If {Choice}, then {Consequence}
Happy Sunday Folks!
Hope y’all are surviving the Omichronic wave of Covid-19. I got my booster shot on Friday (team Pfizer again) and seem to be doing fine. Had a sore and swollen arm but nothing that some good ol’ tylenol can’t fix.
What really hurt my brain was the doozy that Djokovic laid on us this past week. Getting vaccinated or not is a personal choice but let’s not forget that choices have consequences. But if you think you can use your World No. 1 status to have the cake and eat it too, then I think you’re choosing your privilege in the wrong way. Further, when did the player become greater than the game? I agree with Rafa’s statement completely : “There is no player in the history that is more important than the event. The player comes and goes, but the game stays.”
And yes, choices do have consequences. Djokovic took home 2000 points after winning the Australian Open last year, bringing his total count to 11,015 points. And now, since he won’t be defending those 2000 points this year, his count will drop to 9,015 points on February 21st. And if either Medvedev or Zverev win the Open, the World No. 1 will also lose his top ranking. That’s because Medvedev, who’s last year’s runner up (1200 points), currently has 8,935 points and if he wins, he will get up to 9,735 points, and be ahead of Djokovic by 700 points. Zverev, on the other hand currently has 7,970 points and will get to 9,610 points if he claims the AO title, putting him 600 points ahead of Djokovic. So we will find out, but for now I’m just glad that the drama is over and we can go back to some actual tennis!
Going back to the choices have consequences argument one more time though, I have been thinking about it with respect to SPACs, especially as we witness the ongoing doozy in the equity markets. One of the reasons companies choose to go public via SPACs vs a traditional IPO is because of the ability to issue financial projections, which you can’t do with a traditional IPO listing because of the liability risks. This is a less publicized ‘advantage’. In fact I went through many different articles and decks on “SPACs vs IPOs”, and almost none mentioned this point. But below is a paragraph taken from Fenwick, one of the more prominent law firms in the SPAC world, explaining this advantage (emphasis added):
Companies typically do not include financial projections in a registration statement and related prospectus for an IPO because of the liability risks associated with such disclosures. In particular, the safe harbor for forward-looking statements under the Private Securities Litigation Reform Act (PSLRA) that generally applies to statements made by SEC registrants expressly does not apply to statements “made in connection with initial public offering[s].” The same constraints do not apply to de-SPAC transactions. In a de-SPAC transaction, the target becomes a publicly traded company by virtue of its merger into the SPAC, and the target company can include financial projections in the proxy statement and S-4 registration statement filed with the SEC in connection with the de-SPAC transaction.
The ability to provide projections directly to the investors is a key feature of de-SPAC transactions. Because projections provide investors visibility into the target’s future financial growth, they may be especially attractive to companies that will not be profitable for a few years. Moreover, assuming projections provided in connection with de-SPAC transactions are identified as forward-looking and are accompanied by meaningful cautionary language, the projections will be protected under the PSLRA’s safe harbor for forward-looking statements.
So of course this loophole has been utilized both by the companies going public and the Sponsors taking them public. And this is basically at the heart of SEC’s gripe with SPACs, esp. John Coates, Acting Director, Division of Corporate Finance for the SEC. In the open letter he wrote in April, he argued if the “forward looking statements or projections” issued by de-SPAC companies were covered by the safe harbour under the federal securities laws? Here is the full letter but the gist of it all is that could the sponsors and targets be misleading investors by issuing false projections? And does the current law protect them from any punitive action?
I mentioned the SEC story for context and while how the regulation on SPACs unfolds is definitely on the 2022 docket, what’s more relevant for discussion right now is how this loophole has impacted the SPAC sector as the markets have gone to shit in the last few weeks. This same loophole which brought these companies public is now causing them grief. As we see the investor sentiment rebound from the recent carnage, we are starting to see that the valuations and multiples for good quality growth stocks are close to more earth like levels. But what we are not seeing is that rebound in these de-SPAC names because those projections and multiples for many of these de-spac companies seemed to not have any earth-like basis to begin with. Those projections were probably for the Metaverse.
My twitter feed has been recently bifurcated into two themes - one is the buyers of $ADYEY, $CRWD, $DDOG, $LSPD, $MELI, $DLO, $S, $SNOW, $TWLO, $U etc (these are NOT recommendations) and the other is polls like “do you still hold any post merger SPACs”. Not saying that there are no good de-spacs. There are far and few in between but the bigger point is that many of these spac horses weren’t ready to compete just yet, and perhaps they were unleashed from the stable too soon? And even though the market has re-set their valuations, there isn’t much bid for these names. It’s like no discount is good enough. Not yet anyways!
To circle back to the original point of choices have consequences, maybe some of these de-spac targets (and Sponsors) are now realizing if the goal was to just get listed or to also thrive? That those projections weren’t a one time thing? But that once you go public, you have to report on this projections on a quarterly basis? And perhaps also, was the rush worth it? Esp., as many of these stakeholders witness their fortunes get decimated while they are still in their lockup periods. Oh boy. It’s rough out there.
Anyways, it was interesting to think how things are more connected than we might realize, and how these consequential chickens come home to roost. But since the SEC hasn’t regulated us yet, on a forward looking basis, I wish you all a splendid week ahead!
-Nikita