The year concluded with a grim outcome for the Wall Street romance with special purpose acquisition companies (SPACs), as the financial fervor that drove companies into the stock market during the Covid-19 pandemic resulted in major bankruptcies and significant losses for investors. Bloomberg’s data reveals that at least 21 companies, which went public through SPAC mergers, filed for bankruptcy in the past year, leading to a staggering loss of over $46 billion in total equity value based on their peak market capitalization.
Among the casualties were electric vehicle startups and innovative agriculture firms. Gary Broadbent, an executive involved in the liquidation of former SPAC AppHarvest Inc., observed that many of these companies were ill-prepared for the public market, lacking solid financial positions and not ready for the spotlight. Despite varying levels of promise, all of them attracted funds from enthusiastic investors caught up in the SPAC craze, including retail traders, who are now pursuing legal action against SPAC sponsors to recover their losses.
The largest SPAC bankruptcy involved WeWork Inc., a flexible workplace provider, which reached a market value of $9.4 billion in 2021 before succumbing to Chapter 11 last month, opting to abandon costly office leases. Other notable failures included electric vehicle makers Proterra Inc. and Lordstown Motors Corp., with market caps reaching $3.7 billion and $5 billion, respectively, before filing for bankruptcy earlier this year.
Many of these companies sought protection from creditors less than two years after going public. Even Near Intelligence Inc., a software firm that debuted on the Nasdaq less than nine months ago, filed for Chapter 11 in December.
The SPAC mania, criticized as a bubble by many early on, allowed companies to go public quickly with less scrutiny than traditional IPOs. The optimism surrounding SPACs led to optimistic projections from companies targeted by blank-check firms, and arrangers had incentives to complete deals quickly. The result was a surge of SPACs that some describe as a “ticking time bomb” of corporate failures, expected to unfold in 2023.
Higher interest rates are likely to add further challenges to the balance sheets of SPAC companies. Around 140 former SPACs will require additional financing next year to sustain their operations, according to Bloomberg data from mid-December. Hudson Labs, an investment research software firm, reported that about 44% of SPAC companies filing annual reports in 2023 expressed concerns about their future, compared to about 22% of non-SPAC companies.
Some shareholders are turning to lawsuits in hopes of recovering their losses. For instance, Lordstown stockholders accused its SPAC sponsors of inflating demand for its Endurance truck. The slow regulatory response to the SPAC frenzy prompted the SEC, led by Chairman Gary Gensler, to propose new rules in March 2022 for enhanced disclosures and investor protections.
Despite regulatory interventions and a decline in Wall Street’s involvement with SPACs, failures persist. Recently, Bird Global Inc., known for its electric scooters that once filled city sidewalks, filed for Chapter 11 protection, revealing a mere $3.3 million in cash when entering court protection, a stark contrast to its past market cap of $2.5 billion.
