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How SPACs became the new investment craze flooding Wall Street

What does Joanna Coles, a former editor of women’s magazines, have in common with American sports stars Alex Rodriguez (A-Rod) and Shaquille O’Neal, tycoon Sir Richard Branson and Martin Luther King III?

The answer, as those keeping up with the latest Wall Street fad will know, is that they are all enthusiasts of the SPAC – a Special Purpose Acquisition Company.

So what exactly are SPACs? And are they worth the hype, or just some other fad in the market that will bring grief?

Follower of the fashion: Top journalist turned savvy entrepreneur Joanna Coles teamed up with Jonathan Ledecky to form a SPAC called Northern Star Investment Corp II

Follower of the fashion: Top journalist turned savvy entrepreneur Joanna Coles teamed up with Jonathan Ledecky to form a SPAC called Northern Star Investment Corp II

Coles, 58, once editor-in-chief of Cosmopolitan, has made a name for himself as a savvy entrepreneur and investor. The married mother of two is a special advisor to investment firm Cornell Capital and sits on the board of the owner of the messaging app Snapchat.

She works with Jonathan Ledecky, the co-owner of the New York Islanders ice hockey team, to form an SPAC called Northern Star Investment Corp II.

It acquires a financial technology company called Apex Clearing in a $ 4.7 billion (£ 3.3 billion) deal.

Apex, which is expected to begin trading in the New York stock market within three to four months, provides backroom services to Goldman Sachs’ Marcus and online investment platforms, among others.

It is one of the winners behind the boom in amateur stock trading during the pandemic, with the technology providing the ‘plumbing’ for 200 companies and serving 13 million customers.

Coles isn’t alone in embracing SPACs, otherwise known as ‘blank check companies’. It may be an ugly abbreviation, but investors think returns can be very nice. Now, almost everyone who is anyone in US finance, media, politics, and sports seems to be joining the fun.

Just hours after Northern Star’s announcement, it was revealed that California electric vehicle company Lucid Motors expects a $ 24 billion (£ 17 billion) stock exchange listing in its largest ever SPAC deal, despite not producing any cars yet.

About 250 SPACs were launched in the US last year, raising $ 83 billion (£ 58.8 billion), according to The Economist.

Trendsetter: Sir Richard Branson can claim that he sparked the SPAC trend when his Virgin Galactic was listed on the New York Stock Exchange via an SPAC in 2019.

Trendsetter: Sir Richard Branson can claim that he sparked the SPAC trend when his Virgin Galactic was listed on the New York Stock Exchange via an SPAC in 2019.

Trendsetter: Sir Richard Branson can claim that he sparked the SPAC trend when his Virgin Galactic was listed on the New York Stock Exchange via an SPAC in 2019.

Data from SPAC Research showed that 144 of them have raised just under $ 46 billion (£ 32.6 billion) so far this year.

Blank check companies are pure acquisition tools. Unlike conventional companies, they don’t have their own business, but simply a stock of capital to buy or merge with another company, and then put it on a market.

Some have specific companies in mind, others are on the hunt. Once a SPAC is launched, it has two years to find a target to buy or else it will be liquidated with money returned to its backers.

When it makes a deal, its investors share in the profits – or losses.

The big appeal from a target company’s point of view is that they are a way of avoiding fuss, hassle and expense for entrepreneurs who want to list shares in the stock market and avoid a full initial public offering (IPO).

Many company founders are hesitant about an IPO because it means opening their books to investors, jumping through numerous regulatory hoops, and signing up for a time frame that can stretch over many months.

A SPAC is a much faster way to market, although some suspect it can be used for cornering.

And there are obvious risks to putting money in without knowing exactly what it will do with their money – although investors can vote out deals they don’t like.

Skeptics fear that SPACs are another symptom of market madness, and that those who are not wary will burn their fingers.

Investment manager Justin Urquhart Stewart quotes the famous South Sea Bubble era scam of “ a company that does a business with great profit but no one knows what it is ” and cautions investors to stay clear. “You have no idea where your money is going,” he says.

Big hitter: Slam Corp, a SPAC formed by former baseball player A-Rod (pictured), has raised $ 500 million (£ 354 million) to target sports, media and entertainment companies

Big hitter: Slam Corp, a SPAC formed by former baseball player A-Rod (pictured), has raised $ 500 million (£ 354 million) to target sports, media and entertainment companies

Big hitter: Slam Corp, a SPAC formed by former baseball player A-Rod (pictured), has raised $ 500 million (£ 354 million) to target sports, media and entertainment companies

Readers who remember the 1980s will now think that SPACs are very much like empty companies, some of which were notorious for scamming unwary investors.

Frankly, others turned into titans, the most famous of which is Sir Martin Sorrell’s WPP ad group, made out of a shell called Wire & Plastic Products.

Fans of today’s versions insist that this time is different.

Such fears have not deterred supporters of Slam Corp, an SPAC formed by former baseball player A-Rod, an ex-boyfriend of Madonna’s. It has $ 500 million (£ 354 million) to target sports, media and entertainment companies.

Nor have they delayed Austin Russell, a 25-year-old high school dropout. He became the youngest self-made billionaire in the world last year after his company, Luminar Technologies, was listed on the US Nasdaq market via an SPAC.

Basketball star Shaquille O’Neal and Martin Luther King III – one of the famous civil rights activist’s sons – are involved in an SPAC called Forest Road, which raised £ 212 million to invest in media, technology or telecom.

British businessman Sir Richard Branson can claim to have sparked the trend when his Virgin Galactic was listed on the New York Stock Exchange via an SPAC in 2019.

So far they remain largely an American phenomenon and have not yet made a serious advance in the UK. The London Stock Exchange is believed to be considering changing its rules to encourage more SPACs to float.

It is good to be careful. It might be unfair to compare them to the scams of yore, but SPACs are still risky.

When they take off here, British small investors will have to think long and hard before jumping on board.

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