Wednesday, May 26, 2021

SPACS: PIPE Investors "Evaporate"

PIPEs are the part of the SPAC phenomena that we dislike the most. From May 11's "I'm A SPAC Cowboy....":
Bet you weren't ready for that.

Because shorting stocks based on valuation (vs fraud) in a bull market is so dangerous, we don't talk about it all that much. There have been a few, the Great Kinder Morgan short of '14* being a wonderful memory, along with a few tactical i.e. quick shorts of Tesla over the years (in direct violation of the decade-long "Don't short TSLA" admonition), but as a general rule, on the blog we only short frauds in a bull. In a bear, "Short 'em all" as one of my mentors used to say.

The fact we don't put every last thought that pops into our collective heads out in public actually benefits our readers as a couple of things that hurt results in 2020 never made it to the blog.

But I don't like blind pools.

And I especially don't like SPAC's with PIPES....

I mean, for your run-of-the-mill blind pool the rationale offered up is funny enough:

"According to Millette, the SPAC effectively creates a vehicle through which investors deputise a group to do deep, month long due diligence in advance of the deep SPAC, which is effectively the IPO of the company being merged."

But then you throw in the private investment into the SPAC via PIPEs, a tool made famous by the Mafia* in the '90's with Offshore, Reg. S, Death-Spiral Convertibles, and these days containing all sorts of terms, conditions, pricing etc. not available to retail SPAC investors and things get real interesting real fast.

And from ZeroHedge, May 25:

The SPAC Bubble Is Bursting: "Dozens" Of Companies Canceling Mergers As PIPE Investors Evaporate....

....Investors are now lamenting whether or not SPACs have taken too many companies - specifically pre-revenue companies with little financial prospects - public, too quickly. 

Amir Emami, global co-head of SPAC Coverage at RBC Capital Markets, said: “PIPE investors have really put on the brakes in recent weeks and are focusing on more quality opportunities.”

It is odd to see bankers cool on the deals given how quickly they are generally able to exit from such transactions. PIPE investors can sell shares as little as 30 days after a deal consummates, the report notes.

The number of SPACs has fallen off a cliff: only 30 companies have merged with SPACs since the beginning of April, down from 69 from February to March. 

Latham & Watkins LLP partner Tad Freese said: “Most of the SPAC mergers that are getting announced are trading below $10 a share soon after, so there is a very real possibility that folks will redeem their shares and shoot them down.”

60% of the 146 SPAC mergers that have been announced since the start of the year are now trading below the IPO price of their SPAC, Reuters notes.

*From 2017's "Shipping: More On the Scam That Is Dryships AND a Tiny Treasure From The Past (DRYS)":

I was thinking about the SEC's Regulation S and how it might apply to the DRYS scam and maybe doing a post on same, not so much because I want to do the legwork for some hotshot young securities attorney but because I'd get to use phrases like "Safe Harbor provisions" and "Offshore" stock offerings and calling the penny stock hucksters "Pirates" and how clever that would be in relation to a shipping company and oh, the fun we would have.

And then I realized why these bon mots were gurgling out of the subconscious:
SEC Chairman Levitt had said that reg. S was "one  safe harbor with too many pirates in it."

Oh yeah, that's right, the quip was in all the papers.

Worse though, it was suggested I look up one Jon B. Jordan.
Turns out he was a senior attorney in one of the SEC Regional Offices. Florida. Covered Boca Raton and other such securities cesspits. Wrote a monograph.
Got every single one of the shipping phrases into THE FREAKIN' HEADLINE:
Regulation  S  and  Offshore  Capital: Will  the  New  Amendments  Rid  the  Safe Harbor  of  Pirates?
It's a solid 73 page paper published in Northwestern University's Northwestern Journal of International Law & Business.
Has the Levitt quote as the first footnote.
On page one....