Proponents have hailed SPACs as the democratization of capitalism, write Usha Rodrigues of the University of Georgia School of Law and Mike Stegemoller of Baylor University. Known as the “poor man’s private equity,” SPACs have been touted for giving the masses an otherwise rare chance to invest in private companies, and thereby reap the high returns usually reserved for the wealthy. Rodrigues and Stegemoller say their hand-collected data tell a different story.
SPACs are singularly illiquid investments—even when nominally public, SPACs are generally owned and traded by very few. Second, SPACs evolved to eliminate meaningful shareholder voice on the acquisition of a private target, using instead a species of “empty voting,” meaning that any such vote had no economic impact. By rendering the shareholder vote a nullity, SPACs can now virtually guarantee that a target will go public. This laxity of process creates the risk that subpar firms will trade side-by-side with quality public companies, tarnishing the market as a whole, the authors argue.
They say if more than 50 percent of a SPAC’s shareholders redeem their shares, the SEC should block a deal from moving forward. Read more.