We have long believed in the power of free enterprise. Now in our fourth decade of managing money, we have never ceased to be amazed at the creativity of brilliant people who have an idea, invention, or process and turn that into a solid business that serves what other people want and need. It is what has defined Western Civilization and is a very good thing. That idea of being focused on what others want and need, when accompanied by “rules of the road” that adhere to Natural Law, is purely inspired. Often, in history, the rules of the road have become overly cumbersome, notwithstanding all the best intentions of those who define them -- most often government -- and have stultified those who would be creators and innovators.
We have lived through such a time in the last couple of decades. We have called it “the 8,000 to 4,000 problem”. Readers of this commentary, and certainly our clients, know what that means. It is the trajectory of public companies in the U.S. from the late 1990s/2000 era to roughly 2020, during which the number of public companies declined from over 8,000 to a low near 4,000. There have been many different reasons offered for why this has happened, but we have spoken to enough small, entrepreneurial private companies over the last 15 years to squarely put the blame on government regulations that have made it too cumbersome and expensive to become a public company. From Sarbanes/Oxley to Regulation Fair Disclosure to even the NASDAQ trading settlement of the late 1990s, and more – all these have had a role. We won’t take the space here to describe each one because it would require volumes. We suggest readers inform themselves about the nature of those rules on their own. Suffice it to say, these onerous burdens on entrepreneurs have kept larger companies in control, forced more acquisitions of promising private companies by existing public companies, and perhaps have even kept some entrepreneurs from getting off the ground due to lack of capital. This is not conjecture: we have seen it. We have lived it.
This negative landscape has been changing for the better more recently. Entrepreneurs have found their way back through the use of an old, obscure and little understood vehicle known as the special purpose acquisition corporation (SPAC). They are also known as “blank check companies”. Originally used in the oil and gas industry years ago, a SPAC is essentially a shell corporation that is formed for the purpose of acquiring a functioning, operating company, and thereby allowing that company to become a public company. We won’t get into detail about the reason investors put money into a special-purpose vehicle when they have no idea what it is in which they will ultimately be investing, but there are incentives built into the structure that can make it very attractive. While the SPAC is not always less expensive than going public through the traditional route, the regulatory burden and requirements that tax a small company trying to go through the traditional initial public offering (IPO) process make the SPAC route extremely attractive for many small companies, particularly in the technology space. A great way of simply describing the point is that much of the paperwork is already done! The acquired company slips into the existing corporate structure of the SPAC.
We are not suggesting that the rise of SPAC popularity is a panacea for every small company out there. Companies must still be well prepared to be public and they must still be deserving of being a public company. And certainly, the IPO process is still the best option for some companies. Even the “direct listing” route where a company simply lists on the public exchange without raising funds is best for a few companies. But due to the realities of the marketplace, and all the reasons given above, those options tend to be suited for larger, more established companies.
But the SPAC has been a welcome breath of fresh air to public markets sorely needing more publicly-traded, small companies that can be an investment opportunity for everyday people trying to get a return on their hard-earned money before these companies become huge. And, of course, these companies going public through the SPAC process are often the innovative young guns that will challenge the oligarchic mega-companies that have thrived in the preceding period of drought for small companies coming public, allowing those oligarchic titans to dominate all levels of our culture, politics and everyday life in ways that are not always desirable. Look out Amazon, Apple, Google, Microsoft, Facebook, et al: here comes your competition!
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