SEC Warning on SPACs: The Real Lowdown

James West
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With the SEC issuing a warning about investing in SPACs (Special Purpose Acquisition Vehicle, or “Blank Check” companies) and mainstream financial media predictably sensationalizing that into some kind of Monstrous Threat, investors need to relax and get educated.

The same rules apply to investing in SPAC’s as investing in any asset class. Do your Due Diligence, and if you don’t understand it, don’t invest.

There are some pervasive misperceptions about SPACs that are typically exacerbated by journalism, most predominantly that SPAC’s are capital pools looking for companies to take over.

It is actually the opposite.

Most capital pools formed by marquis investors like Gary Cohn (Goldman Sachs) and Bill Ackman are not looking to acquire operational control of companies. Rather, they are trying to attract companies to take over their SPAC to gain access to the capital raised.

So basically, think of a SPAC as a shell company with a whopping big treasury looking to be taken over via Reverse Takeover (“RTO”) by a (hopefully) profitable company.

For operating companies, this is a way to generate a liquidity event for founders while providing a go-public event for shareholders. Merging with a SPAC eliminates any uncertainty about investor appetite or how much capital can be raised.

Thus, a SPAC is inherently de-risked, relative to IPO’s or PIPEs, for investors.

That’s why it is naive to call the explosion in popularity of SPACs some kind of ‘bubble’. It is merely the evolution of RTO’s and shell companies into a new hybrid that is basically shell + cash + built-in banking relationship.

They are here to stay and are not any more or less risky than any investment in any other company type.

That is not to say that some SPAC’s will ultimately constitute failed investments.

The SEC also warned that “celebrity-endorsed SPACs are not reliable investments just because they are endorsed or otherwise attached to a celebrity.

They are not saying “Don’t invest in any SPAC with a celebrity involved”, which is an expected knee-jerk interpretation.

I invested in The Parent Co, known as TPCO Holding Corp (OTCMKTS:GRAMF), specifically because Jay-Z was rolling his Monogram premium cannabis pre-rolls into the company.

Jay-Z himself is joining the management team as Chief “Visionary” Officer…a new corporate officer type, but so what. The man is a successful entrepreneur and proven brand marketer besides being an A-List talent. He knows his herb and knows his client.

Does that mean TPCO Holdings is a guaranteed success? 

Of course not. There is a business plan to be executed upon. Execution is the hard part. And takes time.

TPCO’s share price has drifted lower since the merger, but so have all the major US cannabis brands, as the legislative follow-through by the Biden administration as it pertains to cannabis laws in America have yet to materialize.

Investors – especially the recent crop of Reddit/Robin Hood neophytes – are going where things are poppin. Cannabis isn’t that right now.

Voxtur Analytics vs. Doma

I sold my TPCO Holdings stake for a breakeven because I can see that I’ll be able to buy it back cheaper until something breaks on the cannabis legislation front. I put the money into Voxtur Analytics Corp (OTCMKTS:ILATF) (CVE:VXTR) because that’s a stock and a sector that is popping off big time.

Its biggest competitor is a company called Doma, impressive because it merged with a $645 million SPAC and has Larry Summers as Chairman of the Board, but ultimately, unprofitable and a pale shadow of the array of services and automation that Voxtur has.

Voxtur Analytics shares have increased already by almost 1,000 percent in one year.
Voxtur Analytics shares have increased already by almost 1,000 percent in one year.

The SPAC merger values Doma (NYSE:DOMA) at ~$3 billion, while Voxtur, with its superior cash generation model, is only valued at $400 million.

According to TechCrunch:

“Doma posted modest growth from 2019 to 2020, seeing its GAAP revenues rise from $358.1 million to $409.8 million. After removing premiums paid to agents, its revenues (“retained premiums and fees”) decreased to $179.8 million in 2019 and $189.7 million in 2020.

Doma also expects its economics to worsen in 2021, with its adjusted gross profit as a percentage of its retained premiums and fees falling from 48.3% last year to 39.5% this year.”

A perfect example of a SPAC merging with an unproven business that is likely to be overwhelmed by a more robust competitor. (Obviously, I’m biased since I own Voxtur stock but not Doma).

According to Voxtur Analytics CEO Gary Yeoman:

“It really gets down to the veracity of due diligence from both parties. When dealing with technology corporations, the SPAC must satisfy as any corporation must do when buying or selling anything that you are getting proper value in exchange. 

While SPACS provides a vehicle that may work for both parties, I have great reservations on whether both parties are receiving equal value. Alternatively, when you resort to an IPO, the rigour of due diligence from an abundance and multitude of varied investor institutions, I personally feel that the risk is somewhat mitigated for the investors.”

This is, in my opinion, the biggest risk with SPAC mergers. Sometimes, as is the case with Doma, the merger results in a public vehicle overvalued from Day 1, and the market will obviously make the correction as short interest piles in. 

I wouldn’t be surprised if Voxtur ended up buying Doma once its share price bottoms.

Evaluating SPACS….or any investment…

In general, I like to apply a three-part information exercise to any investment, including SPAC’s. 

These are 1. Known Information. 2. Pro Forma Information 3. Unknowable Information.

Number 1 is what has already happened, and number 2 is what should happen. And number 3 is the Great Unknowns that can kill any company at any point in its evolution.

Essentially known information is used to develop predictive models that consider the unknowable but hedge the risk as much as possible through a complete understanding of the known available information and a conservative application of pro forma predictions.

In theory, this will result in a reliably positive performance when matched with disciplined entry and exit behaviours.

Important Disclosure; The Author owns 148,000 shares of Voxtur Analytics as well as exposure to options that will benefit the author if the share price of Voxtur Analytics rises.

James West

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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