May 28, 2022
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How Wall Street banks made a killing on SPAC craze

How Wall Street banks made a killing on SPAC craze

NEW YORK — Funding banks have raked in billions of {dollars} by feeding the frenzy for blank-check firms, they usually have completed so largely with out risking any of their very own cash on lots of of offers which have left many traders with punishing losses. 

A take a look at one in all these offers exhibits how. 

In late 2020, Acies Acquisition Corp. tapped into investor demand for blank-check firms — formally often known as particular objective acquisition firms, or SPACs — with an preliminary public providing that raised $215 million. Among the many funding banks Acies signed as much as underwrite the IPO had been JPMorgan Chase & Co., Morgan Stanley, and Oppenheimer & Co. 

When the providing closed, Acies, basically a shell firm, adopted the SPAC template. With the money it had raised, it had two years to search out and merge with a personal firm searching for a inventory market itemizing, or return the cash to traders. Acies’ administration group introduced it was on the hunt for a enterprise within the “experiential entertainment industry.” 

The group didn’t must search for very lengthy. Hours after the IPO closed, bankers advising Playstudios Inc. contacted Acies managers to inform them the Las Vegas-based maker of cellular on line casino video games was on the market, regulatory filings present. These bankers had been additionally with JPMorgan. In early 2021, the 2 firms introduced plans for a merger that valued Playstudios at $1.1 billion. 

Within the run-up to the merger and the itemizing of the mixed firm’s shares, Playstudios touted a rosy future. It forecast that surging advert gross sales, a new role-playing recreation and cross-marketing choices to recreation gamers would carry a 20% rise in income in 2021 and a 33% soar this yr. 

Since then, the corporate has scrapped the brand new recreation, and income fell far wanting predictions. Retail traders suffered the results. The inventory is down greater than 50% since shareholders accepted the merger final June. 

“Playstudios is one that looks like crap right now,” Dan Ushman, a 37-year-old Chicago-area entrepreneur, mentioned earlier this yr. He put about $26,000 into Acies after it introduced its cope with Playstudios and shortly noticed his funding drop greater than 35%. 

Funding banks concerned within the deal fared a lot better, having risked none of their very own cash, primarily based on a Reuters evaluate of regulatory filings. 

JPMorgan, specifically, pocketed hefty charges for its twin position as an underwriter for the Acies IPO and as an adviser to Playstudios — completely authorized, regardless of the obvious battle of curiosity, if the financial institution discloses its position, as JPMorgan did. 

The financial institution has not disclosed its charges, however monetary knowledge supplier Refinitiv estimates that JPMorgan earned $4.7 million in underwriting charges and $14.2 million as a sell-side adviser. It additionally acquired $1.6 million for serving to Acies elevate further capital via a maneuver often known as personal funding in public fairness, or PIPE, in response to monetary analysis agency Morningstar Inc and a Reuters evaluation. PIPEs, which faucet huge institutional traders, are sometimes mandatory to shut a SPAC merger. 

Morgan Stanley earned about $5.9 million and Oppenheimer about $1.2 million in underwriting charges, in response to Refinitiv estimates. Every financial institution additionally obtained about $1.6 million in PIPE-related charges, in response to Morningstar and a Reuters evaluation. LionTree Advisors, one other Playstudios adviser, earned $6.2 million on the deal, in response to Refinitiv estimates, plus $1.6 million in PIPE charges, in response to Morningstar and a Reuters evaluation. 

JP Morgan, Morgan Stanley and LionTree declined to remark. An Oppenheimer spokesman mentioned the financial institution had a minor position within the Acies IPO. 

Playstudios famous that the JPMorgan groups it and Acies labored with got here from separate divisions of the financial institution. The corporate mentioned it has “a robust framework for evaluating, approving, executing and optimizing its game initiatives,” and that it’s frequently “revisiting the conditions and decision to either advance or suspend an initiative.” 


The disparate outcomes of the Acies-Playstudios deal — huge bucks for the funding banks that offered it and large losses for retail traders who purchased into it — are typical of many SPAC offers. 

For this text, Reuters analyzed lots of of SPACs spanning roughly two years, reviewed banks’ inside paperwork and regulatory filings, and interviewed greater than two dozen bankers, traders, SPAC managers, attorneys and company executives. The examination discovered that funding banks turbocharged to their profit what turned out to be a speculative bubble in firms which have usually didn’t stay as much as their pre-listing hype. 

The SPAC market has sagged because the collapse of some high-profile blank-check listings amid total grim market circumstances. And in March, the US Securities and Trade Fee (SEC) proposed new guidelines that might enhance disclosure necessities and potential authorized legal responsibility for SPACs and their banks. Dealing with these market and regulatory challenges, some banks have been pulling again from the enterprise. 

No matter occurs to the SPAC market, the Reuters examination reveals intimately for the primary time how, over the previous couple of years, Wall Street banks have enriched themselves by aggressively selling the offers within the absence of the authorized guardrails and monetary dangers related to conventional IPOs. 

Credit score Suisse summed it up final yr in a confidential shopper presentation reviewed by Reuters: SPACs “bend the rules” of the IPO market. The Swiss financial institution has had a position in 136 blank-check offers because the starting of 2020 via the top of March, in response to a Reuters evaluation of SPAC Analysis knowledge. 

A Credit score Suisse spokesperson mentioned the language within the presentation pertains to SPAC “market conventions” that give firms and traders extra flexibility than in conventional IPOs. The financial institution is dedicated to “recommending strategies that conform to all applicable rules,” the spokesperson mentioned. 

In a conventional IPO, underwriters might be held accountable beneath securities legislation for any deceptive forecasts, projections or different statements made to traders. To guard themselves towards legal responsibility, banks carry out rigorous due diligence on firms whose IPOs they underwrite, and people firms usually don’t problem public forecasts about their efficiency. Banks additionally purchase huge chunks of an issuing firm’s new shares, risking losses if they’ll’t resell the inventory for greater than they paid. 

With a SPAC, a financial institution’s position as underwriter ends as soon as the blank-check firm completes its IPO, however the financial institution receives a portion of its charge solely after the SPAC makes an acquisition. By the point the SPAC pronounces a merger, SPAC underwriters aren’t accountable for forecasts and different claims in regards to the efficiency of the corporate to be acquired and publicly listed. And since blank-check IPOs are usually priced at a nominal $10, banks don’t run the danger of getting to promote new shares that fall in worth. 

For funding banks, blank-check offers create “moral hazard” — an incentive to take on danger due to little publicity to it — in response to Usha Rodrigues, a legislation professor on the College of Georgia who research SPACs. That’s as a result of they “don’t have the same liability with a SPAC that they have with a traditional IPO, but banks do get to collect fees if they can get a deal done,” she mentioned. The “companies that merged with SPACs … don’t have the same level of vetting,” which most retail traders don’t understand. 

Shares of firms that obtained a inventory market itemizing in a SPAC merger from 2019 via the start of March had been down roughly 36% on common from when their offers closed, in response to knowledge supplied by Jay Ritter, a professor of finance on the College of Florida. That’s even worse than the 14% decline in shares of firms that went public via conventional IPOs throughout the identical interval, in response to Nasdaq Inc. All informed, in response to Vanda Analysis, retail traders misplaced $4.8 billion, or 23%, of the combination $21.3 billion they plowed into SPACs from the start of 2020 to the primary week of April 2022. 

But the offers that introduced these shares to market have yielded a bonanza for funding banks. Trade tracker Coalition Greenwich estimates that banks booked about $8 billion in SPAC-related charges in 2020 and 2021. That represents roughly 6.5% of whole U.S. funding banking charges that main banks collected in that interval, in response to Coalition Greenwich. 

“The bank has an incentive to push the deal to get closed, at any price, because they want their 3.5% of the SPAC IPO proceeds,” mentioned Mike Stegemoller, a professor of banking and finance at Baylor College, referring to the charges underwriters obtain solely after a SPAC merger closes. “I think the conflict is with retail investors who are buying common shares of stock … Do you really think banks care about these retail investors? I think there are good incentives not to.” 

Many banks amped up their take by working for each side of offers, as JPMorgan did with Acies and Playstudios. Reuters recognized roughly 50 such instances from early 2020 to November 2021. 


Because the SPAC bubble has deflated, debate over accountability for investor losses has centered on the executives of blank-check firms. These founding traders — known as sponsors — danger shedding all of their funding if they’ll’t discover a firm to take public via a merger inside the two-year window. 

Nonetheless, founders purchase their shares at deep reductions to the standard $10 providing worth, because of preferential therapy and charges that may dilute retail traders’ holdings. Likewise, the hedge funds and different institutional traders that account for a lot of the cash behind SPACs usually receive their shares in an IPO or subsequent PIPE beneath favorable phrases that put them relative to retail traders. 

The SEC put SPACs on discover final yr with a number of enforcement actions towards particular firms and their sponsors for allegedly deceptive traders about their prospects. Then, in late March, the regulator introduced its proposed guidelines, which might, amongst different issues, set up that funding banks that underwrite SPACs may very well be held legally chargeable for false or deceptive forecasts or statements about blank-check offers. The SEC will vote on the principles after the public-comment interval ends later this spring. 

The SEC declined to remark. In a March 30 assertion on the proposed guidelines, SEC Chair Gary Gensler mentioned “gatekeepers” resembling underwriters “should have to stand behind and be responsible for basic aspects of their work” and “provide an essential function to police fraud and ensure the accuracy of disclosure to investors.” 

In its proposed guidelines, the SEC mentioned that the charges underwriting banks obtain when a SPAC closes a deal might point out participation within the merger, and that banks even have a “strong financial interest” in ensuring a SPAC inks a deal. For these causes, the regulator mentioned, it’s proposing rising banks’ legal responsibility. 

Up to now, traders haven’t sought to carry main Wall Street banks accountable for false or deceptive info alleged in any of the 47 SPAC-related class motion shareholder lawsuits filed since 2021, in response to a Reuters evaluation of a public database maintained by Stanford Legislation College and legal professional Kevin LaCroix, who follows the instances. None of these instances have but succeeded in court docket. 

One facet of SPACs that has already drawn regulatory scrutiny is undisclosed dealings between blank-check firms and their targets earlier than a merger is introduced. That’s as a result of traders may very well be misled if a SPAC privately shakes arms with an acquisition goal whereas publicly stating it’s nonetheless searching for the very best merger associate. 

Communications between a SPAC and its acquisition goal are a part of an SEC investigation of former U.S. President Donald Trump’s $1.25 billion deal, introduced final October, to checklist his new social media enterprise on the inventory market. 

In a December submitting, Digital World Acquisition Corp, the SPAC that’s merging with the previous president’s Trump Media & Know-how Group, disclosed that the SEC had requested for paperwork referring to communications between Digital World and Trump Media and conferences of Digital World’s board, amongst different issues. The SEC said in its request that its investigation didn’t imply the company had concluded that anybody violated the legislation, Digital World mentioned. 

Trump Media has since launched the Fact Social platform to lackluster impact. 

Trump Media and Digital World Acquisition Corp didn’t reply to requests for remark. The SEC declined to remark. 

Within the Acies-Playstudios deal, pre-existing relationships elevate the query of whether or not the 2 firms already had a merger in thoughts, probably precluding higher offers for traders. 

Acies informed traders when it launched its IPO that it had not recognized a firm to merge with and that it might pursue the most effective alternative it might discover. Nonetheless, Andrew Pascal, chief govt officer of Playstudios, co-founded Acies with Jim Murren, who was chief govt officer of MGM Resorts Inc when that on line casino operator invested in Playstudios, as was disclosed in a securities submitting. 

Playstudios mentioned it “considered all viable SPAC proposals and eventually made the decision it believed was the best of the available options for the company.” Responding to Reuters inquiries on behalf of Murren and Pascal, Playstudios famous that MGM Resorts, not Murren personally, invested within the firm, and that Pascal recused himself from “all Acies deliberations concerning Playstudios” as soon as talks started and “forfeited his economic interest in Acies to avoid even the appearance of having conflicting interests.” 


For many years, SPACs had been a backwater of Wall Street, connecting speculators with firms that had no different technique of going public. That modified in late 2019 and early 2020, when shares of Richard Branson’s spaceflight supplier Virgin Galactic Holdings Inc and sports activities betting operator DraftKings Inc surged greater than 600% after going public via SPAC mergers. Traders caught at dwelling throughout the COVID-19 pandemic and flush with money from authorities stimulus funds helped drive these good points, they usually clamored for extra. 

Wall Street banks had been completely happy to oblige and commenced aggressively selling the enterprise. In shopper displays and different paperwork reviewed by Reuters, they repeatedly acknowledged the contaminated fame of SPACs and boasted of their capability to carry high quality firms to market via blank-check offers. 

In a 2020 presentation, Morgan Stanley mentioned there was a “historical perception of lower quality companies picking (the) SPAC route, although views have improved somewhat.” For its half, Morgan Stanley mentioned it related “only with the highest quality partners.” 

A few of its previous companions embrace Acies, the SPAC that introduced Playstudios to market. Shares of the 51 firms that Morgan Stanley has helped take public via SPACs both as an adviser or by elevating cash to shut the deal because the starting of 2020 had been down 28% on common via late March, in response to a Reuters evaluation. 

Morgan Stanley declined to remark on the presentation and the efficiency of shares in firms that went public via its SPACs. 

Citigroup, in a 2019 presentation, mentioned that whereas SPACs traditionally had been thought-about a “four-letter” phrase, synonymous with poor outcomes, that notion was altering as traders’ urge for food for brand spanking new alternate options grew. 

Firms that Citi helped carry to market via SPACs since 2020, both as an adviser or by elevating cash to shut the deal, had been down 38% on common initially of Could, in response to a Reuters evaluation of SPAC Analysis knowledge. 

Amongst its many offers, Citi was an underwriter for the IPO of a SPAC referred to as Spartan Acquisition Corp II and an adviser to the corporate Spartan subsequently acquired, Daylight Monetary Holdings Inc, a financier of photo voltaic vitality methods. The financial institution helped Spartan decide its valuation of Daylight at $1.3 billion, primarily based on Daylight’s personal revenue estimates, securities filings present. 

Daylight later slashed its revenue estimates. The shares, after peaking at about $14.33 in early 2021, at the moment are buying and selling at lower than $5. 

Citi and Daylight declined to remark. 

Credit score Suisse, in a fourth-quarter 2020 presentation to company shoppers, identified that the latitude firms get pleasure from when issuing enterprise forecasts in SPAC offers can “help improve investor perception of the company.” That will be significantly useful, it mentioned, for firms that “may have struggled to go public via a traditional IPO.” 

In the identical presentation, Credit score Suisse highlighted the “creative marketing tactics” it used within the Virgin Galactic deal. These included flying traders and analysts to tour Virgin Galactic’s manufacturing unit and Spaceport America advanced, which the financial institution mentioned added “a ‘wow’ factor that a regular-way IPO process could not have provided.” 

When Virgin Galactic went public, it wasn’t producing any income. Its shares soared within the months after the itemizing, peaking at $62.80. They subsequently tumbled amid delays in some product testing and at the moment are buying and selling beneath $10. 

In a 2021 presentation, Credit score Suisse asserted that the surge in blank-check offers was being pushed by “high quality sponsors” that “seek to partner with blue-chip assets.” High quality apart, share costs of the 56 firms Credit score Suisse helped carry to market via SPACs previously two years had been down on common about 32% on the finish of March, in response to a Reuters evaluation of knowledge from SPAC Analysis. 

A Credit score Suisse spokesperson mentioned the financial institution is “very selective when it comes to choosing SPAC clients,” and that it treats SPAC mergers “much the same way as regular IPOs” by way of the financial institution’s inside approval course of. When working for a firm that might merge with a SPAC, the financial institution evaluates alternate options and helps determine the “most suitable course of action,” no matter whether or not Credit score Suisse underwrote the blank-check agency’s IPO, the spokesperson mentioned. 

Virgin Galactic declined to remark. 

One other firm Credit score Suisse helped carry to market is Paysafe Ltd. The web funds platform was valued at $9 billion in a March 2021 merger with a SPAC. Credit score Suisse had underwritten the SPAC’s IPO and acted as an adviser to Paysafe on the following merger. 

The $9 billion valuation was primarily based partly on Paysafe’s forecast that its digital wallets enterprise would see double-digit progress from 2020 to 2023. Securities filings present that banks had been concerned in discussions on establishing the valuation. 

After Paysafe went public, it needed to write down its digital wallets enterprise and make technological enhancements to it. The shares are down greater than 80% from their January 2021 peak. 

Paysafe determined to go public via a SPAC as a result of it was the “best route to take to public markets,” and employed Credit score Suisse as a result of it had labored with the financial institution on prior offers, in response to a firm spokesperson. Paysafe has put in place a turnaround plan for its digital wallets enterprise that’s “well underway” to “deliver on a new growth trajectory,” the spokesperson mentioned. 

A consultant for Foley Trasimene Acquisition Corp II, the SPAC that acquired Paysafe, declined to remark. 


The deal that took automotive retailer CarLotz Inc public underscores the aggressive techniques banks adopted of their pursuit of SPACs. 

The Richmond, Virginia-based firm, which sells used vehicles on consignment on-line and thru shops, started in search of a purchaser via a typical sale in late 2019 however failed to search out one on the $1 billion worth it wished, a supply conversant in the matter mentioned. 

A number of months later, Deutsche Financial institution pitched itself as a sell-side adviser to CarLotz, pledging to search out a SPAC purchaser, in response to a individual conversant in the state of affairs. The financial institution sought SPAC consumers that might worth CarLotz at a minimal of $750 million, primarily based on the $730 million paid for rival Shift Applied sciences Inc in a current SPAC merger, and probably as a lot as $2 billion, a supply conversant in the matter mentioned. 

And Deutsche Financial institution already had a bidder ready within the wings, a SPAC referred to as Acamar Companions Acquisition Corp. Deutsche Financial institution had suggested Acamar as an underwriter on its launch greater than a yr earlier, and the blank-check firm was working out of time to safe a merger. Lower than a month after CarLotz employed Deutsche Financial institution, the financial institution instructed to Acamar that it make a suggestion for CarLotz, in response to regulatory filings. 

Acamar made a successful supply of $827 million, lower than CarLotz had hoped for, however beating out two different bidders, the filings present. 

In anticipation of its inventory market itemizing, CarLotz began wooing traders with glowing forecasts. It projected it might have nearly $1 billion in gross sales in 2022, practically 9 instances its estimated 2020 income. It might meet demand, it mentioned, from a various provider base of used vehicles from company fleets. 

About seven months later, a provider representing greater than 60% of CarLotz’s vehicles offered within the prior quarter paused its relationship with the corporate. Gross sales dried up. Income for 2021 got here to solely $259 million. 

CarLotz shares are down greater than 90% since they had been listed, giving the corporate a market worth of lower than $100 million. 

Deutsche Financial institution did much better. It acquired charges of roughly $6.7 million as an underwriter and $14.1 million as an adviser, in response to Refinitiv estimates. 

CarLotz and Acamar didn’t reply to requests for remark. 

In an interview, Eric Hackel, head of fairness origination options at Deutsche Financial institution, declined to remark on the CarLotz deal particularly. Generally, he mentioned, the financial institution’s due diligence for a conventional IPO is “a little bit more thorough” than for a SPAC, but it surely does “a tremendous amount of diligence on companies we underwrite.” 

On offers for which the financial institution is advising the personal firm and has additionally underwritten the SPAC buying it, “there’s usually another bank advising,” Mr. Hackel mentioned. In the end, he mentioned, “it’s up to the company” in the event that they rent the identical financial institution that underwrote the SPAC to advise them on a deal. 

He famous that retail traders get pleasure from among the protections institutional traders have — resembling the appropriate to redeem shares for $10 earlier than a deal closes. Nonetheless, as soon as a deal is finished, Hackel mentioned, retail traders “have to make their own decisions. They have to do their own diligence.” 

Kyle Brown, a 30-year-old accountant in Groton, Connecticut, invested in CarLotz. “We lost the totality of our investment with the exception of $35,” he mentioned. “It was about $11,000, $12,000.” Mr. Brown had hoped his funding would assist pay for a new home, however he ended up having to search out different methods to fund a down fee. — Jessica DiNapoli/Reuters

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