Investor protection must be top concern when considering SPACs

The Yomiuri Shimbun

15:45 JST, May 17, 2021

Going public through a special purpose acquisition company (SPAC), a type of company that does not operate its own business but exists solely to acquire unlisted start-ups, is becoming popular in the United States.

Although the system aims to foster start-ups, it poses many issues from the perspective of investor protection.

SPACs are not allowed in Japan. The government has begun discussing whether to lift the ban on such companies at the Growth Strategy Council — it is an issue that must be vetted carefully.

SPACs are founded by such people as business executives and prominent investors, and get listed on stock exchanges in order to collect funds from a wide range of general investors for the purpose of acquiring promising unlisted companies. SPACs are also called “empty shells” or “blank check companies” because they do not specify which companies they will acquire at the time they are listed.

It is said that SPACs typically acquire a company, in the form of a merger, within about two years.

Normally, it takes time for a stock exchange to review the management of a start-up when it goes public, but a merger with a SPAC can be done in a short period of time. This likely helps to support start-ups to a certain extent through the rapid procurement of funds.

Against the backdrop of financial easing, the number of SPAC listings in the United States last year more than quadrupled from the previous year to 248 cases, raising $83.2 billion (about ¥9 trillion).

The Singapore-based ride-hailing service Grab plans to go public in the United States via a SPAC by the end of this year to raise an enormous amount of capital.

Hong Kong and Singapore are also said to be considering allowing SPACs.

However, there are many points of concern from the perspective of ordinary investors. When investing, general investors will be relying solely on the expertise of a SPAC’s founders, putting their funds in those founders’ hands. It is essential to come up with a system to properly disclose their track record and experience.

In the United States, founders and advisors have included former basketball stars and a former speaker of the U.S. House of Representatives. If this is a fund-raising scheme that relies on name recognition, it is not sound.

Some observers believe that the acquisition of start-ups by SPACs may lead to “backdoor listings.” Companies that do not meet the relevant criteria could still be listed one after another.

U.S. electric truck maker Nikola saw its stock price plummet after its merger with a SPAC due to allegations that its advertising exaggerated its technological capabilities, causing investors to suffer losses. A U.S. electric car maker was also suspected of padding its pre-order numbers, and U.S. authorities have heightened their surveillance.

As a result, the number of SPAC listings in the United States plummeted in April.

The Japanese government needs to put top priority on protecting investors while keeping an eye on trends in global market operations. There is said to be less investment in emerging companies in Japan compared to the United States, but there are also such issues to be discussed as revitalizing existing emerging markets. Hasty discussions must be avoided.

— The original Japanese article appeared in The Yomiuri Shimbun on May 17, 2021.