Spac craze fizzles with bankruptcies and investor losses of $46bn in 2023

The failures span money-losing electric vehicle start-ups and forward-thinking farming companies

The largest Spac bankruptcies this year included that of flexible workplace provider WeWork. Reuters
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Wall Street’s affair with blank-cheque companies, the finance fad that pushed companies on to the stock market during the Covid-19 pandemic, ended this year with a string of big bankruptcies and even bigger losses for shareholders.

At least 21 companies that went public by merging with special purpose acquisition companies, or Spacs, went bankrupt this year, according to data compiled by Bloomberg.

Measured from their peak market capitalisations, the insolvencies bookend the loss of more than $46 billion in total equity value.

The failures span money-losing electric vehicle start-ups and forward-thinking farming companies.

Blank-cheque companies were good at propelling their targets to the public market even when they lacked well-formed financials, said Gary Broadbent, an executive guiding former Spac AppHarvest through its liquidation.

Many weren’t “ready for primetime", he said.

Some were more promising than others, but all drew dollars from excitable investors caught up in the Spac craze, including mom-and-pop traders. Plenty of shareholders are now suing Spac sponsors over their losses.

The largest Spac bankruptcies included that of flexible workplace provider WeWork, which had a $9.4 billion market value after going public in 2021. It succumbed to Chapter 11 [of the US bankruptcy code] last month with plans to jettison expensive office leases.

Electric vehicle makers Proterra and Lordstown Motors also enjoyed sizable market values, topping out at about $3.7 billion and $5 billion, respectively, before filing for bankruptcy earlier this year.

Many of these companies sought protection from creditors less than two years after going public. Software firm Near Intelligence filed Chapter 11 in December, less than nine months after its stock debuted on the Nasdaq.

Of course, many predicted the wave of bankruptcies. Critics called the Spac frenzy a bubble soon after it began.

Going public via Spac has historically been faster and faced less scrutiny than traditional initial public offerings. During the boom, companies targeted by blank-cheque firms also often made more optimistic projections about the trajectory of their businesses than would be seen in old-fashioned IPO processes.

Plus, arrangers had incentives to complete less-than-pristine mergers.

Early investors could redeem Spac shares at $10 if they didn’t like the deal, for one.

Excitement over meme stocks and the promise of high valuations encouraged private companies to complete blank-cheque mergers at a rapid pace, said Usha Rodrigues, a law professor at the University of Georgia who has studied Spacs.

The result was a glut of Spacs that Ms Rodrigues described as “a ticking time bomb” of corporate failures that materialised in 2023.

“Everyone should have seen this cliff coming,” she said.

More trouble is probably on the way as higher interest rates affect company balance sheets.

About 140 other former Spacs will probably need more financing in the next year to keep operating, according to data compiled by Bloomberg in mid-December that estimates a company’s cash needs.

Spac companies were also more likely than their corporate peers to raise doubts about their future, according to Hudson Labs, an investment research software company that analyses regulatory filings.

Nearly 44 per cent of Spac companies that filed annual reports in 2023 have reported going-concern warnings compared with about 22 per cent of non-Spac companies, Hudson Labs said.

Some shareholders are hoping lawsuits can help recover their losses.

Lordstown stockholders accused sponsors behind its Spac of overstating demand for its flagship Endurance vehicle. As Lordstown was preparing to go public in 2020, the company touted a backlog of 38,000 vehicle pre-orders. But unlike Tesla and other competitors, Lordstown did not require a deposit and shareholders claim company officials were aware those lofty Endurance pre-orders were unlikely to net actual sales.

Lordstown’s stock fell after short-seller Hindenburg Research accused the company of overstating demand for the Endurance. Lordstown never sold close to the number of Endurance vehicles it had once projected. After the company filed Chapter 11 in June, its chief financial officer testified that the company sold fewer than 40 vehicles.

Lordstown officials and its Spac sponsor have denied wrongdoing. The vehicle maker’s proxy statement disclosed that Endurance pre-orders were not binding and did not require deposits, the company said. Lordstown stockholders were provided enough information to decide for themselves if the stock was worth the risk, they said.

Federal regulators have been slow to respond to the Spac craze, despite Gary Gensler, chairman of the Securities and Exchange Commission, being a vocal critic of the manoeuvre.

In March 2022, the SEC proposed new rules that would require additional disclosures about sponsors and bolster investor protections. Shortly after, Wall Street majors started to distance themselves from deals involving blank-cheque companies and the Spac pipeline dried up.

But the failures keep coming.

Just last week, Bird Global, the company whose electric scooters once blanketed major cities’ sidewalks, filed for Chapter 11 protection. Once the holder of a $2.5 billion market value, the company revealed in court papers it had $3.3 million cash when it entered court protection.

Updated: December 30, 2023, 3:00 AM