Over the last few years, SPACs—Special Purpose Acquisition Companies—have exploded in popularity. Celebrities backed them. Wall Street pushed them. Retail investors jumped in.

And now? Many of those same investors are wondering where their money went.

SPACs were sold as a fast-track to owning the next big thing. But behind the hype lies a structure riddled with misaligned incentives, poor performance, and costly outcomes for everyday investors.

This article breaks down what SPACs are, why they became so popular, and why most of them fail to deliver what they promise.

Key Takeaways

• SPACs are shell companies created to take private companies public without the traditional IPO process.
• While they offer speed and flexibility, many SPACs have underperformed post-merger.
• The structure often rewards sponsors and insiders—even if the deal is bad.
• Most retail investors who buy in after the merger lose money.

What Is a SPAC, Really?

A SPAC starts as an empty shell company. It raises money through an IPO with the promise to merge with a private company within 18–24 months.

How it works:

1. Investors buy shares (usually at $10 each).
2. The SPAC goes public, but holds no business operations.
3. Sponsors search for a target company to acquire.
4. After a merger, the private company becomes public via the SPAC’s shell.

Sounds efficient—but the devil is in the details.

Why SPACs Took Off

• Low interest rates pushed investors to chase riskier assets.
• Regulatory arbitrage made SPACs faster and easier than IPOs.
• Celebrity endorsements (like Shaquille O’Neal and Chamath Palihapitiya) fueled retail hype.
• Social media and commission-free trading made access easier than ever.

For a while, it seemed like every week brought another hot SPAC deal. But most failed to live up to expectations.

Where Things Go Wrong for Investors

Misaligned Incentives

SPAC sponsors typically receive 20% of shares for free (known as the “promote”). That means:

• Sponsors can profit even if the stock tanks after the merger.
• There’s pressure to close any deal before the deadline—good or bad.

Lack of Due Diligence

Unlike traditional IPOs, SPAC mergers face less scrutiny. This opens the door for:

• Overly optimistic projections
• Poor-quality businesses going public
• Inadequate financial disclosures

Post-Merger Performance

Data shows SPACs tend to underperform significantly:

• A study by Michael Klausner, Michael Ohlrogge, and Emily Ruan found that SPACs lost an average of 35% in value within a year after the merger.
• Many fall below their $10 issue price, leaving retail investors with losses.

Why Retail Investors Often Lose

Many investors buy SPACs after the merger—when the hype is peaking and valuations are inflated. But by then:

• Insiders may be cashing out.
• The “real” business is exposed.
• Price momentum fades, leaving late buyers with losses.

It’s a classic “buy high, sell low” setup—driven by excitement instead of fundamentals.

Are All SPACs Bad?

Not necessarily. Some successful companies have gone public via SPAC. But they’re the exception—not the rule.

Unless the investor:

• Fully understands the target company
• Gets in early (before or at the SPAC IPO)
• Is prepared for extreme volatility

...they’re likely taking on more risk than reward.

Investor’s Due Diligence Checklist

Before considering a SPAC investment, it’s worth verifying a few key items:

• Target Company Fundamentals – Does it have real revenue, a competitive moat, and a credible management team?
• Sponsor Reputation – Have previous SPACs from this sponsor created value—or destroyed it?
• Warrant & Redemption Terms – Are there hidden dilution risks? Can you redeem your shares pre-merger if needed?
• PIPE Participation – Are respected institutional investors involved? Their presence can be a quality signal.

SPACs can work—but only when approached with sharp analysis and a healthy dose of skepticism.