Why SPACs are Popular Investments | How Money Works

0:00When you shop pick up at Fred Meyer, you can expect the savings you love and fresh groceries selected just for you. Our associates are committed to getting every detail right, carefully hand picking your items, checking for quality and freshness and packing your order with care. Because bringing you fresh, quality groceries is what we do best. And right now, enjoy $30 off your first online order of $75 or more! Restrictions apply, seasite for details. Fred Meyer, fresh for everyone! This episode is brought to you by State Farm. Listening to this podcast instead of doom-scrolling? Smart move. Another smart move? Getting help from one of State Farm's 19,000 local agents when you choose to bundle home an auto. Bundling. Just another way to save with the personal price plan. Prices are based on rating plans that vary by state. Covered options are selected by the customer. Availability, amount of discounts and savings and eligibility vary by state. Chronic Migraine, 15 or more headache days a month, each lasting 4 hours or more,

1:00can make me feel like a spectator in my own life. Botox, on a botchalineum toxin A, prevents headaches and adults with chronic migraine. It's not for those with 14 or fewer headache days a month. It's the number one prescribed branded chronic migraine preventive treatment. Prescription Botox is injected by your doctor. Effects of Botox may spread hours to weeks after injection causing serious symptoms. Alerture doctor right away is difficulty swallowing, speaking, breathing, eye problems or muscle weakness can be signs of a life threatening condition. Patients with these conditions before injection are at highest risk. Side effects may include allergic reactions, neck and injection site pain, fatigue and headache. Alerture reactions can include rash, welts, asthma symptoms and dizziness. Don't receive Botox if there's a skin infection. Tell your doctor your medical history, muscle or nerve conditions, including ALS Lugeric's disease, myasthenia, gravis or Lambert Eaton syndrome and medications, including botchalineum toxins, as these may increase the risk of serious side effects. Why wait? Dr. Visit BotoxCronicMigraine.com or call 1-800-44 Botox to learn more. Nikola Motor, Draft Kings and Virgin Galactic have a lot in common.

2:01For starters, all these companies have recently gone public and are still not profitable. And while that's common for many IPOs, neither Nikola or Virgin Galactic have actually generated any revenue from their main service lines. For Nikola, they haven't even sold any electric vehicles. And for Virgin Galactic, they have still yet to deliver on their space tourism services. Most people would consider these stocks to be early stage and incredibly risky. For Wall Street Bets, though it's a great idea. Perhaps the most important thing to understand about these companies is how they went public. And that's through a SPAC or a special purpose acquisition company. In this episode of Compounded Daily, we're going to look at SPACs, how they're structured and answer why they become so popular among investors. SPACs are by no means anything incredibly new. They've existed for a while now but have just recently become popular again.

3:02The general idea behind a SPAC is that their management team raises money from investors to go public and then uses that money to buy another company. The process through which the acquisition occurs is called a reverse merger. And how this works is actually pretty simple. A public company buys a private company so that the private company can bypass the whole process of going public. For the selling company, there are tons of benefits to this. A typical IPO can take years in preparing reporting. And then investment bankers hop on their jets, market the newly issued shares to a variety of institutional investors and negotiate the stock price. A private company going public through a SPAC avoids all of this because the only buyer is the SPAC itself. And the process for going public could take only a few weeks. The SPAC management team just have to seek approval from their shareholders. And when a SPAC acquires a company, there's limited S1 reporting. For those unfamiliar with financial reporting, a traditional IPO process and even direct listings

4:05require detailed S1s. The document details important financial disclosures such as historical financial statements and guidance for investors to understand how the company is planning on growing. In a way, it gives investors a look under the hood. But perhaps the biggest benefit to the selling company is that the purchase gives them a cash infusion. It's a capital raise in a way much like a venture round or any other IPO. This isn't always good though. When a company IPO is, it's typically the last time they end up raising equity. It could do a season equity offering or sometimes call it a secondary equity offering, but that's typically frowned upon and for very good reasons. A study from the Journal of Entrepreneurial Finance found that on average companies that did in SEO had a negative 31.2% performance before the SEO and a negative 77% performance to three years following it. This is because not only does it dilute shareholders, but it also sends a rather negative signal

5:07to the market. If your company is diluting shareholders instead of maybe seeking debt or perhaps you already have too much debt, investors might be worried about the company's survival and unlikely to invest in you. Now I should add that an SEO isn't always bad. If a company's stock price is ridiculously high, it's a great way to take advantage of the high stock price to raise more money. So SPACs can have their advantages and disadvantages for the selling company. But what are the advantages to the investors? The rise in popularity of SPACs has been big this year. In 2017, almost 8 billion was raised through a total of 34 SPACs. But in 2019, 59 companies raised 13.6 billion dollars. However, and more surprising is that just this year, 12 billion has been raised by SPACs and there have only been 39 of them. What explains this? The way that they are structured and their terms tends to be very palatable for investors.

6:10For example, if you invest in a SPAC before it goes public and then after it goes public, you decide, eh, I want my money back, you can claim your money back for net asset value. That means that if you put $10 and you get $10 back, plus interest that was gained on that money. But you have to do that before the SPACs management team announces a deal. As an investor, you also have the right to vote on whether or not a SPAC should make an acquisition. If your SPACs management team is trying to acquire a company that you think is over price, then you can vote not to go forward with it. And if a SPAC doesn't make an acquisition within two years, then they return the cash to the shareholders and the companies dissolved. These Blankjit companies also provide a slew of upside benefits for the investors. When you invest in a SPAC before it makes an acquisition, you technically own units. And depending on the SPAC, are granted warrants. These warrants are like call options and if you hold on to your units, they give you the option to buy shares of the company at a particular price.

7:12So if you invested in Chamath Palahapatia's social capital IPOA SPAC, then you might have the right to buy more Virgin Galactic shares at $11.50, which is great when the stock price is $25. SPACs add those warrants for a good reason. They want their investors to stay invested. Remember when an investor wants out, the SPAC management team has to buy that share for the net asset value. Then the SPAC manager needs to make that money back. So they sell it. If enough people want to sell their shares, then the SPAC management team might not be able to sell it for the net asset value, so they will have to use some of the funds raised to make up the difference. And that, of course, means less money to buy a company. Another added benefit for SPACs is that investment. When you shop pick up at Fred Meyer, you can expect the savings you love and fresh groceries selected just for you. Our associates are committed to getting every detail right, carefully hand picking your items, checking for quality and freshness and packing your order with care.

8:12Because bringing you fresh, quality groceries is what we do best. And right now, enjoy $30 off your first online order of $75 or more. Restrictions apply seasite for details. Fred Meyer, fresh for everyone. This episode is brought to you by State Farm. Listening to this podcast instead of doom-scrolling, smart move. Another smart move? Getting help from one of State Farm's 19,000 local agents when you choose to bundle home an auto. Bundling. Just another way to save with the personal price plan. Prices are based on rating plans that vary by state. Covered options are selected by the customer. Availability, amount of discounts and savings and eligibility vary by state. Botox, 15 or more headache days a month. Each lasting four hours or more can make me feel like a spectator in my own life. Botox, on a botch a line on toxin A, prevents headaches and adults with chronic migraine. It's not for those with 14 or fewer headache days a month. It's the number one prescribed branded chronic migraine preventive treatment. Prescription Botox is injected by your doctor.

9:13Effects of Botox may spread hours to weeks after injection causing serious symptoms. Alert your doctor right away as difficulty swallowing, speaking, breathing, eye problems or muscle weakness can be signs of a life-threatening condition. Relations with these conditions before injection or at highest risk. Side effects may include allergic reactions, neck and injection site pain, fatigue and headache. Alertive reactions can include rash, welts, asthma symptoms and dizziness. Don't receive Botox if there's a skin infection. Tell your doctor your medical history, muscle or nerve conditions including ALS Lugeric's disease, myasthenia gravis or Lambert Eaton syndrome and medications including botch a line of toxins as these may increase the risk of serious side effects. Why wait? Ask your doctor, visit Botox Chronic Migraine.com or call 1-800-44 Botox to learn more. Users who put money into the IPO are not held up by the Stingy Lockup Rule. Usually those who hold shares of a company before it goes public are not allowed to sell those shares for a period of time after it goes public. That's not the case with SPACS. Now that's a little bit on SPACS but who exactly is investing in them? And why?

10:14Perhaps one of the main reasons why SPACS have become so popular as of late is because of a lack of good investment opportunities elsewhere. The venture capital market which invests in early stage companies is flooded with so much uninvested capital because there seems to be an imbalance between money to invest and good investment opportunities. This imbalance puts venture capitalists in a tough position. The dilemma here is that they can make investments in poor companies and get not so good returns or not invest the funds and risk having to raise a smaller fund the next time around. Something no venture capitalists ego would permit. The equity is not much different. At the beginning of 2020 it was reported that there was over 2.5 trillion in uninvested capital or as we in the biz call it, dry powder. All of this money makes bidding for companies more competitive and drives up the company valuations. But that's only half the story. Interest rates are incredibly low right now and in private equity firms use a mixture

11:16of money from their funds and debt to buy companies. And when that debt they use to buy companies is cheap, that means they can use more of it. Further driving up the company valuations. So perhaps SPACs are just another way for deep pocketed billionaires to have another venue to invest their money. After all, Harvard economist Lugwood Straub's paper discussing the savings glut of the rich emphasizes how savings for these billionaires has increased over the past few years. It could very well be that they haven't had good investment opportunities so SPACs might be a new opportunity for them to get higher returns on that money than just having them in a savings account. If that were true though, SPACs would have to perform well. So do they. SPACs have historically performed poorly. With one study finding that since 2003 they have returned on average a negative 19.7%. This might come as a surprise to most people who've seen the performances of some of the

12:17most recent SPACs. When toward a acquisition core acquired highly on is saw a 170% return. Virgin Galactic posted a 62% return and Nikola had over a 470% return. But what explains this? One thing could be that these companies are being acquired at the right place at the right time. For many of them they have great ideas but need money to execute on them. The cash raised from the SPAC acquisitions could provide them that money and therefore their plans are more likely to become profits. This increases the likelihood of positive future cash flows and those in finance know that increases a company's valuation. Perhaps though there's a different explanation. When that study looked at SPAC performance dating back to 2003 there was no Robinhood or Wall Streetbacks back then. Allow me to explain. Most of these SPACs tend to be pretty small when compared to the market caps of companies like Tesla and Amazon. If all 10 million Robinhood users bought 7 shares of social capital he to Sofia when

13:21it was at $10 then almost all of the 49% of shares not owned by Virgin Galactic would be owned by Robinhood users. That same amount however would only purchase about half a percent of Amazon. Therefore the purchase of Virgin Galactic shares is going to have a much bigger impact on the movement than an Amazon share. And when Wall Streetbacks gets hyped up over these small caps shares mass buying could contribute to upwards movement. Now I'm not saying Bill Acman is planning on hiring a team of internet trolls for his $3 billion back. But I am saying that if he finds a trendy enough company to buy the internet could help him get a solid return. When you shop pick up at Fred Meyer you can expect the savings you love and fresh groceries selected just for you. Our associates are committed to getting every detail right, carefully hand picking your items, checking for quality and freshness and packing your order with care. Because bringing you fresh quality groceries is what we do best.

14:24And right now enjoy $30 off your first online order of $75 or more. Restrictions apply seaside for details. Fred Meyer, fresh for everyone. Experience a membership that backs what you're building with American Express Business Platinum. Unlock over $4,000 in business and travel value annually with statement credits on select purchases from brands like Dell, chat GPT Business, Hilton and Adobe and other benefits. American Express Business Platinum, there's nothing like it. Based on total potential value of statement credits on select purchases and other benefits and rollments required, monthly and other limits in terms of apply, learn more at American Express.com slash business dash platinum. Fall has never looked or tasted this good. Sweet Greens Fall Harvest Menu is back with seasonal favorites dressed to impress and made to be devoured. Warm roasted sweet potatoes, crisp apples, maple glazed brussels and crave worthy flavors in the autumn harvest bowl, maple glazed salmon plate and roasted bacon brussels side.

15:26The season's most desirable menu has returned to sweet green. Matchering falls best dressed. Make your move. Order on the sweet green app. Have you heard that McDonald's spicy chicken McNuggets made with spicy tempura and a blend of aged cayenne are back. Remember to grab a few extra napkins. Bada bada bada bada. For a limited time at participating McDonald's. Imagine a left brain and a right brain got together and came up with an incredible banking solution. The innovative minds at Silicon Valley Bank and the pragmatic ones at First Citizens Bank have put their heads together so they can deliver solutions tailored to your unique financial needs. You want deep innovation insights paired with the financial power of a top 20 US bank? Now you can have it. Silicon Valley Bank and First Citizens Bank. It's the best of bank worlds. Close your eyes, exhale, fill your body relax and let go of whatever you're carrying

16:26for you.