SPACs are the hot new way for startups to go public – and a booming ‘side hustle’ for people with star status

• It’s a boom time for SPACs — special purpose acquisition companies that provide an easy way for startups to go public without the rigmarole of an IPO.
• Retail investors are flocking to SPACs, seeing them as a chance to get in early on the next Apple or Google; Pets.com is another distinct possibility. 
• The real winners are the CEOs, celebrities and athletes who get a nice payday mostly for lending their names to SPACs.
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A debate is raging on Wall Street and Main Street about SPACs, the financial-engineering flavor of the moment. Depending on whom you ask, these so-called blank-check companies-funds raised for the sole purpose of buying a company and taking it public-are either the latest get-rich-quick scheme for financial charlatans or the greatest innovation in capital markets in years.

Let’s dispense with some of the drama straightaway: Both positions exaggerate. That said, precisely who is certain to make a buck here –  hint: not the benighted masses – is the ultimate tell. SPACs are a hiding-in-plain-site godsend for bankers, lawyers, capital-hungry entrepreneurs, and, critically, those privileged few who already are exceedingly well connected and can profit simply by lending their name to a project.

At the same time, SPACs are neither new nor particularly innovative. They’ve been around for years, though they’ve mostly been consigned to a darker corner of the finance industry. Still, it’s still worth understanding why they are suddenly the rage – and who will get hurt when the furor inevitably dies down.

Organizers of a special purpose acquisition companies ask investors to give them money to form a publicly listed shell company. These sponsors, who typically invest a modest sum while awarding themselves 20% of the shell, then hunt down a privately held target company that would like to go public. It’s an opportunity for investors to get potentially high returns in an era of ultra-low interest rates. And for the target companies, especially those who might otherwise have struggled to go public, it’s a speedy route to an IPO. Virgin Galactic, Draft Kings, and, more recently, the genetics firm 23andMe and the dog-walking app Rover, have all agreed to be purchased by a SPAC.

In short, a SPAC is like a pop-up private-equity firm but without the diversified portfolio. The SPAC makes precisely one investment and then goes away, a process known as “de-SPACing.” The risk is that as more and more SPAC deals get raised, each will have fewer companies from which to choose. Last year 248 SPACs raised $83 billion, according to SPAC Research, a nifty firm in Chicago that is soaring as a sort of Bloomberg terminal for the SPAC world. Already this year there’ve been 134 more SPAC deals that have raised $42 billion. Before last year there were fewer than 200 deals in the last seven years combined.

As the software entrepreneur Aaron Levie joked the other day on Twitter, "Little-known fact: We reach singularity once there are more SPACs than actual companies in existence." There's a healthy development at play here. In an era that concluded with the burst of the dot-com bubble in 2000, companies went public at much earlier phases in their development than they have since. Apple, Microsoft, Amazon, and others gave retail investors the opportunity to get in relatively early.

SPACs, flawed though they may be, are giving investors that chance today. Consider a deal from this week that saw Alta Crest, a SPAC overseen by veteran investment banker Ken Moelis, inject $1.1 billion into a Palo Alto, Calif., flying taxi manufacturer called Archer Aviation. United Airlines, which is investing too, announced a $1 billion order of Archer's aircraft, with an eye to creating a short-haul taxi service between airports. The downside: Archer doesn't intend to begin delivering its far-out planes until 2024, which is also the first year it projects having revenues. That's as early - and speculative - as it gets. 

And that's the rub. Investors in SPACs are taking a flyer. (Literally, in the case of Archer.) As for who is simply going along for the ride, consider the growing number of established executives and other prominent people sitting on the boards or advising SPACs. This group stands to make hundreds of thousands of dollars without doing all that much work.

For example, a SPAC called Forest Road Acquisition associated with ex-Disney bigwigs Kevin Mayer and Thomas Skaggs, is buying the well-regarded fitness company Beachbody. Its advisors also include hoops star Shaquille O'Neal and human rights advocate Martin Luther King III. Stanford professor Fei Fei Li and Kristina Salen, chief financial officer of World Wrestling Entertainment, are on the team that's advising the SPAC started by entrepreneurs Reid Hoffman and Mark Pincus. And Vy Global, the SPAC offshoot of a venture-capital firm, counts Facebook executives Hugo Barra and Javier Olivan as well Reddit CEO Steve Huffman as its directors. (A different Vy fund recently invested in Reddit, prompting some on the Reddit board Wall Street Betsto wonder if Vy's SPAC will buy the whole company.)

It's not as if these people add no value. Surely their networks alone are helpful for raising money. Some also invest alongside the SPAC founders. But all have full-time jobs, making this the latest "side hustle" for the already well off.

It's more or less obvious how all this will end. Good deals will lead to bad deals. Volume will dry up the moment interest rates climb. A few companies will go on to greatness while a great many more will vaporize when the bubble bursts.

And the financial engineers and those who serve them will move on to the next new thing.

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The Wall Street Journal reported Wednesday and that the buyout of TikTok by Oracle, Walmart and others is on hold indefinitely. In my first Insider column, on Nov. 13, I noted that the deal made good sense for Oracle, which is struggling to build a cloud business to compete with Amazon, Microsoft, and Google. The deal was bad policy from the beginning, however, as it was a capricious diktat from a transactional president seeking "key money" for his troubles. I noted at the time the deal was likely to wilt in a Biden administration. I am told that Google, not Oracle, remains TikTok's cloud provider.
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Is it just me, or has Twitter become immeasurably more pleasant since it removed the 45th President of the United States? I'm finding my feed interesting, informative, entertaining, and downright civil these days. You?

Adam Lashinsky is a Business Insider contributor and former executive editor at Fortune Magazine, where he spent 19 years. He is the author of two books: "Inside Apple" (about Apple) and "Wild Ride"(about Uber).