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The SPAC Trap: How SPACs Disable Indirect Investor Protection
Spamann, Holger Guo, Hao
Spamann, Holger
Guo, Hao
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Abstract
Indirect investor protection makes investing in most public securities safe even without understanding their terms or the underlying business. Special Purpose Acquisition Companies (SPACs) disable this protection by offering two alternative payoffs from the same security, the SPAC share, in the de-SPAC process: the redemption value, or a share in the post-de-SPAC entity. The former is usually higher and chosen by sophisticated repeat players, while unsophisticated investors elect the latter or receive it by default. Before the de-SPAC process, the SPAC share price reflects the higher payoff, such that unsophisticated investors systematically overpay. This overpayment is captured, directly or indirectly, by SPAC sponsors and IPO investors. This allows the latter to make money from SPACs even if SPACs create negative social value.