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SPACs: The Backwards IPO That's Taking Over Wall Street

LEILA FADEL, HOST:

The hottest trend on Wall Street this year is a SPAC. That's spelled S-P-A-C.

(SOUNDBITE OF MONTAGE)

UNIDENTIFIED REPORTER #1: Constantly now - SPAC, SPAC, SPAC.

UNIDENTIFIED REPORTER #2: SPAC frenzy.

UNIDENTIFIED REPORTER #3: SPAC in action.

UNIDENTIFIED REPORTER #4: SPAC is the new black.

FADEL: Former House Speaker Paul Ryan's got a SPAC. Shaquille O'Neal's got a SPAC. And the youngest self-made billionaire ever just brought in all that cash through a SPAC. But what the heck is a SPAC? We'll let NPR's Camila Domonoske explain.

CAMILA DOMONOSKE, BYLINE: In an IPO, or initial public offering, you start with a company that wants to go public, and then investors toss a bunch of money at it. A SPAC, or special purpose acquisition company, kind of flips that around. Investors pool their money together first with no idea what company they're investing in. Then that pile of money goes out and looks for a company to merge with. The company gets the money and the stock ticker with a lot less paperwork. Until recently, this was not a well-regarded way to go public.

USHA RODRIGUES: They have this sort of shady origin story, right?

DOMONOSKE: Usha Rodrigues is a professor at the University of Georgia School of Law.

RODRIGUES: There were these blank check companies who really had a bad reputation.

DOMONOSKE: A lot of blank check companies were outright frauds, so the federal government cracked down. So SPACs added more safeguards to the blank check model, like investors can get their money back if they don't approve of the company that gets picked. But they were still on the fringes of the financial world until now.

SARAH MORGAN: I've probably done, you know, one or two SPAC combinations a year for the last five years until this year. And then I would say this year, the market just exploded.

DOMONOSKE: Sarah Morgan is a lawyer with the firm Vinson & Elkins. SPACs today...

MORGAN: Over 50% of my practice this year.

DOMONOSKE: Why now? Well, if you look past the bad reputation, SPACs have some real advantages. They're faster than IPOs and have less uncertainty for founders - both attractive during this really uncertain year. Austin Russell is the CEO of Luminar, a company that makes lidar. That's like radar but with lasers. It's used in self-driving vehicles. He founded the company as a teenager. Now he's got contracts with companies like Volvo. It was time to go public, and he saw the appeal of a SPAC.

AUSTIN RUSSELL: You got through the process end to end in, you know, like, four months, as opposed to having to spend huge time and distraction for the better part of, you know, a year or two.

DOMONOSKE: And he'd seen several well-respected companies do it first.

RUSSELL: It's pretty cool.

DOMONOSKE: His SPAC merger earlier this month made him, at 25, Forbes' youngest self-made billionaire. Today's SPACs have clear benefits for founders like Russell, who can go public with less paperwork. They can also mean big bucks for the sponsors who organize them. In fact, sponsors make so much money if they close a deal that some critics worry there's an incentive to merge with a mediocre company just to get that payday. And that raises a big question - whether this SPAC craze will be good for investors. Usha Rodrigues says the risks are real.

RODRIGUES: Because the flip side of making things easier for companies is inevitably that the risk of fraud to investors goes up. I don't know any way to square that circle.

DOMONOSKE: Some of this year's SPACs have performed badly on the stock market, and others have raised bigger concerns. After zero emission truck maker Nikola went public through a SPAC, it was accused of fraud, which the company denies. Despite the skeptics, the spectacular rise in SPACs shows no sign of fading away.

Camila Domonoske, NPR News. Transcript provided by NPR, Copyright NPR.

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