Investing

SPACs: Hype Vehicles or Hidden Hazards for Investors?

In recent years, SPACs—short for Special Purpose Acquisition Companies—took financial markets by storm. They were promoted by celebrities, embraced by Wall Street, and widely adopted by retail investors.

Now that the dust has settled, many of those same investors are asking: What happened to the money?

SPACs promised a shortcut to investing in high-growth companies before they hit the mainstream. But beneath the headlines lies a financial model often marked by skewed incentives, spotty oversight, and poor outcomes—especially for everyday shareholders.

This article explains how SPACs work, what fueled their surge, and why most haven’t lived up to expectations.

What Exactly Is a SPAC?

At its core, a SPAC is an empty corporate structure. It raises capital through an IPO without having any operational business—its sole purpose is to merge with a private company, usually within 18 to 24 months.

Here’s the typical sequence:

Investors purchase shares, generally priced at $10.
The SPAC goes public, holding only cash and a mandate to find a merger target.
Sponsors search for a private firm to combine with.
Once a deal is finalized, the private business becomes publicly traded under the SPAC’s shell.

The process sounds straightforward—but the fine print matters.

Why SPACs Gained Traction

Several forces converged to make SPACs a popular investment vehicle:

Low interest rates drove demand for riskier, growth-focused plays.
Looser regulatory pathways made SPACs quicker and less burdensome than IPOs.
Celebrity involvement, from athletes like Shaquille O’Neal to high-profile financiers like Chamath Palihapitiya, added media firepower.
Social media enthusiasm and no-commission trading widened access for individual investors.

For a while, SPACs were everywhere. But many have since failed to meet the lofty expectations.

How the Model Can Undercut Investors

Misaligned Interests

SPAC sponsors typically receive a 20% stake—known as the “promote”—at little to no cost. That means:

They can profit even if the post-merger stock drops.
There's pressure to complete any deal before the deadline, regardless of quality.

Limited Oversight

Unlike traditional IPOs, which face rigorous vetting, SPAC mergers operate with fewer disclosure demands. This can result in:

Optimistic forecasts that aren’t well-grounded
Unproven or problematic businesses going public
Incomplete financial transparency

Poor Track Record Post-Merger

According to research by Michael Klausner, Michael Ohlrogge, and Emily Ruan, SPACs on average lost 35% of their value within 12 months of completing a merger. Many trade below their original $10 price point—leaving late-stage retail buyers with meaningful losses.

Why Individual Investors Often Get Burned

Many people buy into SPACs only after the target company is announced—when media attention peaks and valuations are inflated. But at that point:

Insiders may already be exiting.
Lofty promises begin facing real-world scrutiny.
The excitement fades, often followed by a price slide.

It’s a setup that leaves many holding depreciating shares after buying into hype.

Are There Good SPACs?

Yes—but they’re rare.

Some legitimate businesses have successfully gone public through SPAC mergers. But for most investors, the odds of identifying those early—and exiting at the right time—are slim.

Unless an investor:

Has a deep understanding of the target company
Participates early in the SPAC lifecycle
Accepts the possibility of sharp volatility

...the risks often outweigh the potential upside.

Investor’s Due Diligence Checklist

For those still considering a SPAC investment, here’s what to review before jumping in:

Business Fundamentals: Does the target company have real revenue, product-market fit, and a credible path to profitability?
Sponsor Track Record: Have the SPAC sponsors launched other deals? How did those perform after merger?
Warrants & Redemption Rights: Understand how dilution works and your right to redeem before the deal closes.
Institutional Participation: Is there backing from credible PIPE investors? Strong institutional interest can signal higher-quality transactions.

SPACs aren’t uninvestable—but without proper diligence, they often reward insiders at the expense of everyone else.

SPAC Investing — FAQs

What was the typical issue price for SPAC IPO shares?

SPAC IPO shares are generally issued at $10 each, with value erosion occurring when post-merger trading drops below that baseline.

What incentive pressures do SPAC sponsors face as deadlines near?

Because sponsors profit from closing any deal, they may push through lower-quality mergers before the 18–24 month deadline, creating risk for outside investors.

How did celebrity endorsements affect SPAC demand?

High-profile endorsements from figures like athletes and venture investors amplified retail interest, adding to speculative demand during the SPAC boom.

What common myth about SPACs misleads investors?

A common misconception is that SPACs are a low-risk shortcut to high-growth companies, but in practice, most have significantly underperformed after merging.

Can SPAC terms expose investors to hidden dilution?

Yes. Warrant structures and redemption terms can dilute remaining shareholders if not carefully reviewed, reducing long-term returns after the merger closes.

What due diligence should investors perform before considering a SPAC?

Key checks include the fundamentals of the target company, the sponsor’s track record, PIPE investor involvement, and the terms of redemption and warrants.

What structural flaw often disadvantages retail investors in SPACs?

SPAC sponsors can profit through their promote regardless of whether long-term investors lose money, creating misaligned incentives between insiders and retail holders.

Did all SPACs underperform, or were there exceptions?

While most SPACs fell short, a minority of deals have created value. However, these are exceptions, and success depends on early entry and high-quality targets.

How can PIPE investor participation serve as a signal?

Institutional participation in a private investment in public equity (PIPE) may indicate stronger deal quality, though outcomes remain uncertain for public investors.

Why is the “buy high, sell low” pattern common in SPAC investing?

Retail investors often buy after hype-driven runups, only to face fading momentum and insider selling once the merger closes, creating a poor entry point.