The SPAC skeptic who got the SEC to listen

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The Weekend Pitch

April 3, 2022

Presented by Plante Moran

(Photo by Brendan Smialowski/Getty Images, illustration by Joey Schaffer/PitchBook News)

A dismal outlook for SPACs recently got much worse.

In a batch of new rules unveiled this week, the SEC acted to guard against companies' unrealistic revenue growth projections—a practice that many target companies had taken beyond justifiable limits. A number of proposed changes would also make it easier to sue sponsors, target companies and underwriters of deals.

For Michael Klausner, a Stanford Law School professor and prominent critic of SPACs, the most important change will be to clarify dilution within blank-check deals. Through dogged research with co-authors Michael Ohlrogge and Emily Ruan, Klausner showed that SPAC investors—especially those who entered a deal later on–consistently weren't getting their money's worth, and that a complicated web of diluted shares obscured the true value of a company's stock.

We caught up with Klausner this week to hear what he thinks of the SEC's new rules, and where blank-check deals will go from here. I'm James Thorne and this is The Weekend Pitch. You can reach me at james.thorne@pitchbook.com or on Twitter @jamescthorne.

The iconoclastic stance taken by Klausner and company, first published in the midst of the SPAC frenzy, was vindicated this week in the SEC's proposed rules. The Klausner team's paper, titled "A Sober Look at SPACs," was cited more than a dozen times throughout the agency's framework.

Even without the new rules, hundreds of SPACs that went public in recent years most likely would've been doomed for liquidation—forced to end their hunt for acquisition targets by returning money to shareholders.

During the most recent quarter, SPAC mergers were announced at a rate of about five per month, according to PitchBook data. Meanwhile, 339 blank-check companies that haven't yet executed a deal have less than a year to complete one, assuming the industry's two-year horizon standard.

We caught up with Klausner this week to hear what he thinks of the SEC's new rules, and where blank-check deals will go from here.

Quote/Unquote

(ilbusca/Getty Images)

"The amount of capital, the diversity of capital, the quality of entrepreneurs and the quantity of excellent talent have all dramatically increased in Austin."

—Mike Smerklo, co-founder and managing director at Austin-based Next Coast Ventures, which just raised $310 million across three funds.

Venture investors poured more than $5.5 billion into Austin-area startups during 2021, according to PitchBook data.

Deal Flow

Since the global financial crisis, fintech has been one of the most well funded and fastest growing areas of emerging tech. The expansion of the sector was largely a technological response to the shortcomings of the traditional financial services industry, which came under extreme pressure during and after the GFC.

The COVID-19 pandemic further accelerated the transformation of financial services toward digitization as consumers and businesses became more reliant on and comfortable with conducting financial services online and via mobile apps. These trends benefit the growing ecosystem of fintech startups seeking to address emerging opportunities.

Did you know ...

Some of the greatest VC exits in the IoT vertical are deriving from the smart home sector. (Marcus Millo/Getty Images)

… That the global internet-of-things vertical is maturing as end customers communicate their priorities via spending decisions and strategic investments? Universal IoT platforms are struggling to scale given the failures of general-purpose integrations to create business value across disparate data streams.

As a result, the greatest VC exits are deriving from use-case-specific applications including fleet management and smart home controls. While end-user spending had a bounceback year from the COVID-19 lockdown, the rising tide did not lift all boats.

Datapoints

US middle-market exit activity rocketed to new highs in 2021. More than 1,000 PE-backed middle-market companies were exited during the year, setting a new high-water mark. Cumulative middle-market exit value surpassed $240 billion, also setting a record.

The fervent monetization environment was propelled by several factors: sponsors pushing back exits after a tumultuous and unpredictable 2020, rising multiples that stemmed from a robust economic recovery, and a surfeit of dry powder and cash on corporate balance sheets.

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This edition of The Weekend Pitch was written by James Thorne and Ryan Prete. It was edited by Alexander Davis, Angela Sams and Sam Steele.

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The SPAC skeptic who got the SEC to listen

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Deal Flow

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