The Pied Piper of SPACs | Hacker News Reader

The Pied Piper of SPACs

newyorker.com

58 pointstareqak35 comments

I think people don't realize that SPAC creators make money in very different ways than the SPAC share/warrant chasers.

Its the same with crypto, ICOs, and basically every financial service.

The SPAC creators get a large percentage of the shares in almost every deal, just for showing up and getting an agreement with a target company. Depending on the contract they also get a percentage of the capital used to fund the SPAC. So even with Chamath's deals being "down" with the share prices tanking, he's made a ton of money for himself and his fund. Share prices tank probably because he is selling into liquidity.

I do not find this controversial. I find the gap in knowledge to be peculiar.

Agreed - as with most things I am often shocked at the lack of knowledge people know about how things work. Especially in the stock market frenzy these days - people are just buying stock as if its a gamble (which it kind of is) but without any understanding of much of anything other than hype (which, to be fair, you can do well trading like that).

I’m still trying to reprogram myself to understand hype momentum trading.

I’m just about ready to open small but meaningful positions in meme stock options and meme cryptos. I expect them to make a loss, but all the others tops were not tops and actual hedge funds and non profits (Mormon Church, for example) join the sentiment and trade too.

All top indicators don't matter when the Federal Reserve and Congress are adding more money into the system. It doesn't matter if people that rarely have money to invest are talking about investing.

This is correct, but I wonder how many people also consider the banks often price the IPO so they get a better deal than the public markets. Somewhere, everyone is always getting a cut.

IPOs the banks already have bought all the newly created shares from the company in the company’s last funding round before being publicly traded, and attempts to generate public interest and sell the shares at a higher price.

Keeping a percentage of the proceeds and a percentage of the shares and upfront fees.

That’s not accurate at all. Investment banks rarely participate in fund raising rounds. They don’t usually hold a stake in the company at all. The way they make money is typically by charging a 6% commission on the shares that are floated in the IPO. The higher the IPO price, the higher their commission.

What do the underwriters do and are they not investment banks?

Investment banks are the underwriters. They do in fact buy the IPO shares from the company and re-sell them, but the mark-up for that resale is on a commission basis, customarily 6%. It’s not like they are buying the shares at price x and then trying to sell them at price y. The round is priced jointly between the underwriter and the IPO’ing company based on orders obtained during the road show.

"I don't want to be a slave to money," he later told a reporter.

It seems that is exactly what he is. If this article is any indication, that is all he talks about.

The minute he stops talking money-related topics, he is irrelevant and incapable of holding anyone's (i.e., the media's) attention.

Another case of America's (American media's, at least) belief that when a person becomes engorged with cash, that person suddenly becomes worth listening to.

I actually enjoy listening to him on the All-In podcast, even though I often disagree. In fact I get most bored when he talks finance. /shrug

I randomly started listening to the All-In podcast a few weeks ago, without any context on Chamath or the other hosts (I thought it was a poker podcast).

I find him entertaining. Everything I’ve learned about him since has been pretty off-putting though.

If you'd like to short SPACs, there's even ETFs coming out to help you do so:

https://www.prnewswire.com/news-releases/first-pure-play-de-...

Can someone enlighten me how SPACs differ from platforms like https://republic.co ?

Edit: or https://wefunder.com

Republic looks to be some form of VC funding. The whole point of a SPAC is to take a company public without filling for an IPO.

So it's a "stock market" bypassing public-trading so it doesn't have to abide by SEC, SOX, etc.?

The SEC does have rules pertaining to privately traded investment. They are normally more lax than for publicly traded companies, and therefor normally require the investors be accredited. The investor is expected to preform more due diligence. https://www.investopedia.com/terms/a/accreditedinvestor.asp

If you are confused about how SPACs work, and the OP article didn't help, the investopedia is good https://www.investopedia.com/terms/s/spac.asp

A SPAC is basically a vampire company that is publicly traded, but which has no operating business. Its sole purpose is to merge with another company, usually a private company, by expending its founding capital to buy the target. After the merger, the private company is now public - it trades on an exchange, has to file 10K’s, has to abide by Sarbanes-Oxley, etc.

It’s a mechanism to take a private company public without an IPO. That’s all.

SPACs take companies public. Once a SPAC merges with a private company like SoFi or Virgin Galactic, the combined entity's shares can be traded on the NYSE or Nasdaq like any other stock.

With platforms like Wefunder and Republic, there is no mechanism to take a company public.

Ooooh. So it's after angels, VC, REITs, pension funds, sovereign wealth funds pass to get to "IPO" crowdfunding-style.

The platforms mentioned are like crowd angels.

No, its mutually exclusive.

A SPAC can transform any private company into a public company.

They take VC backed companies public, they take newly formed pre-revenue companies public, they take previously public companies public, they merge with public companies, it does not matter.

Its just a reverse merger with a specific structure and formula.

SPACs are not such a bad idea as it is made out to be, especially at a time like this. Post covid, we are going to see the rise of new winners and segments.

They offer an operating point between VC money and IPO in terms of price vs risk.

I think under normal circumstances this would be true. But VCs seem increasingly bad at picking winners vs. obvious scams (see latest failing SoftBank startup). In this environment, SPACs can be used as a way to dump garbage companies onto the public markets. Consider that WeWork would have probably been considered a great SPAC acquisition target (lots of hype, huge private valuation), while it failed to IPO using normal means because of dodgy financials.

Most SPACs sign on "influencers" and "celebrities" who promote the hell out of the SPAC before the group has any clue what they're trying to buy.

VC money goes into a company that the VC knows about. IPOs have strict public financial disclosures such that everyone knows how the company operates as it IPOs.

A SPAC? You only know that its held by Shaq O'Neal and they're trying to raise money for something something something. And sure, maybe some of us know how to look up the history of the financial types who make up SPACs, but we all know that dumb retail money is just following the celebrities that they're a fan of.

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All the people who bought "Current Forest Road" (aka: the Shaq-SPAC) had no idea that they were buying Mixology. They raised money first, and then bought Mixology later. You're pretty much buying the SPAC purely on celebrity presence. There's no fundamentals to analyze, no industry to speculate the future about. Its purely a "lets collect some money together and buy something later" vehicle.

Not a bad idea, but there absolutely are regulatory gaps in disclosure. I don't think fixing those gaps would make a difference because investors don't care.

On the surface SPACs are a bad idea for investors (as many have outlined below). But in a world where companies are spending more on customer acquisition (SG&A cost as a percentage of sales is ~50% for most SaaS companies) could it be that the hype/marketing that comes from SPAC promoters has material savings in the year the SPAC goes public?

Might be a stretch as your customers may not be following SPAC promoters or be listening to CNBC all the time but there may be some value we are underestimating.

https://archive.is/y5MxT

The term "pied piper" comes from an old German tale, "The Pied Piper of Hamelin," about a man with a magic pipe that comes to a town called Hamelin.[a] Without getting into details, the tale ends with the piper playing his magic pipe to hypnotize the town's children, who follow him out of town and into a dark cave, never to be seen again. (Like most old tales, this one is horrible.)

The author of the article likely chose the term on purpose, all but saying that non-insiders who buy into SPACs are like little children being led into the dark cave, never to be seen again.

[a] https://en.wikipedia.org/wiki/Pied_Piper_of_Hamelin

> In the case of SPACs, who are the children being led into the dark cave, never to be seen again?

Anyone who isn’t the sponsor, bankers, PIPE or pre-IPO investors (the ones who get a warrant and stock for $10).

Agree. I'd just finished editing my comment to say as much before you responded...

The target gets a public stock, which is what they want and a valuation higher than they were before the deal

Investors give money to companies, with only some expectation that the money will be returned later.

The "Pied Piper" will mislead investors into giving money into illegitimate causes: people who sell $1 for $0.80 under the name of growth, with no real plan on actually making a sustainable long-term business model.

In the short term, investors are happy that other investors are piling on and buying the stock (increasing the stock price). But in the long term, when the company inevitably runs out of money, the investors will be left holding onto worthless shares.

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This has already happened with MoviePass.

> Without getting into details, the tale ends with the piper playing his magic pipe to hypnotize the town's children, who follow him out of town and into a dark cave, never to be seen again.

Uh, you are omitting the important detail that the town hired the piper to get rid of rats during the black plague, and the piper played his tune and the rats followed him to their death. After the town refused to pay him for removing the rats, he took his own revenge, playing again but for the children. Hence the saying that one must "pay the piper", as a reference to needing to pay one's debts, the connotation being that a community that refuses to pay their debts is literally jeopardizing their children's future.

In this case, we can therefore debate whether the piper is leading children or rats. As the followers are clearly investors, one can make a case for either interpretation.

Putting aside the fact that headlines are usually chosen by editors, not writers – this is where it comes up in the article itself:

> When the stock market was sky-high in January [...] Palihapitiya was tweeting, “Tell me what to buy tomorrow and if you convince me I’ll throw a few 100 k’s at it to start. Ride or die.” [...]

> Such peacocking, [financial historian Irene] Finel-Honigman told me, is fun to watch and potentially useful: “These kinds of scam artists are really important, because, though maybe they go too far, they’re the ones who convince everyone else to start paying attention. They’re Pied Pipers. They notice things other people miss.” Then, as these fanciful tales are replaced with legal fine print, living happily ever after becomes having a 401(k).

So he's been promoting several SPACs for a while now and now he thinks they need more regulation. Quite the shift. https://mobile.twitter.com/chamath/status/139791065787435828...

As a random aside, the German navy at one point had a minesweeper called the Hameln:

https://www.flickr.com/photos/twic/14029282300

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