The Indicator from Planet Money - The SPAC Is Back!

Last year, more than half the firms that went public were special purpose acquisition companies, also known as SPACs. We explain what that means and how it impacts the world of finance.

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NPR

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Camila domonoske NPR business reporter welcome back to the indicator. Thanks for having me and you came prepared you brought us an indicator for the show. That indicator is 248 what's going on there? That is the number of spacks or special purpose acquisition companies that launched in 2020 and that is 4 times more than the year before and actually more than half of all the companies going public last year were these things called spax sounds pretty dramatic. But yeah, tell me that's a big deal. Right? It's an astonishing fact Wall Street is racking up spax. It's packet a pack of stop. I'm going to take your microphone away from you unless you plan on doing the entire show in. Dr. Seuss write only need like 25 more seconds. I've got this whole stack absolutely not

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This is the indicator from Planet Money. I'm Cardiff Garcia and Camila you are here to help us understand what a spec is and why this ridiculous sounding acronym is actually the hottest thing in finance. This is a story of how power is shifting on Wall Street and billions of dollars are flowing in a new way in a trend is so hip celebrities are getting it on did you know Cardiff that Shaquille O'Neal has a stack a shack and we'll be right back after a quick break.

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Okay, Camila domonoske lay it on me. So first I want you to meet Austin Russell. He had a bright idea when he was just 17 years old. He founded a company that makes self-driving car technology. It's a sensor using lidar which is like radar but with lasers and now it's doing really well. They have a big deal with Volvo what we're getting out there with for 2022 going to be close to you can buy and go public when your company start selling shares of stock on the open stock market in me. And essentially that you have switched from being a privately owned company with just a small number of investors to being a company that almost anybody can invest in right it can bring in a ton of cash for the company to use to grow and also in this case for Austin he became literally the youngest

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Self-made billionaire ever. That's the sort of textbook Silicon Valley success story, but the textbook way to do it would be going around to Banks the banks lineup Rich investors to buy the shares and then they put them on the stock market for the first time and Michelin public offering and IPO banks have a lot of the power in this process. They set the price and you got to do a bunch of paperwork about how awesome and safe and not at all fraudulent. The company is met satisfies Regulators, but he respects come in packs special purpose acquisition company. Yeah. Okay, they flip this whole equation upside down and backwards you start with the group of investors who have money and want to put it somewhere it'll grow so they come together and throw their money into a big old bag of cash. They know they want to invest in a company later, but they do

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What company now so they just write TBD on the side of the bag and that metaphorical bag of money is what goes public what issues shares now, you have this bag of money label TBD that you can buy shares in and buy you I mean literally be you or me Camilla really anybody right? And then somebody representing the investors wanders around with this stack of cash looking for someone with a growing company like Austin and his lasers they say, hey don't do an IPO. Let's just merge our TVD sack of money company and you're actually has a product self-driving car tech company together share our shares Abracadabra, the private robot car laser company is now public so much more efficient way to go public and it gives people like him a lot more control over the process. Okay.

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Shirt, these facts are the new hotness. And as you said at the top of the show Camilla a half the companies going public last year were specs which is nuts. Right? Wild. I mean for a while it was basically zero. Here's the thing though. Spax are not actually new they've been around for quite a while. They even used to have a super sketchy name because they used to be super sketchy. There were these blank check companies really had a bad reputation Hoosier Rodriguez is a professor at the University of Georgia school of law. She's tracked this history of spacks and long story short history short blank check companies started out as outright scams really but over time. They got more rules and restrictions because people noticed and Regulators started applying these rules and that's house facts were born, but it's not

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Straight line Evolution from fraudulent to legitimate is more like a ping pong ball. At first these blank check companies were used to rip off investors. So there were new rules. But then add another Point big investors were actually the ones exploiting them because they had too much power do this back and forth. I know kind of gave spax a terrible reputation and they were on the fringes of the financial World never really took center stage at least until recently push and pull in financial markets who she says you can think of it as a dialogue like think about the role of federal Regulators, their whole mission is to encourage investment in legitimate businesses while protecting investors from unscrupulous scam artists dramatic pause, right like or but I'm bum because those goals are inevitably intention because of you make it easier for companies to go public. That means inevitably you

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Shut down the protections that are in place to protect against fraud and spax exist right at the heart of this tension trying to push money into companies but also protect investors and that's a big reason why they keep evolving and speaking of evolving. Like we said a few years ago these things were sketchy and Founders like Austin wouldn't be caught dead taking a bag of spec cash. That's right. They had such a terrible reputation. He he said that second-rate companies would do them. But right now the market is booming investors are eager to Plowman into companies companies are kind of the belle of the ball and they don't want to give up power to investment Banks if they don't have to and then some famous companies like fantasy sports company DraftKings took the plunge and went public through spaxx some well-regarded Mega investors got involved in them. And of course as with anything, we're big names.

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Involve that tends to enhance the reputation and that's what happens here. Yeah, basically once enough big names did it it wasn't suspicious anymore. It was even as Austin puts it pretty cool. Although I should emphasise. There are Skeptics sounding the alarm that these things can still be very risky. Plus there are so many of them flooding in the market all looking for deals to make speaking of which you know, Shaq's back is still looking for the right opportunity. You could say he's sitting back ready to take his wack. Yeah. Okay. So big picture markets have turned to spax and it doesn't look like they're showing any signs of backtrack. Oh I had to ask you a good one. Thanks so much for bringing us this episode with by the way. I think may have set a new indicator record for most fry.

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Truly, my pleasure was produced by Britney and Dave Blanchard. It was fact-checked by Sean saldania indicators edited by Patty Hearst. It is a production of NPR.
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