This is not really a merger because the other company is a “blank check” holding company (a.k.a. SPAC). It has no operations, it just holds a bunch of money put in by investors who want to find a private company that wants to go public.
Also all the people who built the company in the first place will cash out. People can decide for themselves whether they think the product will become more or less secure from this.
Faster: the finance markets have been extremely tenuous the past 4 years between pandemics, supply chain crisis, world wars, inflation, and so on. An IPO requires 12 to 18 months of work / process before listing. SPACs can be done in a quarter or 2. In uncertain times it is much less risky to get the listing done fast.
Cheaper: Startups pay much less in fees to investment bankers when going through SPACs, there is also less dilution for investors and employees and more valuation transparency. In traditional IPOs investment bank underwriters have some conflict of interest to get lower valuations to pass the 'pump' onto their high value clients or proprietary trading desk. Why should they benefit over the people who have literally built the company?
While it is true that there is room to better regulate SPACs, there haven't been horrible abuses yet. It is also true that SPACs have not had the best returns for retail investors over the past few years however drawing a conclusion that this is due to SPAC usage versus the complex macro economic environment of recent years is very difficult.
Instead we saw popular podcasts push their SPACs on gullible retail investors, based on fuzzy concepts like disruption and TAM. Subsequently these SPACs lost 90% of their value and the insiders made bank. I hope to see jail sentences for the more shameless SPAC pump and dump players.
If people want to gamble, then that is their problem.
The thing is, nobody is born sophisticated and there are many ways to get hurt in financial markets in the absence of scams even if you're intelligent and do your homework.
You mention index trackers, but they are no silver bullet. Their mechanism is basically to buy more of stocks that go up, and to sell those stocks that stumble badly. The more people rely on index trackers (exchange traded or not) the more volatile they'll become, and because index funds use such a simple trading strategy it's easy to front-run or otherwise exploit them. Furthermore, index trackers depend on active investors for price discovery, and the fewer active investors you have the worse index funds will perform. Relying on a vanguard ETF might continue to work, but to assume that it will is hopelessly naïve. It's no coincidence that ETFs got so popular with interest rates at 0 and a fed that made stonks go up.
Imagine I buy a chainsaw which is clearly labelled as something that can cut your hands off, it's widely known and obvious to everyone that chainsaws can cut your hands off very easily, not just in the specialist financial press but also on comedy shows and from TV news pundits and loads of other sources - I'm a mentally competent adult, I'm informed about the substantial risks, I want the chainsaw anyway so I can chop down lots of trees fast. Then I chop my own hand off by mistake.
Was it society's responsibility to protect me from my own mistakes, even when I was fully informed of the risks?
It's like giving 40% of the adult population a chainsaw that they have to use if they want to retire at a reasonable age. The outcome is predictable and they would be wise to invest in a prosthetics company.
The questions are rhetorical. Companies will rob their shareholders blind if you let them. You can't just be "lol caveat emptor".
(Casinos also cheated players shamelessly in the good old days before regulatory oversight.)
But, I'm really not getting your point here. SPACs have to report financial results just like any other public company. They aren't allowed to commit fraud any more than any other company.
A conventional IPO has a number of roadblocks for fraudsters. First they have to convince a reputable investment bank (like Goldman Sachs) to take them on as a client. Then the CEO and CFO of the company have to go on a grueling road show where they talk to groups of sophisticated investors, present their business prospects, and answer difficult questions. The IPO doesn't happen if those investors aren't willing to pay up, or if the investment bank feels like management is not transparent about their realistic business prospects.
With a SPAC you have none of that. You can have a slide deck and a webcast and make outrageous claims and nobody will call you out on it. The company and SPAC sponsor can dump their shares on retail investors who think they are investing alongside the executives and SPAC sponsor, when in reality they are their exit liquidity.
Lordstown Motors. Faked their order book. Blatant securities fraud.
There are many others.
> Index ETFs have been around for 15+ years now, and the advice is widely known that if you are an uneducated investor without inside information or some type of edge, you should stick to sub 0.15% expense ratio index funds....
> If people want to gamble, then that is their problem.
So what? It's also well known that the IRS doesn't take payment in iTunes gift cards. So do you think if people get scammed, it is their problem for not knowing better? Should we just repeal all the laws against fraud and scams, because caveat emptor?
The behavior described in the GP post is unacceptable, and the fact that someone theoretically should have known better doesn't excuse it.
> It's faster and cheaper, those are things that are generally considered valuable.
For the company. It's also faster and cheaper for the company to just to ignore all regulatory requirements (financial reporting, product safety, pollution, labor, etc.), but that's usually illegal for good reason.
It's seems pretty dysfunctional that companies would be allowed to do an end-run around pre-IPO scrutiny like this.
[edit]
Some googling[1] implies my memory was mostly correct.
1: https://www.investopedia.com/roth-ira-conversion-rules-47704... See particularly the part about "backdoor
1. Take N dollars of post-tax money.
2. Put it in a Roth IRA.
But the same limits don't apply to this process:
1. Take N dollars of post-tax money.
2. Put it in a traditional IRA.
3. The next day, convert the traditional IRA to a Roth IRA.
When you do the conversion, you only owe taxes on any additional earnings (not your post-tax contribution) during the one day that it was a traditional IRA. So the second procedure accomplishes almost exactly the same thing as the first one, but it legally gets around the limit designed to prevent rich people from getting Roth IRA tax breaks.
However the companies that go public via SPAC are mostly VC-funded, so in that sense you’re right that they’re also profiting from the SPAC con by being able to dump their holdings in these companies that were not actually ready to go public.
This reads like a non sequitur. The corporate structure is irrelevant if there is a radical change affecting how strategic decisions are made regarding their products and their userbase.