Do you also have $5 billion in your Roth IRA?

The educational portion of this newsletter focuses on SPACs

In 3:45 seconds, you will learn:

  • What an SPAC is and why people want in on it
  • 5 headlines that pretty much sum up the week
  • Why people are mad at Peter Thiel
  • Our rec of the week

Source: Google

TL;DR

  • SPACs, or special purpose acquisition companies, are formed to raise money through an IPO to buy another company
  • At the time of their IPO, SPACs are effectively shell companies with no existing business operations or stated acquisition targets
  • SPACs are typically funded at the top by wealthy sponsors and institutional investors before being offered to retail investors around a standard price of $10 per share
  • While investing in a SPAC can have substantial upsides, the plethora of opportunities and structure of each individual SPAC can mean investors are taking on significant risk to seek their rewards

A SPAC, or special purpose acquisition company, is a shell company with no commercial operations, cash flow, or investments. Also dubbed “blank check companies,” these are shell companies erected for the sole purpose of raising capital through an IPO. And in recent years, they’re an increasingly prevalent vehicle for carrying various transactions to fruition – in particular, transitioning a private firm to a publicly traded security. 

How SPACs work

SPACs are generally formed by institutional investors (such as hedge funds) or wealthy individuals, called sponsors, with expertise in a certain industry or sector. 

The founder of a SPAC typically has at least one acquisition target or sector in mind upon creation of the shell company. But to avoid extensive filing disclosures during the IPO process, they may avoid identifying an entity until after the first round of funding. 

Source: Nasdaq

Typically, the original sponsor will seek capital from underwriters and institutional investors first, then retail investors. The funds raised usually goes into an interest-bearing trust account and cannot be redispersed except to a) complete an acquisition or merger, or b) refund investors in case of liquidation.

After its IPO, a SPAC generally has 18 months to 2 years to complete a merger or acquisition lest it face liquidation proceedings. The average period for a SPAC to find a suitable transaction ranges from a few months to over a year. 

Once a SPAC finds an operating company of interest, management negotiates the terms of a deal for a potential initial business combination (the merger or acquisition). It’s not unusual to see these structured as a reverse merger wherein the operating company becomes part of the SPAC or a SPAC subsidiary.

 

Why some investors are not fans of SPACs

Not everyone is thrilled about the emergence of SPACs as a means to a publicly listed end. Former Goldman Sachs CEO Lloyd Blankfein told CNBC that investors need to exercise caution if they’re considering signing up to a SPAC: 

Blankfein also noted that SPAC participants are not incentivized to prevent overpaying for target businesses due to the structure of a SPAC. As such, he mentioned, this leads to situations where “some people make a lot of money and investors lose money.”

Acquired companies are the most likely to benefit from a SPAC merger, as they get to jump straight to the cash. For them, SPACs provide a method of going public without wading through mountains of SEC filings for a traditional IPO. Moreover, some market participants believe that SPACs offer small companies more certainty in pricing and IPO terms. 

But from the investor’s point of view, SPACs are slightly riskier.

Why SPACs are not exactly designed with retail investors in mind

Standard practice for an SPAC is to list IPO shares at $10 apiece. Investors who buy in after the initial offering pay the current market price – and if a deal goes belly-up, they’ll only receive the pro rata rate of $10 per share. 

Sponsors and institutional backers benefit the most. SPACs are often structured so that profits go to sponsors first, and generally purchase equity at more favorable terms than IPO investors.

SPACs are not usually profitable for retail investors. Advisory firm Renaissance Capital discovered that, between 2015-2020, the average returns from SPAC mergers fell short of average post-market returns for IPO investors. 

Source: Google

The bottom line

Among the 114 companies that went public via SPAC mergers in the past decade, investors who bought common stock on the first day of trading lost an average of 15.5% over 3 years. At the same time, hedge funds and sponsors took advantage of better prices and warrants to unload their shares at the beginning and drive down prices further.

The moral of this story is to understand that as a retail investor, SPACs aren’t always going to operate in your favor. That is not to say you cannot profit off of it – it’s just a lot riskier.

Read the full “Investing 101” resource on SPACs

Five headlines that sum up the week

1. Markets rallied after saying “lol jk” to last week’s abysmal performance

Source: Google Finance

The things that caused markets to drop last week aren’t important. This week, investors are all “Inflation? Never heard of it” and continued to buy. The S&P 500 in particular hit record highs and U.S. stocks are well on its way to record the best week since March.

2. The infrastructure bill is a go and internet companies aren’t mad about it

Source: Pittsburgh Post-Gazette

The infrastructure bill is for, well, infrastructure. $65 billion will be going to the expansion of broadband services and, naturally, certain companies are psyched about the work they’re about to get hired for. This will expand internet in rural areas that have otherwise been unable to access the internet.

3. Big Tech loses a big antitrust case

Source: NY Post

It might actually happen. Big Tech might get broken up. The Ending Platform Monopolies Act bill, also known as the “breakup bill,” has just passed the House and would next go to the floor for a close vote. A lot can happen in the interim, and all of the tech giants are currently in full-blown lobby mode.

4. McDonald’s is rolling out a new loyalty program

Source: Giphy

This loyalty program is intended for McDonald’s to be able to collect customer data. Digital sales were almost $1.5 billion in Q1 for McDonalds, so a loyalty program will likely bring in even more money for the fast food chain. The program allows customers to earn 100 points for every dollar that they spend. The easiest items, like hash browns or a cheeseburger, cost just 1,500 points to redeem. A Happy Meal or Big Mac will cost you 6,000 points.

5. Visa acquires Swedish fintech company Tink for $2 billion

Source: Giphy

Visa abandoned its multi-billion dollar deal with Plaid last summer after it was blocked due to antitrust concerns. It is now acquiring Tink, a Swedish fintech company that provides the technology banks and third parties use to access customer data. You’re probably thinking, “how is this different from the Plaid deal?” You’re not alone; many are wondering the same thing. 

ICYMI: Peter Thiel has $5 billion in a Roth IRA

ProPublica has been digging up a lot of info that has rubbed people the wrong way. The latest revelation, that Peter Thiel currently has $5 billion sitting in his IRA Roth, questions whether company founders should be legally allowed to contribute to this tax-free retirement fund. 

A 2014 report from the Government Accountability Office explains why:

“Founders of companies who use IRAs to invest in non-publicly traded shares of their newly formed companies can realize many millions of dollars in tax-favored gains on their investment if the company is successful. With no total limit on IRA accumulations, the government forgoes millions in tax revenue.”

Source: ProPublica

As a refresher, Roth IRA’s are tax advantaged, meaning that the wealth can grow tax-free. Thiel would have paid capital gains taxes on the money he made from the PayPal acquisition. Instead, he turned his $1,700 investment into $28.5 million of tax-free profits. Thiel’s Facebook investment is also sitting in his Roth.

Given that the current maximum contribution is $5,500, and only those who make under $140,000 qualify for Roth IRA’s, is this legal? Technically, yes. Morally permissible? Depends on who you ask. 

How to get a million dollar financial education for free

Source: MarketWatch

The internet is ripe with plenty of options for new investors who are eager to learn about finance. After all, Q.ai publishes a weekly investing education newsletter and we’re not even in the content business! The abundance of content isn’t always easy to navigate – neither is it always free. This article in particular lists out a number of free resources for you to explore at your leisure. Whether you’d rather tune in to a course or read a good book, all of these recs are free.