If someone had told Robert Fenwick-Smith at the beginning of 2020 that within the next 18 months he’d help take a business public through a special-purpose acquisition company, then start his own $50 million pre-SPAC fund, he’d have said they had lost touch with reality. Fenwick-Smith, the founder of Boulder-based equity fund Aravaipa Ventures, had spent the previous 15 years investing in early-stage Colorado companies that focused on disruptive technology with global environmental impacts. He didn’t have much familiarity with SPACs. But his fund was an early investor in the Loveland electric vehicle company Lightning eMotors. The opportunity arose to take the business public via SPAC. Fenwick found himself the interim chairman and chief financial officer for a company rapidly transitioning from private to public. When that process was complete, he launched Aravaipa’s second growth equity fund, targeting companies that can merge with a SPAC within 18 months. “I have been drowning in SPACdom for the past nine months,” Fenwick-Smith said. He’s not alone. Seemingly overnight, SPACs, also known as blank-check companies, exploded in popularity as an alternative method for taking a company public rather than a traditional initial public offering. The number of new SPACs nationwide and the amount of money they raise has grown exponentially, from 59 SPACs raising $13.6 million in 2019 to 248 raising $83.3 billion in 2020 and 310 raising more than $100 billion so far in 2021, per SPACinsider.com. Growth really picked up at the end of 2020 and beginning of 2021, from 20 new SPACs in November 2020 to 109 in March 2021. The stock prices of certain SPACs also skyrocketed from the initial SPAC value of $10 per share. The space company Virgin Galactic Holdings (NYSE: SPCE) hit a 52-week high of $62.80 in February. So did electric vehicle SPAC Churchill Capital Corp. IV (NYSE: CCIV), which climbed to $64.86. Nikola Corp., another electric vehicle company, (NYSE: NKLA) reached as high as $93.99 during its June 2020 zenith. This trend also hit Boulder. Several local businesses or businesspeople have taken advantage of the financing option, including: • Fenwick’s pre-SPAC Aravaipa Growth Equity Fund II. • Brad Feld, founder of the Boulder tech incubator Foundry Group, is chairing the SPAC Crucible Acquisition Corp., which has one $225 million fund (NYSE: CRU) already launched and two more in preparation. • The Los-Angeles-based private equity fund The Gores Group has launched one $345 million SPAC out of Boulder (NYSE: GMIIU) and is planning a second worth $400 million. • And Boulder biotech company SomaLogic Inc. announced last month that it’s going public through the SPAC CM Life Science II (NYSE: CMIIU). Near the end of February, though, the share prices of many SPACs retreated from their highs, highs they have yet to recover. And the U.S. Securities and Exchange Commission issued new SPAC accounting guidance at the beginning of April that brought SPAC creation to a sudden halt: Only 10 new SPACs debuted that month in the U.S. All of this has raised numerous questions: Are SPACs a bubble? Are they dangerous to the general investing public? Will they remain an effective way to take a company public? Through conversations with Boulder SPAC investors, corporate lawyers and executives of private companies going through the SPAC process, the answers, with few caveats, seem to be: no; no more so than any other public companies; and yes. “[SPAC] is certainly a buzzword, but it’s also certainly more than buzzy,” said Matt Stamski, Boulder corporate partner at the law firm Faegre Drinker. “There’s more to it than that. I cut my teeth in the ’90s working in the dot-com bubble. There are various bubbles that have happened since then. I’m not sure this is a bubble. This is just a means to access the public markets that is less cumbersome than traditional methods.” How do SPACs work? For companies and investors, there are significant differences between the IPO and SPAC processes. During an initial public offering, a private company will use underwriters for its public offering, often large investment banks. Usually, the underwriters will determine the value of the IPO through analysis of the private company’s business fundamentals. Then, during the pre-marketing process, institutional investors and large private accredited investors have a chance to get in before the general public. Finally, on the offering day, the general investing public, also called retail investors, can trade the company’s stock. Many IPOs also include a lock-up period, usually 90 days, during which company insiders can’t sell their shares. In a SPAC, venture capitalists effectively create a public shell company that has no operations — its only purpose is to find a private company to merge with and take public. All SPACs debut on the stock market at $10 per share. Investors can also buy warrants, which entitle them to buy more stock at a fixed price at a later date. When the SPAC finds a private company to take public, the SPAC’s shareholders vote whether to merge the companies. If approved, the SPAC will take on the name of the private company, and the stock ticker will change to reflect that. SPACs offer several benefits to companies and investors that IPOs don’t. For investors, it’s obvious. The prices of major IPOs in the past year — $105 per share for DoorDash, $145 for AirBnB, $245 for Snowflake, $380 for Coinbase — are beyond the reach of many retail investors. SPACs let them get in at the ground level of a company for a mere $10 per share. Warrants offer additional value. SPACs also don’t have a lock-up period. For companies, SPACs allow greater control over the process of going public than IPOs do. SomaLogic president Melody Harris said the company, which specializes in protein-based diagnostic tests, had considered going public for a long time before it agreed to merge with the SPAC CM Life Science II. “The markets weren’t right, and the technology wasn’t ready,” Harris said of why the company waited until now. SomaLogic didn’t even seek out a SPAC — the SPACs came to SomaLogic. The company was targeted specifically by CM Life Science II, which is led by investors Casdin Capital and Corvex Management. Casdin specializes exclusively in biotech and life-sciences investments; for SomaLogic, they were too good a partner to pass up. “They bring expertise we don’t get through an IPO process,” Harris said. “The relationships Casdin has are invaluable to us. That deep, deep understanding of our business is just truly invaluable.” SPACs also can offer private companies quicker access to public markets than IPOs. At Lightning eMotors, for example, the time from its merger agreement with the SPAC GigCapital3 (NYSE: GIK) to approval of the merger by shareholders was barely more than four months. When completed, it will give the company the capital it needs to scale its business. “Every little company should only consider a SPAC merger if it needs to raise a material amount of cash,” Fenwick-Smith said. “That was our case at Lightning. We started to realize that to allow Lightning to realize its potential, it needed a lot of cash. It had a $150 million order backlog. When we started exploring IPO, private money, the alternatives, the SPAC merger option became obvious. We rapidly came to the conclusion that SPAC was the way to go.” A SomaLogic employee works in one of the company’s labs. The company, which creates protein-based medical diagnostic tests, announced earlier this year it would go public through the SPAC CM Life Science II. (SomaLogic / Courtesy photo) Do crazy SPAC prices mean anything? While the share prices of many SPACs hover around the initial price of $10, the volatile performance of SPACs such as Virgin Galactic, Churchill Capital IV and Nikola drew much media attention, from coverage of price increases to concern-trolling about the danger SPACs posed to retail investors when prices came back down. Fenwick-Smith said much of that was driven by a fundamental misunderstanding of how SPACs are valued; Virgin was never worth $62, Churchill was never worth $64, Nikola was never worth $93. “The press generally only covers the sensationalist part; the part that is visible in the market,” Fenwick-Smith said. “All SPAC mergers are fully valued at $10. When you see the market now talking about the decline in the prices, it’s bull—. They’re talking about a decline compared to unrealistic highs. The real metric is, how do current SPAC prices compare to the $10 fair value? That fair value can change over time as companies make progress or fail to make progress. The stupidity of the market is what drove prices insanely high.” For investors involved in SPACs, the best option is often to ignore the irrationality of the stock market. Jim Lejeal, CEO of the Boulder SPAC Crucible Acquisition Corp., took two companies public through the traditional IPO process — one as founder, one as an angel investor — before joining Crucible. “As a CFO of those companies, what I tried to do and tried to coach my teammates to do was to ignore the stock market because of the volatile nature of the market,” Lejeal said. “When you’re selling a value, what your stock price is trading at doesn’t really matter. As a public CFO in the past, I have tried to focus on my business venture and purpose and not focus on the stock market because it didn’t really affect my business. When Brad [Feld] and I started Crucible, at no time did we say anything about the market.” What are the risks of SPACs? For retail investors, the most hysterically hyped SPACs can present a risk; someone who’d bought Nikola at its $93.99 high would be holding a $12.12 bag as of this writing. The risk can come from traditional angles: the inherent irrationality of the stock market or the poor performance of a company. The latter factor can be exacerbated by the fact that many companies that go public via SPAC are pre-revenue or early revenue.SPAC leadership also takes on outsize importance. “The market is sort of divided between professional teams and Tom, Dick and Harry who happen to have been able to raise a SPAC without any real track record,” Fenwick-Smith said. For those “professional teams” such as Crucible, whose leaders have a decades-long track record of successfully taking companies public, that can be an advantage. “You’re betting on the quality of the professionals that are running the entity, what their backgrounds are, your own opinion of whether you think they’ll do a good job,” Lejeal said. For people who happen to invest in a SPAC with less-than-professional leadership, the results can be suboptimal. Nikola has become a cautionary tale. It debuted numerous electric-vehicle concepts for commercial uses and the consuming public. Amid the rapid rise of its stock price, it announced a partnership with General Motors that would have seen GM purchase an 11 percent stake in the company. Less than two weeks later, the SEC was investigating Nikola for securities fraud: in a product demonstration video, a Nikola commercial truck that was supposedly driving on a road was found to have been simply rolling down a hill without onboard propulsion. The company’s founder and chairman resigned. The GM deal was scrapped. The second line of Nikola’s Wikipedia entry now reads, “The company has stated on several occasions that it intends to take some of its concept vehicles into production in the future.” In addition to being potentially harmful to investors, the actions of companies such as Nikola frustrate legitimate SPAC operators. “They told an out-and-out lie,” Fenwick-Smith said. “Any company who does that kind of (thing) deserves to be buried. It harms the whole industry. Lightning is today suffering because of Nikola’s dishonesty, and that makes me very angry.” Robert Fenwick-Smith, founder of Aravaipa Ventures, stands on the factory floor of Lightning eMotors. Aravaipa was the first institutional investor in the electric vehicle company, and Fenwick-Smith served as its CFO during the company’s SPAC process. (David X. Tejada / Courtesy photo) The future of SPACs Amid the massive boom in SPACs, the SEC issued accounting guidance at the beginning of April that would classify SPAC warrants as liabilities instead of equity instruments. In addition to drastically slowing the emergence of new SPACs, the guidance has put existing SPACs in a holding pattern as they try to ascertain what it means for them. Stamski, the Boulder corporate partner at Faegre Drinker, said it’s too soon to tell the impact of this guidance on SPAC accounting. For companies that have already completed the merger process, he said, the new guidance should be immaterial. But for businesses in the middle of the process, the SEC may have forced them to restate their financials. “For market professionals that are living and breathing this today, it’s a pretty severe annoyance,” Stamski said. “We are representing companies and investors right now that are conducting the analysis of, ‘Do we need to restate or take another corrective action?’” The SEC’s stated goal — and the hope of industry professionals — is that more scrutiny leads to a safer process for businesses and investors, potentially weeding out the next Nikola before it becomes public spectacle. “To a certain extent, I’m happy to see the SEC is helping eliminate this circus,” Fenwick-Smith said. “I do believe that the SEC needs to increase the professionalism around SPACs.” Said Lejeal: “I think our reaction to increasing scrutiny is that it’s a good thing. Anything that increases the quality of the process, we’re in favor of. Now the SPAC industry will have to process and understand it. That’s true of any accounting issuance.”And this guidance has done little to decrease the appetite of investors or companies for SPACs. More than 400 are currently in the pipeline nationwide, and supporters say they likely will remain a useful tool for private companies to go public and for retail investors to get in on the ground level of newly public companies that could experience explosive growth. “I don’t think SPACs are going to go away,” Lejeal said. “They will stay a real interesting, positive alternative that can capitalize a business in a very interesting way. Whether the markets are good or bad, that value proposition isn’t going to go away.”