THE RISING POPULARITY OF SPECIAL PURPOSE ACQUISITION COMPANIES: HIDDEN DANGERS, REGULATORY CHANGES, AND A LOOMING BUBBLE

Abstract

Special-purpose acquisition companies, or SPACs, have existed in various
structures for decades. SPACs, often referred to as blank-check companies, are an
unconventional investment to make a company public. Instead of the traditional IPO
route, the SPAC is a shell structure that raises capital by buying or merging with an
existing company in under two years. SPAC investments soared to new records during
the COVID-19 pandemic in 2020 and 2021. This research analyzes the hidden dangers
specific to retail investors and the actions regulators may take to protect the retail
investor given that SPACs are likely the next bubble to burst. The research uses
quantitative SPAC data on post-merger returns, SPAC index, deal size, and bookrunner
count. The research also consults two openly available surveys examining retail investor
knowledge of SPACs.
This research suggests that regulators and SPAC sponsors endorse more stringent
disclosure and reporting requirements around costs, fees, and sponsor incentives. This
research concludes by suggesting that if SPAC transactions come to a pause or return to
normal levels, there could be retail investors holding losses and, like all bubbles, the
SPAC bubble could burst.