SPAC Attack: The Emperor’s New Clothes?

SPACs (Special Purpose Acquisition Companies) have, for the past year or so, been the hottest thing since fidget spinners. They are a cost-efficient and rapid method for turning privately held companies into publicly-traded companies. They are also a way for founders, executives, and employees to extract some of the value from their efforts in building a company. And, of course, investors do pretty darned well too. It is a symbiotic relationship that seems to benefit everyone involved. What could possibly go wrong?

This morning it has been widely reported that the SEC has opened an inquiry into SPACs. This may be the precursor to a formal investigation. Some may ask why the SEC is concerned when everything seems to be going well. The fact is that when investors see something great, they often turn it into a controllable snowball rolling down a steep hill. This has tended to result in destruction (and some great movies). Look back at the collapse of financial firms a decade ago, or the now almost forgotten “Dot-com” crash at end of the 1990s. In both examples, it became difficult to separate the real value from the fake. When this happens, trust is lost and we lose access to both the real and the fake value.

In a sense, the SEC is asking if the Emperor is wearing any clothes. Many SPAC transactions have been completed successfully. Some have seriously less successful. This is to be expected and is not dissimilar from the traditional IPO market. Some succeed, some fail. But the SEC has seen overexuberance lead to disaster in the past and knows it does not have the processes and controls in place to avoid the same with SPACs. It sounds like they are trying to make sure the Emperors isn’t naked before we all need to be involved in cleaning up a mess.

What does this mean for compensation professionals?

First, it means we may in store for a bumpy ride on the stock market. You need to review your equity compensation granting practices and ESPP plans to ensure that you will not accidentally run out of shares if the stock price drops precipitously. ESPPs in particular are notorious for burning through their allotted shares when stock prices fall.

Second, it means you make need to look at where you have spent extra on compensation. Maybe you have built for a future that will be delayed or turn out differently than expected. There is no need to panic at this point, but a bit of research and planning can go a long way to averting something bad over the next year.

Lastly, it means that some of the companies who were hoping for a “stretch SPAC” (one where the company really isn’t fully ready) may need to dial back their expectations and plan on staying private for a few more years. Your SPAC dreams may still come true, but having a back-up plan seems prudent at this point.

In my next post, I will return to a more traditional fun, and cheeky post, but I wanted to make sure you had the early-warning you needed to properly avert your eyes. You never know if SPACs will turn out to be a doughy naked guy riding proudly down the street on an unfortunate horse.

Please contact FutureSense - HR Consulting Services if you have any questions about HR Operations, Organizational Development, or rewards and incentives for employee retention. We are experts in working with businesses to create growth- and success-oriented programs. We might work with you in partnership to manage your personnel by offering guidance and support.

Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. Dan is also a leading expert on incentive plans and equity compensation issues. He has written several industry resources including a resource dedicated to Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, , “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or follow him on Twitter at @DanFutureSense.