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How Private Companies Are Bypassing the IPO Process | WSJ - YouTube
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(fireworks crackling)
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- [Narrator] There's a big trend
right now in the IPO world.
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- Be latest company to go
public through a SPAC IPO.
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- SPACs for many, many
years had a very bad name.
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- [Narrator] Over the last two years,
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companies like Nikola,
DraftKings and Virgin Galactic
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have all entered the market
through something called SPACs,
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or Special Purpose Acquisition Companies.
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These controversial entities
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also known as blank-check
companies offer private businesses
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a fast track to going public
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that bypasses the traditional IPO process.
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And they're growing more popular.
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You can see activity has almost
quadrupled so far in 2020.
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Some investors see a
big opportunity in SPACs
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and say they're a more efficient way
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for companies to go public.
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But critics say they
allow for backdoor deals
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and that they're not worth the risk.
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- One criticism of the
SPAC process is that
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investors can get into a
company and then get burned,
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they won't have the time to figure out
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if it's really a legitimate company
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and there is even risk of fraud.
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- [Narrator] To understand
why investors are rushing
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to blank-check companies
despite the potential risks,
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first, you need to
understand how they work.
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(gentle music)
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SPACs are public shell companies
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that exist for a single purpose,
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finding a private company and
taking it to market quickly.
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In order to take a company public,
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a SPAC will merge with it.
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The company then gets
a spot on the exchange
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and a new ticker.
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The SPAC transforms
into the target company
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taking on its name.
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Once the deal closes,
investors who own shares
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in the blank-check company now
own a piece of the new entity
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and the founders of the SPAC
get a large part of it too,
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often at a very good price.
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Blank-check companies are primarily owned
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by veteran corporate
leaders and big investors,
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like private equity firms.
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Usually it's a smaller amount
of shares that are available
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to the public.
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- Ideally, a SPAC gives you
an opportunity to invest
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in a good management team
or in a good entrepreneur,
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where you have a good feeling about them
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doing some sort of profitable deal
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that increases the
value of the investment.
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But it is writing a blank-check,
you're taking a risk,
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you don't know if they're
gonna do a good deal
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and have the stock go up
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or if they're gonna do a bad deal
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and the stock will go down.
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- [Narrator] For the
companies going public,
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SPACs offer a different
approach than traditional IPOs,
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where the private company
works with underwriters
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or investment banks to work out a deal
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and then takes the company public.
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The process can take months,
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and under traditional IPO rules,
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the private company must stay quiet
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and refrain from promoting its shares
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until they start trading.
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This is where SPACs have a big advantage.
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- With a SPAC deal, companies
can actually talk about
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themselves and promote
themselves to investors
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in a way that they can't with an IPO.
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- [Narrator] Analysts say
growing mainstream acceptance
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of SPACs, help fuel this year's boom,
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but it was also the coronavirus pandemic.
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- We are looking at another
day of extreme volatility,
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stocks opened just moments ago
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with the Dow down more than 600 points.
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- [Narrator] This is because
during volatile markets,
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a company's valuation can crash overnight.
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- The main advantage to
going public through a SPAC
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has been definitely true this year
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is there's more certainty of execution.
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You know earlier on in the process
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they'll get the deal done.
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IPOs get derailed at the
last minute all the time.
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Because the markets are volatile,
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they're falling, nobody
wants to go public.
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- [Narrator] And this
year, many of the companies
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going public through SPACs
are seeing big valuations.
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In September, United Wholesale
Mortgage agreed to go public
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in the biggest SPAC deal ever
with a $16 billion valuation.
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This is a sharp change from
the early days in the 1980s
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when the precursors of today's SPACs
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were called blind pools.
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These had a shady reputation
tied to Penny-Stock frauds.
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But in the decades since,
new laws and regulations
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helped add credibility and
bolster investor confidence.
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Now as SPACs gain momentum,
more blue chip institutions
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and veteran investors are buying in.
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- For instance, Goldman Sachs
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never used to underwrite SPAC IPOs.
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A few years ago, it
did its first SPAC IPO.
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The New York Stock Exchange
now lists a lot of SPAC.
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For a long time it did not.
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- [Narrator] And with
SPAC funds getting larger,
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the size of blank-check deals
are expected to grow as well.
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- This year Bill Ackman
launched the biggest SPAC ever.
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It could potentially take a
very, very large company public.
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- Our thesis here is by having
a $5 million dollar cash pile
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in a public company.
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It's really, it's our
own version of a unicorn.
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- [Narrator] Still, some
critics remain concerned that
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companies going public through SPACs
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aren't getting as much scrutiny
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as those using traditional IPOs.
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- Exhibit A for that might
be the situation with Nikola,
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which went public through
a SPAC a few months ago,
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and has turned out to be the center
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of a firestorm of fraud allegations.
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- Nikola shares are tumbling
after a short seller
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called the company quote,
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"An intricate fraud
built on dozens of lies."
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- The people who don't like SPACs
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and prefer traditional IPOs would tell you
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that if it had gone
through a traditional IPO,
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there would have been
more time for investors
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to kick the tires and to
scrutinize the company for fraud
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before it went public.
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- [Narrator] Federal
regulators are raising concerns
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as well.
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The SEC is now examining
how blank-check companies
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disclose their ownership,
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and how compensation is
tied to an acquisition.
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- [Clayton] We wanna
make sure that investors
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understand those things.
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And then at the time of the
transaction, when they vote,
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that they're getting the
same rigorous disclosure
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that you get in connection
with bringing an IPO to market.
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- [Narrator] Critics also say,
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SPACs have often been a bad
deal for companies going public.
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- The founders of the SPAC,
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when they do a deal, they
get to have a 20% stake
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in the company that results from the deal
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without having to pay very much for it.
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And so essentially a way they
can line their own pockets.
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- [Narrator] But this
is starting to change.
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Akckman's blank-check company
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is one of the largest to
not include this feature.
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- If Bill Ackman SPAC succeeds
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in getting a large multibillion
dollar private company
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and taking it public,
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I think it'll be the
best proof of concept yet
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for the SPAC idea.
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- [Narrator] But right now,
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the future of blank-check
companies remains unclear.
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Investors say SPAC deals are here to stay,
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while critics argue that the
blank-check boom is just that
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a trend that isn't destined to last.
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(gentle music)
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