SPAC Bubble
Peak Value
$162 billion raised for 613 SPACs
Crash Value
$13 billion raised for 86 SPACs
Duration
12 months
Overview
A SPAC is a blank-cheque company with no operations that raises cash through an IPO and then typically has about two years to merge with a private operating company, taking that target public through a de-SPAC transaction rather than a traditional IPO. In 2020 and 2021, this structure shifted from a niche product to a dominant feature of the U.S. new-issue market. SPACs were 55.7% of all U.S. IPOs in 2020 and 68.5% in the first quarter of 2021. By the end of 2021, the U.S. had seen 613 SPAC IPOs, up from 248 in 2020, and 2022 would collapse to 86 and about US$13 billion of proceeds.
The Narrative
The SPAC narrative begins with a genuine market need. In riskier markets, private companies like having a negotiated valuation, deal certainty, and faster execution relative to a conventional IPO. In 2020, those benefits became much more desirable because the pandemic had disrupted normal listing windows even as central banks pushed rates to the floor and investors searched for yield and growth. The post-COVID environment as particularly favorable for new listings because of low interest rates and liquidity, and the number of publicly traded companies on the three major U.S. exchanges jumped nearly 28% between the end of August 2020 and December 2021.
Once a few SPAC deals showed success, more began to appear. DraftKings closed in April 2020, Opendoor announced its deal in September 2020, and the market began to treat SPAC investors as curators of future winners. In 2021, giant announcements for SoFi, eToro, WeWork, and Grab made SPACs feel less like shells and more like a pipeline through which prestigious late-stage start-ups could go public on demand. At the same time, 250 SPAC IPOs came to U.S. exchanges in the first quarter of 2021, with nearly $88 billion raised in that same quarter, more than all of 2020.
The mechanism of the boom matters as much as the narrative. Investors could raise capital first and find the target later. IPO-stage investors often had redemption rights that let them get cash back if they disliked the eventual merger, while sponsors kept their promote economics and underwriters kept fee incentives geared toward getting deals done. Meanwhile, because SPAC mergers were widely treated as allowing broader use of projections than IPO roadshows, targets could sell long-dated growth narratives to the public market more easily than in a conventional IPO. That combination pulled in more sponsors, more investors, more startups, and more publicity.
The bust came when the market began to understand that the structure had made too many weak deals possible. Reuters reported in late March 2021 that first-day SPAC pops had faded sharply, many new SPACs were trading below $10, and Wall Street’s appetite was waning even though year-to-date issuance had already reached extreme levels. Then the SEC sharpened the attack: the March celebrity alert, Coates’s April 8 liability statement, and the April 12 warrant-accounting statement all forced investors and dealmakers to look directly at conflicts, disclosure, projections, and financial engineering. Later reports show that issuance fell from roughly $17 billion in the first 20 days of January 2021 to about $2.5 billion in the first 20 days of April.
From there, the overhang became fatal. The second half of 2021 still had heavy activity, but the pace had eased substantially because the market was suffering from a excessive number of SPAC IPOs, fatigued IPO and PIPE investors, inexperienced sponsors, celebrity-driven promotion, and overly optimistic valuations for early-stage startups. By early March 2022, more than 600 listed SPACs were still hunting for targets. Then inflation and rising rates changed the macro backdrop entirely. When the Federal Reserve began raising rates in March 2022, the risk appetite that had subsidized the structure disappeared, and the market moved from exuberant deals to liquidations and terminated transactions.
References:
Federal Reserve Issues FOMC Statement (March 15, 2020) – Federal Reserve Board
Reuters – DraftKings set to go public despite coronavirus-induced sports freeze
FactSet – U.S. IPO Market: SPACs Drive 2020 IPOs to a New Record
Reuters – SoftBank-backed Opendoor to go public via Social Capital II merger
Current Trends in SPAC Transactions – BCLP Presentation (PDF)
SEC Investor Alert – Celebrity Involvement with SPACs
Reuters – SPAC trading pops deflate as 'exuberance and greed' depart (March 24, 2021)
SEC – SPACs, IPOs and Liability Risk under the Securities Laws (Speech/Statement)
Reuters – How Wall Street banks made a killing on SPAC craze (May 11, 2022)
Warning Signs
- Speed of issuance: The market had raised about $13.6 billion across 59 SPAC IPOs in 2019; exploded to roughly $83 billion across 248 IPOs in 2020, and then to about $88 billion in the first quarter of 2021 alone. SPACs were 55.7% of all U.S. IPOs in 2020 and 68.5% in the first quarter of 2021. That kind of velocity almost always means quality control is degrading faster than headline volume is rising.
- Celebrity endorsements, inexperienced sponsors launching multiple SPACs, and aggressive marketing became central selling points. At the same time, overly optimistic valuations for early-stage companies grew common. When investors are buying the sponsor’s story rather than the business economics, speculation is usually outrunning fundamentals.
Who Benefited
The biggest beneficiaries were sponsors, IPO-stage arbitrage capital investors, and Wall Street intermediaries. Sponsors typically acquired their equity on much more favorable terms than public shareholders, giving them strong incentives to complete a merger even when the outcome might be less attractive for ordinary investors. SPAC IPOs were also largely purchased by hedge funds and other institutional investors. Research found that SPAC IPO investors and deal sponsors earned exceptionally high returns, with sponsor gains far exceeding those of long-term public shareholders.
Investment banks also benefited significantly. SPAC related activity generated billions of dollars in fees during the boom years. Because part of the underwriting compensation depended on successfully completing a merger, banks had incentives to keep transactions moving while facing less of the pricing risk associated with traditional IPOs. Concerns about these incentives later contributed to increased regulatory scrutiny.
Some target companies and existing private shareholders benefited as well, at least at the point of transaction. SPACs allowed companies to negotiate valuations directly and present ambitious growth projections that would often face greater constraints in a conventional IPO process. High-profile firms such as Grab Holdings and WeWork used the structure to access public markets, making it particularly attractive for companies seeking speed, flexibility, or a second chance at going public.
Who Lost
The most obvious losers were investors who held their shares through the merger rather than selling them early. Retail investors collectively suffered substantial losses during the SPAC boom, and companies that went public through SPAC mergers significantly underperformed traditional IPOs on average. Academic research similarly found that long-term public shareholders in merged SPAC companies earned very poor market-adjusted returns.
The costs of the SPAC structure were carried primarily by investors who remained shareholders at the time of the merger. While sponsors often realized large gains, post-merger shareholders experienced steep declines in share prices. By late 2022, the average share price of many SPACs that had completed mergers during the boom period had fallen far below the standard $10/share value.
A second losing group was the operating companies that entered public markets before they were ready or on overly optimistic assumptions. Some failed to meet projections, lost access to financing, or ultimately entered restructuring or bankruptcy. Examples included the cancellation of the planned merger involving eToro, the bankruptcy of Lordstown Motors, and the bankruptcy filing of WeWork following its SPAC listing. In many cases, the structure not only redistributed wealth among investor groups but also brought fragile businesses into public markets before they were prepared to operate as publicly listed companies.
Market Impact
For a brief period, SPACs changed the composition of the U.S. equity market itself. SPACs were more than half of all U.S. IPOs in 2020 and nearly seven in ten IPOs in the first quarter of 2021. The Federal Reserve later found that the fraction of small-size stocks classified as SPACs rose from about 8% to about 28% between August 2020 and the end of 2021, and that the share of ordinary common shares of foreign-incorporated companies also rose during the same window. In other words, SPACs were not just a corner of the market; for a time they meaningfully altered the makeup of listed U.S. equities.
The damage on the way down was equally real. Retail investors lost $4.8 billion through early April 2022, and SPAC-merger stocks from 2019 to early March 2022 were down roughly 36% on average after closing. By the end of 2022, Stifel’s market update recorded 141 SPAC liquidations, while IPOX reported that U.S. SPAC IPO proceeds had fallen to roughly $13 billion, down 92% from 2021. The market did not merely cool; it moved from hyperactive formation to a clearing process.
Lessons Learned
De-SPAC is economically very close to an IPO and should be regulated with similar seriousness. That insight became the SEC’s formal position in its 2022 proposal and 2024 final rules, which aligned SPAC disclosures and liabilities more closely with traditional IPO standards, especially around sponsor compensation, dilution, projections, and target-company responsibility for disclosures.
Bubbles expand in a world of zero rates and ample liquidity, and they busts rapidly once the conditions change.
Financial innovation does not eliminate economic reality. New structures, products, or investment opportunities may appear to create easier paths to wealth, but they cannot remove the fundamental need for sustainable cash flows, realistic valuations, and transparent risk.
Discussion
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