Just two years after the SPAC (special purpose acquisition company) market was practically left for dead, these blank check companies are back with a vengeance. But can SPACs, whose shares since 2009 have lost about half of their value on average, finally deliver for investors?
SPAC sponsors are hoping that is the case. So far this year, 63 SPACs have filed for initial public offerings worth $12.8 billion, according to SPACInsider. That’s triple the 31 SPAC IPOs in 2023 and close to the 65 SPACs that made it to market in all of 2024 — but still far from the 613 in 2021.
This year’s SPAC IPO boomlet has also occurred while the rest of the IPO market is practically moribund. “SPACs, which may have been the ugly stepchild of the past, are now front and center,” said Douglas Ellenoff, partner at Ellenoff Grossman & Schole, which is the top law firm for SPACs this year, according to SPAC Research.
The Trump administration’s crypto push is also driving the increase in SPACs. Ellenoff predicted crypto will account for more than a third of the SPAC deals this year.
That is due to what he calls the bitcoin treasury trade, referring to investments in companies that hold their reserves in bitcoin or other cryptocurrencies rather than cash. Michael Saylor’s MicroStrategy, which has become a bitcoin holding company, is the pioneer of the strategy and previously tangled with the Securities and Exchange Commission over its business model.
Under SEC Chairman Gary Gensler, the regulator considered such holdings investments, which meant that companies should be subject to the Investment Company Act of 1940, which has strict protections for investors. But this year the SEC put out guidance that bitcoin and ethereum are cash equivalents, said Ellenoff. “And if you’re a cash equivalent, you are exempt from the 40 Act.”
SPAC sponsors are already taking advantage of the change. This year’s best performing SPAC, Cantor Equity Partners, is the first of these new deals. Its sponsor is Cantor Fitzgerald, which is already a big player in the crypto world as it holds Treasury securities in reserve for Tether, the world’s largest stablecoin issuer.
Stablecoins are digital assets used to buy and sell crypto and were developed as a way to easily trade crypto, whose prices are volatile. Stablecoins, which can be created by anyone, are typically pegged to the dollar and were originally 100 percent backed by dollar equivalents like Treasuries. The adequacy of Tether’s reserves has been questioned in the past, but it has insisted that most of them are in Treasuries.
The problem of holding reserves in assets other than dollar equivalents became apparent when Terraforma’s algorithmic stablecoin, which was backed by bitcoin, lost its peg to the dollar and investors lost billions. In a settlement with the SEC, the company agreed to pay more than $4.5 billion when a jury found it liable for securities fraud.
But with the changed SEC posture, companies are being created whose sole purpose is to place their cash in crypto without fear of running afoul of securities laws.
Cantor’s SPAC has gained almost 200 percent since announcing a deal in April to merge with Twenty One Capital, a new entity that will be majority-owned by Tether, its co-founder, and Bitfinex (Tether’s sister crypto exchange), with significant minority ownership by SoftBank. Cantor, whose former CEO Howard Lutnick is Trump’s Commerce Secretary, is also the top SPAC underwriter of the year, according to SPAC Research.
The interest in the so-called bitcoin treasury deals came as a surprise to Ellenoff. “I thought it was going to be companies, real operating companies that have been in business doing crypto-related business the last five, six, seven years that were avoiding the public markets of the Gensler era, and they'd want to now enter the SPAC marketplace. But in addition to those, you have these bitcoin treasury plays.”
The most recent one is a deal inked in late June between ProCap BTC, Anthony Pompliano’s financial services firm, and Columbia Circle Capital, the new name of a SPAC that went public in May.
Ellenoff, whose law firm worked on both of these SPACs, said his firm is being “inundated with these deals,” which are a way for institutions to invest in bitcoin even if they are prevented from doing so directly.
It's still unclear how these will work out. After SPAC sponsors find a company with which to merge, before the deal closes the original IPO investors can redeem their shares for full value if they don’t like what’s on offer. Historically a majority of the IPO investors do just that, leading the shares to slump after the merger goes through. This year 22 deals have closed in what is known as a de-SPAC, according to SPAC Research. Of the 22, only five are trading above their $10 IPO price, as investors have opted to redeem more than 90 percent of the shares in most cases. And of those five, one is a transaction in which redemptions are expressly prohibited. Some of the others are trading at pennies on the dollar.
Eventually almost half of the SPACs that came to market during the 2021 heyday ended up being liquidated, and that could well happen again.
“I think at some point, [the bitcoin treasury play is] going to be a crowded trade in that there are too many of these things,” acknowledged Ellenoff. “For the moment we're an expanding universe because it's just bitcoin. Somebody's going to announce ethereum, then somebody after that's going to announce a solana play. But the trade could all end by September for all I know because if it gets too crowded institutional investors will have too much of it.”
But he doesn’t expect the SEC to be an impediment — and not just because of its embrace of crypto. Ellenoff said he has told the SEC privately that he believes the new SPAC rules instituted under Gensler’s chairmanship should be repealed.
Ellenoff said he wrote a draft letter detailing his concerns which he sent to the SEC staff before the new chairman, Paul Atkins, came on board. Although Ellenoff isn’t expecting the rules to be repealed, he said, “When we saw what Mark Uyeda was doing as interim chair, we're like, wow, these guys are already on top of it.”
The new SPAC rule’s most substantive change was additional disclosure requirements in de-SPAC transactions that specifically prohibit them from making misleading financial projections.
