Coase-Sandor Working Paper Series in Law and Economics
Special Purpose Acquisition Companies, or SPACs, have come to play a large role in bringing together small and large investors in the acquisition and expansion of private companies. A pessimistic version of this relatively recent alternative to conventional initial public offerings (IPOs), and other methods of investing in companies ready to expand, is that clever sharks take advantage of overly optimistic and ill-informed small investors. This Article offers a very different view. It shows that small investors need someone to locate good investment opportunities, and then often also benefit if another well-informed party can credibly vouch for the entity that claims to have found a good target. It also suggests the development of other means of vouching for parties that claim to have found worthy targets for investment.
The analysis focuses first on SPACs that have recently arisen to play the important role of finding targets and then on PIPEs (Private Investor(s) in Public Equity) that serve the role of evaluating and certifying those SPACs. Each of these is rewarded for what it does along the “financing chain.” SPACs and PIPEs are to be welcomed rather than feared. Small investors would benefit from knowing when and at what prices potential PIPEs turned down deals, and they might benefit if SPAC founders earned lower rewards as the period during which they have use of investors’ funds comes towards an end. The discussion shows how these problems are related to those found in other markets, such as the information consumers can (and cannot) derive from knowledge about a large purchase that preceded them. Hertz’s purchase of a Toyota, and Warren Buffett’s purchase of stock, is not terribly different from a PIPE’s purchase of a SPAC.
This Article also suggests alternatives to SPACs that might arise with a little help from changes in law. Prediction markets could aggregate information possessed by many small parties. SPACs themselves, or yet other providers, might offer insurance against the possibility of a target whose bad quality can be detected only with factfinding that is difficult for dispersed, small investors to obtain. Finally, the analysis suggests that SPACs represent a new way of dealing with strategic investors who hold-out for more than their fair share of a discovery.
Saul Levmore and Frank Fagan, "SPACs, PIPEs, and Common Investors", Coase-Sandor Working Paper Series in Law and Economics, No. 954 (2022).