Spacs: Federal government sees potential, but also warns of risks

The Federal Ministry of Finance sees Spacs as a “sensible” addition to other forms of financing. The Greens demand to observe the company constructs more closely.

So far, only two Spacs have been listed on the Frankfurt Stock Exchange.
So far, only two Spacs have been listed on the Frankfurt Stock Exchange.
Getty Images / Ralph Orlowski / Stringer

The federal government warns investors of the risks associated with so-called S.special purpose acquisition companies (Spacs), however, she does not currently see any need for regulatory action. This emerges from a small question that the finance and startup politician Danyal Bayaz and his party The Greens made. The answer lies in the start-up scene. According to the statement, the regulatory environment in which Spacs operate is assessed as sufficiently robust. The federal government reserves the right to intervene should serious deficiencies in investor protection emerge.

Spacs are shell companies that initially collect capital through an IPO in order to buy up another company with great growth opportunities – and thus to bring it to the stock exchange as well. In the USA in particular, there was a real hype about these company structures last year. There, however, the Spac boom came to a temporary end last month after the US Securities and Exchange Commission issued new accounting regulations. If these become law, the Spac founders, the so-called sponsors, have significantly more information obligations than before.

Many fear that the company structure could soon no longer be profitable. This can already be seen in the figures: While March was a new record month with 109 Spac IPOs in the USA, there were only ten such IPOs in April, as reported by CNBC.

So far only two Spacs have been listed in Germany

In Germany, on the other hand, there has so far been little sign of the Spac boom. The corporate shell of the Lakestar founder Klaus Hommels was the first of its kind to be listed on the Frankfurt Stock Exchange after ten years. There are other Germans who have started a Spac, but most of them have chosen the New York Nasdaq as their stock exchange. Company headquarters is usually a tax haven like the Cayman Islands. This is the case with Rocket Internet’s Spac, for example.

Accordingly, the Federal Ministry of Finance can refer to a few examples in its response to the Green politician Bayaz’s small inquiry. At the time of the statement, Lakestar was still the only Spac on a German stock exchange. In the meantime, Hommels’ example has also been followed by Spac from 468 Capital, the fund of the scene heads Alex Kudlich, Ludwig Ensthaler and Florian Leibert. Basically, the Ministry of Finance takes a positive view of the company shell: Spacs are a “sensible addition” to the existing financing options for startups, they say.

Spacs are intended to help close the funding gap for German startups

Many founders and investors have long complained that there is too little capital for larger companies in the European financial market. The federal government is also aware of this problem: the possibility of an exit through an IPO is “currently comparatively underdeveloped in Germany,” according to its answer to the small question. This makes the location less attractive for venture capital investors and thus also restricts the financing options for startups. In its statement, however, the Federal Ministry of Finance warned of the “considerable risks” of a Spac that could differ from those of an investment in other stocks.

The Ministry has two major criticisms of the construct. On the one hand, the information deficit of the investors: As soon as the sponsors, i.e. those who have set up a Spac, have identified a takeover target, the investors have to vote on whether the merger should take place. There is a risk that insufficient information is available for this decision, according to the finance department. Because it is purely a formal corporate merger, the “transparency regulations applicable to a conventional IPO” are not applicable in this case.

On the other hand, the ministry warns of conflicts of interest with the sponsors. The success of a Spac depends above all on the initiators and board members who have to find a suitable target company. If these decision-makers are also active for other companies with a similar business model, there is a risk of conflicts of interest.

Most of the Spacs are also designed in such a way that sponsors are rewarded with company shares of 20 percent as soon as they have set a takeover target. That can result in them benefiting from the deal even if all the rest of the investors don’t. The Bafin and the Ministry of Finance also warn of this: “While the (public) shareholders of Spac are typically interested in the long-term development of the target company, this only applies to a limited extent to the initiators and sponsors.”

Greens demand: Clearly identify risks

Danyal Bayaz, green finance politician and initiator of the small inquiry, is of the opinion that for this reason Spac shares are not a good form of investment for small investors and stock market laypeople. “The financial supervisory authority Bafin and the Federal Ministry of Finance would do well to evaluate the developments very carefully. Risks for investors have to be clearly identified and potentials have to be used in the best possible way, ”says Bayaz.

In the US, however, the end of the Spac boom has meant that more and more stock speculators are shortlisting Spacs – they are betting that the share price will fall. In Germany, the Bafin is not yet aware of any short positions against Spacs. But one wants to keep an eye on that.

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