"Mature unicorns" I never really understood SPACs until WeWork. A SPAC is a special purpose acquisition company (or "blank-check company"), a corporate shell, sponsored by a well-known investor, that goes public and raises money from investors with a plan to find a private company to merge with. The merger effectively takes the target company public, without an initial public offering; the SPAC effectively transforms into the target company. Investors who buy the SPAC in its initial public offering don't know what they're buying; it will eventually transform into a real company (the target), but they don't know what company it will transform into. They are effectively buying the target company's IPO in advance, without knowing what the target company is, or the price. (If they don't like the target, though, they can get their money back before the merger closes.) In general I did not get the appeal. If you're an investor, you will presumably pay more for a company that you like than for a company to be named later. If you are the target company looking to go public, the SPAC offers some obvious disadvantages. The fees are, effectively, much higher than in a regular IPO: The SPAC pays its own IPO fees, you pay advisers to negotiate the merger, and the sponsor of the SPAC generally gets a big cut of the SPAC as a reward for looking for the target. And because there is no market check on the IPO price—the target and the SPAC just negotiate the target's valuation between themselves—you do not avoid the "IPO pop" that private companies are always worrying about. Nikola Corp. famously went public this month via a SPAC merger that raised about $10 per share; its stock closed that day at $33.97.[1] It left a lot of money on the table, as venture capitalists are always saying about IPOs. If you are looking for a calmer, more rationally priced, lower-key alternative to the IPO, a direct listing might be a good idea, but a SPAC merger is sort of the opposite. But the SPAC merger has one really good feature for the target company, which is that, when you sign the merger agreement, you know you're going public, and you know the price. You negotiate with one person—the sponsor of the SPAC—and you agree on the price, and then you sign the agreement and the deal is pretty much locked in. You don't necessarily know how much money you're raising—how many shares you'll sell—because the investors in the SPAC have the right to ask for their money back if they don't like the deal. But you'll at least raise some money, at a fixed price.[2] In an IPO, on the other hand, first you announce the deal, then you negotiate it. You file to go public, then you call up investors and see if they want to buy stock, and at what price. In a huge boom for private tech unicorns this is a delightful and validating process: You call them up and say "we think we're good and want $20 per share," and they say "no, you are not good, you are great, we want to give you $30 per share." But times change. WeWork filed to go public last year, hoping to get some astronomical valuation ($96 billion?), but investors read the prospectus and laughed it out of town. WeWork raised no money, and it really needed to raise money; the result was a grim bailout from its private investors, layoffs, litigation, and general sadness. WeWork perhaps marked the end of the really good times for unicorns, but even before WeWork some big unicorn IPOs had been a bit soft and achieved lower prices than they wanted. Increasingly, for big tech unicorns, the IPO was again an uncertain and risky process, one that might end up raising money at a lower valuation than they wanted, or not raising money at all. If, the week after WeWork, you had gone to another big private company contemplating an IPO and said "hey we'll guarantee that you can raise at least $X at a fixed price of $Y per share," they would have listened attentively. For a broad range of X and Y, that sounds better than what WeWork got! Yesterday Bill Ackman's Pershing Square Capital Management LP filed a prospectus for its own SPAC, with the delightful name Pershing Square Tontine Holdings Ltd. Pershing Square Tontine is explicitly designed to go find a big tech unicorn and offer it certainty during uncertain times. Here's how it explains the market opportunity: We also believe that the economic and market dislocation resulting from the COVID-19 pandemic has created market conditions and a resulting set of investment opportunities in four principal areas that we intend to pursue. First, as a result of the currently high degree of stock market and debt capital market volatility, it has become increasingly difficult for even a high-quality, well-managed, large capitalization company to execute a public offering on favorable terms. Completion of an initial public offering (an "IPO") is difficult, even for a business which has not been disrupted by the COVID-19 crisis. The inherent nature of the IPO process—whereby the pricing, the ultimate terms of the offering, and even whether or not the offering can be completed remain unknown until the day of pricing of the offering—makes the IPO process inherently uncertain and risky. We believe that this uncertainty, risk, the related upfront expenses, and the significant time required to pursue an IPO have discouraged many large private companies from attempting to execute public offerings in the current environment. As the blank check company with the largest amount of committed capital from the forward purchasers (affiliates of our sponsor)—a minimum of $1,000,000,000 and as much as $3,000,000,000 (or such greater amount as mutually agreed upon)—we believe that our ability to finalize the principal terms of a transaction with a merger partner prior to their public disclosure will make us a more attractive alternative to a traditional public offering for a substantial number of large capitalization, high-quality growth companies, particularly in the current highly volatile environment. Second, over the past decade, numerous high-quality, venture-backed businesses have achieved significant scale, market share, competitive dominance and cash flow—we call these companies "Mature Unicorns." Many of these companies have chosen to remain private, as there has been, until recently, limited pressure from their investors for liquidity, and large amounts of growth capital available from investors, mutual funds and hedge funds. The recent dislocations in both the stock market and private growth equity markets, combined with a number of high-profile private investment failures and disappointing IPO outcomes, have substantially reduced the amount of private funding available for these companies, while demands for liquidity from their investors have increased. Furthermore, the short-term impact of COVID-19 on many of these Mature Unicorns has, even with respect to many of the highest quality companies in this sector, reduced their revenues and cash flows, thereby increasing their need for additional capital. In light of our large amount of committed capital and our willingness to effectuate a merger in which our stockholders will own a minority, non-controlling interest in a company, we believe that we are well positioned to facilitate the recapitalization and public offering of a Mature Unicorn on terms that will generate attractive returns for our stockholders. Basically big private tech companies want to go public and need money, but going public in a pandemic is way more uncertain than going public in a boom. Ackman's tontine can offer them certainty, and it can charge them for that certainty. (In the form of "terms that will generate attractive returns for our stockholders"). And Ackman's SPAC is built around maximizing certainty. For one thing, as it says in that passage, the SPAC has a lot of committed capital from Pershing Square itself: Pershing Square has committed to put in at least $1 billion, and as much as $3 billion, of its funds' money when the SPAC finds a merger target. It is also raising $3 billion in its public offering, but as is typical in SPACs, that $3 billion is not fully committed; investors can demand their money back at the time of the merger if they don't like the target or the price. But if Ackman likes the deal, he can absolutely promise to raise at least $1 billion, or at least $3 billion if he wants to commit more of his funds' money. There's also one other novel feature to increase certainty, which is the "tontine" part. SPACs usually sell investors units consisting of shares and warrants: If you invest your $20 (in this case—usually it's $10), you get a share of the SPAC and also a fraction of a warrant to buy more shares if the deal goes through. Usually those warrants can be traded separately and are just a little sweetener for buying the stock. But in this case, some of the warrants are "tontine warrants": Only investors who don't demand their money back when the SPAC finds a target will get those warrants, but the number of those warrants will be fixed. The more investors redeem, the more warrants each non-redeeming investor will get. (It's like a tontine in that, the more people drop out, the higher the value for the remaining people.) This gives investors an incentive not to redeem; in particular, it makes it less likely that a lot of investors will redeem (because the value for the remaining investors will keep going up). So Ackman has a better ability to offer certainty, because his public investors are a bit more locked in than SPAC investors usually are. We talked a lot about direct listings in the last year or two. Direct listings were, in a sense, a phenomenon of the boom. The essential thinking behind direct listings was: "Why should we give big investors a discount on our shares just to buy them in our IPO? Let's just sell them on the stock exchange at whatever price the market will bear." If you are a big investor, or a capital-markets banker, you will say: Wait, no, we are taking a risk on a new stock when we buy in the IPO; we are doing you a favor; we want to be compensated for that risk, and for committing capital to you, by having our stock go up. But that message was not very convincing when everyone wanted to buy tech unicorn stocks. "What risk? What favor," the unicorns could have replied. This is a phenomenon of the bust, or quasi-bust, or Covid, or of volatility anyway. The essential thinking here is: "We will give big investors a really big discount on our shares if they will buy our whole IPO in advance, so we don't have to worry about it failing." If you are a big investor, buying shares in an IPO can be profitable, but buying an entire IPO can be even more profitable; when certainty is in demand, you can extract some value for it. Disgorgement The basic rule is that if you do securities fraud, the U.S. Securities and Exchange Commission can sue you in federal court. If they win, they can get a court order telling you not to do the fraud anymore, and they can fine you up to the amount of money that you made from the fraud. (If you were doing insider trading, which is technically a species of securities fraud, the fine can be up to three times the amount that you made.) That is an unsatisfying penalty, for two reasons. First, it is an inadequate deterrent: If you do the fraud, you make, say, $100; if you don't get caught, you keep the $100; if you do get caught, you have to pay $100 and are left with $0; if there is any probability of not getting caught, your expected value from the fraud is positive, so you should do the fraud. Second, the money goes to the U.S. Treasury, not the victims of your fraud, which seems a little unfair. If the government is supposed to be protecting investors, it's not a great look for them to take the money you stole from investors and keep it for themselves. Both of these problems can in the abstract be solved: The investors can sue you. They should win—you already lost to the SEC!—and a court will award them damages. You'll have to pay $100 to the investors, and $100 to the SEC. The investors will be made whole, and you'll be deterred because you'll have to pay twice as much as you made. All is right with the world. This has problems too. The investors will have to get together to hire lawyers and manage the lawsuit, and the lawyers will take a cut. Also if you stole a lot of money you may not have enough to pay both the SEC and the victims, so they will be in a race to sue you first. So the SEC found a simpler solution: It can order "disgorgement." "Disgorgement" just means that you have to pay back the money you made. You pay it to the SEC, but the SEC will, uh, probably try to give it to the victims. Disgorgement is separate from the fine, so if you made $100 doing fraud the SEC can fine you $100 and make you disgorge $100, costing you $200 and making you worse off than if you had never done the fraud at all. (Which, again, is the point of deterrence.) The problem with this is that there is no actual law saying that the SEC can sue for disgorgement, which is awkward. But there is a law saying that the SEC can sue for "any equitable relief that may be appropriate or necessary for the benefit of investors," and it does sound like that would include disgorgement. But that was never exactly certain, for legalistic reasons of statutory interpretation and the historical legal category of "equity." And so the SEC sued some people for securities fraud (involving a visa scheme), and won, and got disgorgement, and the fraudsters appealed, and they went all the way to the Supreme Court, and yesterday the Supreme Court decided the case. It decided that the SEC could get disgorgement. This is not really a surprise. The decision was 8-1, and the only dissenter, Justice Clarence Thomas, basically agreed that the SEC could get disgorgement; he just wanted to call it "accounting" instead. (I am telling you, lots of arcane legal history.) It just makes sense; surely if the SEC can get "any equitable relief that may be appropriate or necessary for the benefit of investors," it can get back the money the fraudsters stole and give it to the victims. Still there is one oddity here, which is that the SEC doesn't always actually give the disgorged money to victims.[3] Sometimes it does. Sometimes it is hard to identify the victims, or the fraud is somehow victimless, or there are other uses for the money. From the opinion (citations omitted): The SEC, however, does not always return the entirety of disgorgement proceeds to investors, instead depositing a portion of its collections in a fund in the Treasury. Congress established that fund in the Dodd-Frank Wall Street Reform and Consumer Protection Act for disgorgement awards that are not deposited in "disgorgement fund[s]" or otherwise "distributed to victims." The statute provides that these sums may be used to pay whistleblowers reporting securities fraud and to fund the activities of the Inspector General. Here, the SEC has not returned the bulk of funds to victims,
largely, it contends, because the Government has been unable to collect them. The statute provides limited guidance as to whether the practice of depositing a defendant's gains with the Treasury satisfies the statute's command that any remedy be "appropriate or necessary for the benefit of investors." The Supreme Court majority opinion says, well, the SEC really should give the money back to victims, mostly, if it can, but punts on the question of whether it can sometimes keep it: The Government additionally suggests that the SEC's practice of depositing disgorgement funds with the Treasury may be justified where it is infeasible to distribute the collected funds to investors. It is an open question whether, and to what extent, that practice nevertheless satisfies the SEC's obligation to award relief "for the benefit of investors" …. The parties have not identified authorities revealing what traditional equitable principles govern when, for instance, the wrongdoer's profits cannot practically be disbursed to the victims. But we need not address the issue here. The parties do not identify a specific order in this case directing any proceeds to the Treasury. If one is entered on remand, the lower courts may evaluate in the first instance whether that order would indeed be for the benefit of investors … and consistent with equitable principles. Justice Thomas objects: The award should be used to compensate victims, not to enrich the Government. … The money ordered to be paid as disgorgement in no sense belongs to the Government, and the majority cites no authority allowing a Government agency to keep equitable relief for a wrong done to a third party. Requiring the SEC to only "generally" compensate victims is inconsistent with traditional equitable principles. Worse still from a practical standpoint, the majority provides almost no guidance to the lower courts about how to resolve this question on remand. Even assuming that disgorgement is "equitable relief" for purposes of §78u(d)(5) and that the Government may sometimes keep the money, the Court should at least do more to identify the circumstances in which the Government may keep the money. Quite a lot of securities fraud is just stealing money from identifiable people, but quite a lot of it isn't. Insider trading, spoofing, even putting out fake corporate press releases—these things all involve defrauding anonymous market participants, and it is not always clear who the victims are or how much money they lost. One possibility here is that, in those cases, the SEC can no longer demand disgorgement.[4] (It can still fine you the amount of money you made, though—just not twice as much.) Another possibility is that it can, and can keep the money, because whaddarya gonna do. A third possibility is that it can demand disgorgement, but has to go out and find the victims and give them the money. It's not clear what the answer is, but the last possibility is the most interesting: If the SEC is getting this money for victims, it should really have to go find them. Goldman Sans Weirdly, everything I know about design, I learned at Goldman Sachs Group Inc. I know very little about design. But when young people ask me for career advice on choosing between going into corporate law or investment banking, what I tell them is that if you go into law you will care way too much about the placement and, sometimes, italicization of commas, but if you go into investment banking you will care way too much about the alignment of logos and the choice of pleasing colors for charts. (In both cases early in your career; it is hard to be a successful lawyer or banker if you keep caring too much about these things, though some people pull it off.) Banking is a profession that spends a lot of time on the visual design of its work product, which is not to say that it gets great results or anything, but nonetheless it's true. I do puzzle hunts sometimes with some Goldman people on a team named "Pantone 652," which is Goldman's particular shade of blue. Anyway Goldman has a font now: Called, appropriately enough, 'Goldman Sans,' the new font appears to have been unleashed last week and has its own site explaining its lineage. The intention was apparently to create a 'clear, contemporary and credible' font that would be a 'modern typeface designed for the needs of digital finance.' … Generously, Goldman is allowing anyone to use and download its special font simply by clicking here (keeping on clicking to the end). Now might be the time to rewrite your resume with a whole new aesthetic. It looks fine to me? I don't know, like I said, I know very little about design. How is Martin Shkreli doing? Here is a Reddit post from Shkreli's account, purporting to be from a friend of his, purporting to list what he purports are his prison nicknames. "Pill Gates," seems to be the main one, and I guess I believe it. It's good, but not too good, you know? The remainder I assume he just made up for fun and seem tenuously related to him, his career, phamaceuticals, etc. "Goldman Stacks" is one, okay, fine, he has money, sure. "Hunnit Trill," why not. "Bond King." Why Bond King? Isn't that already Bill Gross's nickname? Gross should visit him in prison and fight him for the name. "Lil Muni"? "Smiff Barney"? "Bid-Akx"? I don't know, I am glad he is keeping busy. Things happen Wirecard's Former CEO Braun Arrested in Accounting Scandal. Wirecard Explored Deutsche Bank Tie-Up in 2019. SoftBank executives set to lose profits from Wirecard trade. Square, Jack Dorsey's Pay Service, Is Withholding Money Merchants Say They Need. American Air to Raise $2 Billion from Share, Convertible Sale. Chinese Energy Company Defaults on Dollar Bonds. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] These numbers are not fully comparable to IPO numbers. The $10 per share is roughly what the SPAC raised in its IPO, though that is complicated by the fact that it sold shares and warrants (and paid fees). (Each private Nikola share converted into 1.901 shares of the SPAC, valuing those shares at $19.01, but the effective public price was $10.) Of course by the time the merger closed on June 3, people already knew that the SPAC would transform into Nikola, so the shares were not trading at $10; they closed on June 2—the day *before* the merger—at $31.37. But you can't attribute that to the SPAC's pot of money being worth more; that just reflects that Nikola was already worth more than the price it had agreed with the SPAC, and SPAC investors already knew that they'd be transforming into Nikola investors. [2] There's still some risk. From Barron's: "The cash raised in a SPAC IPO goes into a trust, where it earns interest until the merger with the target company is completed. At the time of the transaction, common stock can also be redeemed for a proportionate share of the cash in a SPAC's trust. Arbitrage funds often comprise a large share of SPAC investors, seeking to earn the spread between where the shares trade and the discounted value of their trust—and hoping for big upside from the warrants if the deal is a success. They'll often redeem their shares at the time of the SPAC's merger, sometimes leaving the sponsors without enough cash to complete their deals." But it's opt-out rather than opt-in: They've already put in the money and have to decide to ask for it back, rather than an IPO where they have to decide to invest. [3] There's another oddity about whether fraudsters have to disgorge the gross or net amounts of their profit: If they spent some of the investors' money on legitimate business expenses, while also doing fraud, do they have to give back the money they spent legitimately, or only the money they stole? That's actually a hard question; the court basically says that they should only have to disgorge the net amounts, but sent this case back to the lower courts to think harder about the math. [4] I am simplifying here. All of the text is about SEC lawsuits in federal court. The SEC also can bring cases in its own administrative courts, where it is allowed by statute to get disgorgement; that's just a separate set of rules not affected by this decision. |
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