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My 1001 Entrepreneurial Tales: SPACs — Wharton, Warts And All…

I was truly looking forward to the recent Wharton’s webcast: “Understanding SPACs”. It took place on Apr 21, 2021, and I wanted to better understand the good, the bad, and the ugly behind the latest “going public” craze. Since this post is a part of my 1001 Entrepreneurial Tales — you can also find it on my YouTube channel at: https://youtu.be/TkpMF_Rgaz0

And to make Warton’s webcast more engaging, I published a few comments one day before the event took place. Little did I know that my comments will generate 11,700 views in less than 48 hours…

Scrutinizing SPACs…

Well, in 2020, SPACs accounted for nearly 50% of the entire IPO market. And it is well known that publicly traded SPACs are blank check “Special Purpose Acquisition Companies” that are supposed to merge with a private company, within two years.

What is less known is that the Sponsors who bring SPACs to public markets receive a handsome fee — often up to 20% of the deal value. In addition, only hedge funds and Wall Street insiders often get a free warrant with each IPO share they buy.

Warrants give IPO investors the right to buy a share at a pre-arranged price. It’s often $11.50 for SPACs that come public at $10. So, what prevents the hedge funds from selling all their shares the next day, and get all their money back — but still have exposure to SPACs via the free warrants?

The answer: absolutely nothing. You may shake your head but regardless of the number of shares being sold, the warrants are still theirs to keep… So, it is a great deal for the hedge funds but “not so much” for the retail investors who buy in the post-IPO market and don’t get the warrants to keep…

SPAC’s Buffalo Bills…

In my initial comment, I stated the following: it seems to me that SPAC pioneers are redefining the meaning of the “Wild West“ by allowing companies to use future revenue projections — something an IPO wouldn’t allow for…

Merriam-Webster’s definition of Wild West is quite concise: “a frontier period characterized by roughness and lawlessness”. So, IMHO, SPACs are legal, but without greater scrutiny and transparency — “roughness” is here to stay…

To me, the valuations based exclusively on future revenue projections are a polite way of… “imagine the future hand-waving”. Many companies that are targeted by SPACs do not produce any revenues yet, don’t have a product, and never brought a product to market, either. They just ride the wave of… “huge market potential”

And EV SPACs are a good example of looking at opportunities linked not only to transportation, but also to renewable energy generation, storage, and deployment. Buyers beware, not so long ago you were offered a different kind of opportunity linked to the transportation sector…

Would You Like To Buy A Bridge?

George C. Parker was opening fake sales offices and forging the documents to support his cons. According to Wikipedia: “Legend claimed that he sold the Brookly Bridge at least twice a week. He did sell it several times including at least once for $50,000”

It was often reported that “the new owner would be discovered he was the victim of a con when the New York police officers would stop such “new owners” from setting up toll booths in the middle of the bridge”.

But this then… The question I posted was quite hypothetical: would setting up a SPAC to promote and sell the “brand new and soon to be built” Brooklyn Bridge and all the electronic tolls on it, be fraudulent?

SPAC’s Financial Engineering…

I am convinced that left unchecked, SPACs can draw many “financial engineers” out of the woodwork. Some would make even Bernie Madoff look like a boy scout…

For example, what prevents a “mammoth-size” VC fund to skip the hard work and go for the jugular in just 2 years? The “harvesting” can be done as follows:

· Invest the first round in a startup — at a ridiculously high valuation. Undoubtedly, it will shrink the size of a possible syndication

· Invest the second round in 6–9 month — at an even more ridiculous valuation

· Invest the third round shortly after — at the valuation that makes several existing SPACS salivate. The “grooming” phase is over, and your work is done…

· Do the SPAC deal and wait a few months until the vested shares are liquid. Then, sell the shares and generate a wholesome return to all your GPs and LPs while at it…

The problem is that it will take many years to analyze, assess, and write extensive research papers on the subject. And when the regulators finally catch up, a lot of damage has been already done…

When In Doubt…

I would recommend a much simpler solution to avoid Rumsfeld’s “known unknowns” and “unknown unknowns” altogether:

· Make a SPAC vesting period far more extensive. It will cool off the engines and force the SPACs to prove their “hypothesis” works. After all, a hypothesis is just a fancy word for guessing…

· Do not let just about ANY acquisition go through…Allow for the acquisitions of companies that have a longer and demonstrable track record of earnings and valuations

Preserving markets’ integrity is the key and we can’t let the industry “regulate itself”. We already tried to do so with the tobacco industry. Remember how that panned out?

SPACS Are Eating The World…

First, SPACs started to eat the IBs, and now the VCs are eating the IBs and the SPACS… Such HUGE VC rounds are a good explanation of why so many VCs are now starting their own SPACS.

And soon the PEs will be eating the IBs, the VCs, and the SPACs for breakfast. Left unchecked, SPACs may cause more than just minor indigestions…

SPAC — The Coat Of Many Colors…

I agree that the concept behind the SPACs is very innovative and creative. I know so, as I was working already a long time ago with the Toronto Stock Exchange (TSX) on promoting Reverse Takeovers using the Capital Pool Companies (CPCs). I wrote about it in my LinkedIn post: Reinventing TSX

Although the CPCs are much nimbler versions of the SPACs, I promoted the CPCs to the Israeli and Chinese technology companies, as a less expensive version of the IPOs. However, all such technology companies had a decent amount of traction, already.

Just Trust Me…

So, in response to some of the SPAC comments I received, I asked the following question: would anyone invest in a $40B SPAC that promised the most advanced and the longest-lasting grid battery — without ever building one, and never even validating the materials that could offer the promised energy density?

SPACs & Conventional IPOs…

It’s because of greater uncertainty, the rules of the conventional IPOs shouldn’t apply to SPACs. Such pose a much greater risk to retail investors.

IMHO, comparing SPACs to IPOs is like claiming that Short Selling equates to trading Options. Perhaps the result will be the same in FINANCIAL TERMS. But such outcomes were not achieved within a similar context. One is PASSIVE, while the other is EXTREMELY ACTIVE.

By trading Options, you make a personal bet based on your specific beliefs & understandings of the financial markets. You either win or lose. The net effect is affecting YOU, not the company. Everything else remains PASSIVE.

When you Short Sell, you MANIPULATE the share price of the company & it affects all other investors, too. Especially, when Naked Short Selling takes place & the company finds that its float is 10X bigger than the number of Treasury Shares ever issued…

We’ve Been Wrong Before…

Globalization anyone? We thought that 40 years of unrestrained GLOBALIZATION was the best thing since sliced bread was invented. Yet COVID-19 just showed us how misguided such policy was and how it decimated N/A manufacturing capabilities…

And why would we even allow considering SHARE BUYBACKS following the biggest bailout in history by the… taxpayers! Are bailouts supposed to benefit only the shareholders instead of all the stakeholders? Is this the best way to preserve and increase the employment levels?

Federal Government can do much more! It can take a few steps and provide a level playing field. While we embark on a recovery from the worst economic collapse since WWII, businesses need to be temporarily shielded from the “peace-time” Wall Street pressures…

Before 1982, share buybacks were considered illegal and treated as market manipulation by SEC. There is enough evidence 39 years later that tinkering with SEC rules didn’t work.

Think, Plan, And Act…

It’s time to rethink and reverse the mistakes of the past and to make share buybacks illegal! Using taxpayers’ money to “manipulate” markets & send a “fake” message of a “greatly improved profitability” is… the best we can do?

If corporate profits are to be reinvested in developing new products, building factories, or opening new stores — they can’t be redistributed, instead. Otherwise, we will be stuck with dwindling employment levels and a diminished capacity to innovate.

Top R&D Spenders Today…

Still not convinced that share buybacks erode innovation? Remember this: countries like Israel, South Korea, Germany, Finland, and Switzerland are now spending a bigger % of GDP on R&D than the USA…

SPACs are not “IPO-Lights” and the vesting period should be much longer due to the inherent risks involved. And I am convinced that the regulators can implement such changes with ease…

Otherwise, be prepared for a roller-coaster ride with a twist: by the end of the ride, someone might just hit you over the head with a 2x4 — and then politely ask… if you’re dizzy.

My Bacon & Eggs Analogy

I was thinking for a while about the best way to concisely articulate the difference between PARTICIPATING in the IPO vs. COMMITTING to the SPAC. Well, let’s use the Bacon & Eggs analogy and say that the chicken… PARTICIPATED, but the pig was definitely COMMITTED

My Parting Thoughts

But perhaps, things begin to change. As recently reported by CNBC:

“SPAC transactions come to a halt amid SEC crackdown, cooling retail investor interest. After a record of 109 new SPAC deals in March alone, issuance has now come to almost a standstill with just 10 SPACs in April, according to data from SPAC Research. The drastic slowdown came after the Securities and Exchange Commission issued accounting guidance that would classify SPAC warrants as liabilities instead of equity instruments”

I learned about the SEC guidance on the day of Wharton’s presentation. Naturally, I tried to alert the presenters and ask for their comments — to no avail. It would have been nice to get the questions answered and no to leave the audience hanging — with the Silence of the Lamb in the air…

And in light of the ~12,000 views of my comments, perhaps it’s time for… Borat to start interviewing some of the SPAC promoters?

For More Information…

For more information, please see my posts on LinkedIn, Twitter, Medium, and CGE’s website.

AI Boogeyman

You can also find additional info in my book on amazon: “AI Boogeyman — Dispelling Fake News About Job Losses”, and on our YouTube Studio channel… Thank you.

I offer hands-on AI investment advice to Venture Capital & Private Equity portfolio companies. Hence, I am in the business of joining Advisory Boards (ABs). And in many cases, I deliver results in 90 days by structuring JVs to bring untapped revenue streams — just as I did w/ Verizon 20-yrs ago…

A good Advisory Board improves the decision-making process by helping the CEOs to consider different perspectives. More importantly, there is not a single top athlete who does not have a coach. And yet, only 20% of CEOs are coached by Advisors. The other 80% — may never become the top performers they could have been. Thus, my advice to CEOs: “Amateurs don’t use coaches, professionals do… and so should you”.

I used advanced BusinessAI™ strategies in Renewable Energy for 12 yrs. Now, I help VC/CVC/PE funds to maximize their returns in Healthcare, Fintech, Transportation, Construction & Manufacturing, too. And I apply the same structured finance expertise I acquired through financing over $1B of Renewable Energy projects.

As a 30-yr BusinessAI™ veteran, I Propose, Design, Structure, Finance, and Deploy state-of-the-art Joint Ventures to bring RAPID & SUSTAINABLE REVENUES. And as a coach & mentor, I bring business savvy to separate the wheat from the chaff — through a unique process to beat the odds. Such pattern recognition abilities allow me to see what is still missing & how to maximize business offerings & profitability…

What I learned over the years is that it is not just technology innovation, but also the exponential increase in the value offered to clients at a much lower cost — that makes all the difference. Business Model Innovation is as disruptive as Technology Innovation and yet I see too many companies focused on pushing their product out the door — while losing ~70% of untapped revenue streams.

My LeanBOD™ recommendation? Mandate CEO Advisory Boards and create a pool of viable Co-CEOs to be chosen by the BODs. Co-CEOs offer the fastest way to accelerate Scale-Up & Expansion, Revenue Growth, Margin Enhancement & Opening New Channels.

SELECT ACCOMPLISHMENTS: Using AI in CT medical diagnostic, financial fraud detection, solar PV, wind, WTE, energy efficiency, etc. Finance skills: equity, non-recourse debt, balance sheet financing, and tax equity. I also took a tiny startup public, building a $135MM enterprise & received funding from NRC & DND. Academic R&D collaborations included: UW, UofG, UofT, and MCC Consortium in Texas.

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I used #AI in #Technology, #Finance, & #Renewable #Energy for 30-yrs. Now, I help #VC/#CVC during due diligence of AI investments & advise their portfolio Cos.

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Oleg Feldgajer

Oleg Feldgajer

I used #AI in #Technology, #Finance, & #Renewable #Energy for 30-yrs. Now, I help #VC/#CVC during due diligence of AI investments & advise their portfolio Cos.

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