Musk (though Enron Musk is more appropriate), took his prized “company” public through a SPAC at a valuation of approximately $3B.

This company with no revenue, no operational prototypes, a founder with a history of deception and sleaziness, and a name that totally wasn’t copying Tesla (Nikola Motors? I mean seriously), naturally rocketed from $10 per share to $93.99 after its merger. What Nikola lacked in production, it made up for with social media presence and photoshop skills.

At one point, Nikola was worth more than Ford at $30B, or $1B per rendered image (a new non-GAAP accounting method).

After the Nikola merger, SPACs exploded. SPACs tend to trade at $10, or their “floor value”, but they would increase once a merger was announced. After the Nikola merger, everyone was rushing to find the next hot SPAC.

On a merger announcement, a SPAC could shoot up from 50% to 100%. However, the real “get rich quick” vehicle was the warrants. Warrants are essentially a five year call option for SPACs that give the holder the right to buy one share at $11.50 for up to five years post-merger. Since unannounced SPACs trade around $10, their warrants would trade around $0.50 to $1.50, inherently worthless. However, when a SPAC jumped to $15+, the warrants would jump to $4+, or 200%+. 

Communities on reddit and discord searched for the next hot SPAC before it happened, leading to some incredible gains and ridiculous losses. Users would notice a SPAC had updated its website or added someone to the board of directors and instantly hundreds of “investors” would buy thousands of warrants in that shell company.

Zero revenue electric vehicles companies such as Fisker, Hyliion, Canoo, and Lordstown announced that they were going public through SPACs, and the stock prices of their SPACs would double instantly. Reddit users were flipping these SPAC warrants for 300% and rotating to the next one without looking back. Hyliion and Lordstown’s stocks went up by 400% and 200% respectively, and their warrants increased by 1000% or more. 

It seems like everyone and their mother is forming a SPAC now. Investors such as Bill Ackman and public figures like Paul Ryan and Shaquille O’Neal have set out to form their own SPACs.

Some of these people have no business forming a shell company. In the near future, a ton of money will be lost from people bag holding these SPACs. Go to Twitter and type “$SPAQ” in the search bar, the Fisker cult is already losing their mind that no one wants to buy a $3B company with no revenue until 2022. 

While it feels euphoric now, SPACs will probably stick around as a good alternative to the traditional IPO process. However, the easy gains of the last five months will inevitably lead to some ridiculous losses in the near future. It will be interesting to see how this plays out.

Follow SPAC Raines on Twitter @Jack_Raines

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