Wave of tech startups entering Nasdaq via SPAC backdoor

Canoo Holdings Ltd. announced on Tuesday its plan to go public through a merger with Dan Hennessy’s Hennessy Capital Acquisition Corp., a special purpose acquisition company, or SPAC, at a $2.4 billion valuation. Canoo raised $300 million through the process without even filing a prospectus or explaining to the public its business model. It now plans to use the money it raised to continue developing its skateboard platform that was designed as the base for a range of vehicle designs known as top hats that have a wide selection of cabin layouts.

While a global pandemic is running riot, more and more tech companies are announcing their plans to go public and it is important to notice the different methods in which they are doing so. It used to be obvious that companies would go down the IPO route, the traditional and healthy method which requires companies to go through a series of stress tests. Over recent years, with the insatiable hunger of investors for investments continually growing, tech companies can allow themselves to be more creative.

Spotify was perhaps the company that set the trend when it decided to go public on NYSE in a direct listing. Slack followed suit and Peter Thiel's Palantir intends on going down the same path as well. When you enter the market in such a way you are bypassing two main hurdles: the uncertainty regarding the valuation of the company and cutting the costs of using underwriters. This is mainly suitable for companies who don't want to offer their shares at a discount only to be able to enter the market and that may have doubts regarding the company's business model, while also wanting to avoid diluting the current shareholders. On the other hand, this method doesn't include a funding round and the company doesn't go through an examination before being listed.

We are now seeing the rise of another route to going public known as SPAC, which stands for Special Purpose Acquisition Companies. SPACs have been around since the 1980s, with their goal being to list on the stock market without any significant activity and then raising money from public and private investors and using it to purchase another company. The company that is acquired is merged into the SPAC and essentially receives the funds raised by the SPAC and a backdoor entry into the stock market without having to go through a public due diligence. SPACs were initially a popular tool to defraud investors, but once the U.S. Securities and Exchange Commission regulated the matter in 1992 it essentially stopped.

But over recent months tech companies are returning SPAC to its former glory, with these companies raising $13.6 billion in 2019, 16% more than the record set back in 2007. That record has already been shattered in 2020, reaching $31.3 billion through 70 different listings.

Canoo is the fourth company to enter Nasdaq via a SPAC over the past couple of months, following in the path of Fisker, which was listed at a value of $2.6 billion, Nikola, listed at $15 billion despite having yet to commercially sell its zero-emission trucks, and Lordstown Motors, which raised $676 million via a SPAC on a valuation of $1.6 billion.

Major investment banks are also participating in this celebration, with Goldman Sachs, Credit Suisse, Citigroup and Deutsche Bank all acting as underwriters in these hollow SPAC IPOs.

Tech chiefs are also deeply involved, with co-founder and chairman of Eventbrite, Kevin Hartz, filing last month a request to raise $230 million for a SPAC, while a different SPAC founded by Leo Apotheker, the former CEO of HP and SAP, applying to raise $400 million that same day.

SPACs may no longer be a method to defraud investors, but they still serve as financial trickery which is becoming more and more popular these days as it isn't a healthy way to raise money. That is no coincidence and is the result of the uncertainty created by the pandemic and the stress companies are feeling to raise quick capital. It is a comfortable path through which to invest and share the risks with the public as soon as the merger is complete and the shares can be traded.

But this public is made up of many small and unsophisticated investors who are only getting confused by these moves. These investors are used to knowing that regulators sift through companies that want to go public and that only those that meet strict demands go on to be traded. All of these processes go missing when it comes to SPACs and this leaves small investors facing a wave of risky tech companies entering the market without any restraints.