Money managers will often tell you that there is always some risk when investing, particularly in more volatile markets. However, when it comes to managing risk, how do we know what chances to take and what chances to pass by? One of the more popular risky investments of recent years has been the growing popularity of SPACs.
SPACs, Special Purpose Acquisition Companies, have become increasingly popular in the space industry and beyond. This popularity began to grow in 2019 and peaked in late 2020-early 2021. Since then, many have noted a distinct downturn in the SPACs market and an increasing number of litigations brought against SPACs by unhappy investors.
Space SPACs have been no exception in this decline. Space SPACs, like Momentus, Planet Labs, Virgin Galactic, and AST SpaceMobile are all down from their starting price. Meanwhile, other space SPACs, such as Spire, Redwire, and Virgin Orbit are also performing poorly compared with early projections.
So, is this proof that space SPACs are risky business? And, if so, should we avoid investing in them? Here, we look at some of the risks surrounding SPAC investments and how space SPACs are holding up as we enter 2022.
Are there risks associated with SPACs?
In short, yes. SPACs are a temperamental business, and the process still has a long way to go in terms of proper regulation and due diligence. SPACs are, by nature, unpredictable because they are set up for the purpose of acquisitions or mergers which haven’t yet been fully planned out. This usually happens when a company wishes to expand into a certain sector but hasn’t yet finalised the details.
SPACs are opened up to private investors, often celebrities or high-profile clients, who can buy into the fund. After this, the funds are usually made public. While transactions of this sort don’t necessarily carry more risk than other types of investment, the lack of transparency and legal process around SPACs can make them volatile. Several SPACs have also recently been involved in litigations for fraud, highlighting the need for proper regulation and due diligence in the industry. Some of the main risks associated with SPAC investments are as follows:
Celebrity investors or endorsements
One issue that is frequently raised with SPACs is the fact that they are often endorsed by celebrities. Celebrities can use these types of investments to spread and diversify their wealth and to endorse certain products or companies. However, if celebrity endorsements are made public, this can influence their fans’ decisions on how to invest.
Celebrity endorsement may also artificially inflate demand in certain areas of the market. Their endorsement of a SPAC may make the investment seem more desirable than it really is. This will only be discovered later, by those who buy shares in the SPAC, when the SPAC underperforms, thereby losing the investors’ money. Some celebrity SPAC sponsorship deals also include compensation fees, which will thin out the value of the fund for other investors.
SPACs are developed off the back of speculative mergers, often without concrete evidence that real demand will meet projections. This can be seen in multiple unprofitable space SPACs, where projected demand for launches has not caught up with real figures. In several litigation cases against SPACs, it was also revealed that companies exaggerated the potential demand when presenting the SPAC to investors.
Lack of transparency and due process
Recent cases against SPACs have shown that, without due diligence, investors cannot always make informed decisions about where to put their money. Many SPACs are not transparent with investors, so these investors do not truly know where their money is going or if it will make a return. The lack of legal regulation and due diligence in SPACs means that investors are not always able to find this information out before they invest. This has led to fraud claims where investors feel that companies have not given them honest or accurate information regarding their likely returns.
Why are there lawsuits against SPACs?
All the above-mentioned risks make lawsuits highly likely when it comes to SPAC investments. Most claims brought against SPACs are brought by investors who feel that they have bought into something without being properly informed of the risks or outcomes. Litigation against SPACs includes cases where financial inconsistencies have been hidden from potential investors or projected returns have been massively exaggerated. Conflicts of interest between managers and investors are also common. Some high-profile litigation cases have included:
Immunovant & Nikola
Pharmaceutical firm, Immunovant, was entangled in a litigation just like Nikola. The cases stated that neither company had performed the proper due diligence checks before arranging the merger. This led to both parties having to pay a large settlement.
One of the most well-known cases involved PureCycle Technologies. This SPAC was accused of misleading clients about its financial projections. The company lost around 40% of its stock after paying damages.
Are there space companies that use mergers with SPAC?
SPACs are common in the space industry. However, several space SPACs have also been tied up in litigation processes in 2021. AST SpaceMobile was recently involved in litigation due to a lack of transparent merger options for investors. Astra Space also faced investigations for allegedly exaggerating projected demand for its rocket launches.
Space company, Momentus, similarly had to pay a large settlement after a case ruled that they misled clients and held back information about internal security issues. Meanwhile, Redwire faced litigation after reports that they had not fully disclosed their financial reports before seeking investment.
What’s the future of the SPACs trend?
When it comes to investing, SPACs are a good area to be wary of. SPACs have a reputation for creating unsatisfactory investors and, at worst, for fraudulent practices. If you plan to invest your money, make sure you research and analyse markets carefully before you buy. It is always a good idea to call in an expert or look at historical litigation cases against SPACs before buying into one.