10 Ways SPACs are Being Manipulated
Disclaimer: This post does not constitute financial advice. Author has has a long position Clover, Romeo, and Hyliion. Do your own due diligence before making an investment.
Is your post-merger SPAC down 60% from its high? Does it often drop 5-10% for no reason? Are people posting comments like, “The CEO is dumb,” or “This company is garbage?”
If so, it's probably being manipulated. Especially if your SPAC is part of a growing industry.
Skip ahead to the list if you want, but it’s important to understand the finer details of SPACs to see why they’re so easy to manipulate.
SPACs, or (Special Purpose Acquisition Companies) have been around since 2003. But they didn’t see much interest until 2014. Even then, there were still only 184 SPACs that went public from 2014 to 2019. It wasn’t until 2020 that SPACs exploded.
248 SPACs were unleashed in 2020, with even more planned for 2021.
SPACs come in two forms, pre-merger and post-merger.
Pre-merger SPACs are often referred to as “blank check companies.” They’re usually formed/controlled by a single individual, referred to as the sponsor. Sponsors are sometimes celebrities or influential investors. (More on sponsors later.)
The sponsor sells SPAC shares to early investors to amass a war chest of capital. Then they list the blank check company on a stock exchange. At this point, the stock price will tread water around $10. Now it’s the sponsor’s job to find a high-quality company to merge with. If they can find a good private company within two years, they’ll merge with it and the private company will now be public.
If the sponsor fails at their job, then the investors their $10/share back.
During the initial round of investing, early investors are usually given a warrant with each share. These warrants are like options contracts, but instead of giving you the option to buy 100 shares, it’s just 1 share. And there’s only one strike price: $11.50. The expiration date for the warrant changes with each stock. It can be months or years. (Both warrants and sponsors are used by Wall Street to manipulate stocks.)
SPACs have weird names and temporary ticker symbols. They’re called things like Atlantic Coastal Acquisition Corp ($ACAH) or Social Capital Hedosophia Holdings VCorp ($IPOE).
The ticker symbols are temporary. Once the SPAC mergers with a real company, they get a new symbol. Like $SPCE or $DKNG.
While the SPAC stock will tread water around $10, once a merger target is announced there’s some wild price action. SPACs will jump in value if the market thinks it’s a good deal, or they will drop if the market thinks the company is crap or the specifics of the merger are bad.
This is when the manipulation starts. That’s why it’s important to understand the history of SPACs to see through this trickery. It’s also important to understand why SPACs are so popular these days.
Let’s say you’re a CEO.
You want to take your company public so you can raise funds to fuel future investments. You also want to sell a bit of stock so you can buy a house/car/boat/whatever.
Stock prices are a function of value + sentiment. If you can get people excited in your company, then you can sell more shares at higher prices. This is good for both the CEO and the company’s balance sheet.
Before SPACs the simplest way to go public was to go through an investment bank. This is expensive and time consuming. Your entire company is vetted from top to bottom. You spend months on the road visiting institutions and trying to get them excited your business. Your life is transformed into that of a travelling salesman. You spend the days eating out of your car, pitching your new invention, and praying people don’t call it snake oil.
This can take an entire year, which has its own costs. It takes you away from the company. You spend less time innovating, inventing, growing, etc.
There are also financial costs. Investment bank fees can be up to 7% of the funds raised. If you sell 500M in stock, the bank can take up to $35 million. That’s a lot. But there are other hidden costs as well. If you’ve been paying attention to IPOs, you’ll notice that a lot of them blast off on day one.
Fresh IPOs for exciting companies have been going up 100% or more on their first trading day. This is great for the bank. This is great for the institutions that bought stock. But this is not great for the company. If a private company sold stock to institutions at $50, and then goes public to find out the company is worth $150 on the open market, then they’ve just lost all that potential value.
SPACs work differently. Private companies like to merge with SPACs because it’s cheaper to go public.
Advantages for a company to go public with a SPAC:
1. It takes less time (3 months quicker on average.)
2. They don’t pay $35 million in underwriting fees.
3. They get higher prices for their stock. (Transparent price discovery.)
4. The company keeps more stock for themselves.
SPACs are great for growth companies because their intrinsic value can change quickly. Growth companies can easily double their revenue in a year, or maybe even a few months. One big contract can drastically boost their market cap. CEOs know this. And they want to capitalize on it.
Going public via SPAC is good for both the company and the small investor (assuming you don’t buy a lemon.)
Unfortunately, post-merger SPACs are extremely easy for Wall Street to manipulate. It’s so easy that the SEC should probably place short-selling limits on these companies for at least a year after they go public. (This will probably never happen as the SEC seems fine with large scale, short-term stock manipulation.)
Note: Most manipulation occurs after the merger is announced, as it is near impossible to create a narrative that a SPAC is bad if it’s just a blank-check company with a pile of cash. Especially since if the company doesn’t find a merger target, everyone gets their money back.
Okay, so here are 10 ways that Wall Street manipulates SPACs.
1. Young Company Revenue Attack
When Wall Street tries to short a stock to death, they’ll be all over the message boards posting negative comments and trying to manipulate sentiment.
If it’s a company that’s been in business for a few years, they’ll say things like, “Revenue will drop next year,” or “They will lose that big contract,” or “Competition will steal market share.”
These types of comments are designed to create fear around a company’s revenue potential. This makes SPACs an easy target. They’re new companies. They usually have little to no income. They might not see revenue for years. But that’s okay. Business is like that. It took 18 years for Tesla to post a profit.
Wall Street has an army of analysts with a genius-level intellect. They have spies. They bribe people. Steal information. They know what’s going to happen before you do. Years in advance.
If a SPAC stock drops 60%, this will flush most people. They can’t stomach a loss like that. They panic, sell, and quit investing. Wall Street buys their shares. Because Wall Street isn’t seeing -60% today. They’re looking at +4000% in five years.
To you it’s Armageddon, but to Wall Street it’s the self-created deal of a lifetime.
Manipulating stocks is Wall Street’s most lucrative side gig. They burn companies to the ground and buy the ashes. Then come the price upgrades. Then the come the contracts. The deals. Suddenly sentiment is overwhelmingly positive. The stock goes on a monster run and never stops.
If you buy a SPAC, understand that it could take up to 10 years to show good revenue. That’s what you’re investing in. If you can’t hold it for 10 years, consider buying something else.
When I buy a SPAC, I check in every so often to see what the price is. If it’s dipped too much, and the company still appears to be manipulated and undervalued, I’ll average down.
My time horizon to sell a SPAC is a decade. Who cares what their revenue is today?
2. Personal Attacks on the Sponsor
Some sponsors, like Chamath Palihapitiya, have been involved as the sponsor in several stocks. Virgin Galactic, Opendoor Technologies, Clover Health. These are all @chamath SPACs.
And since they are loosely connected via the sponsor, Wall Street can use that as an attack vector.
They use a logical fallacy called the Ad Hominem Attack. This is where you attack the character of someone instead of their argument.
For SPACS, Wall Street will say something like, “Since Clover Health is doing poorly, then Virgin Galactic will probably do poorly as well.”
They’re trying to push an idea that the Chamath is a bad investor. A fraud. A scam artist. A man who cares only about enriching himself at the expense of others.
On the stock message boards, the paid bashers even refer to him as Scamath.
Ad hominem attacks are dumb when it comes to companies because a SPAC is more than just the sponsor. Virgin Galactic has more than 1,800 employees. Some of them are literally rocket scientists. Are these people dumb because the stock dropped 5% for no reason?
Of course not.
So, if you see someone pushing a narrative that a SPAC is bad because the sponsor is dumb you can safely ignore it. The sponsor’s job was to take the company public. They did their job. Now you do yours and hold it for a decade.
3. Untested CEO Attack
This attack is similar to the classic manipulation attack of, “The CEO is garbage!” but adds some clarification. “The CEO is too new at their job, therefore they are garbage. They should be replaced!”
What the paid bashers are saying is the CEO is untested. They have no experience. They have no business running a billion-dollar company. They don’t know what they’re doing.
There are several holes in this logic.
The first is, if the CEO/founder didn’t know what they were doing, they never would have got their company public in the first place. They absolutely know what they’re doing. They might not be the greatest CEO in the universe, but they’re still a CEO.
Imagine you were playing Dungeons and Dragons and someone said you were a garbage Wizard because you were only level 4. “There are better wizards out there that could finish this campaign in two minutes!”
Like, no shit.
(SPAC investor fighting the Vampire Squid.)
At one point your wizard had even less experience.
At one point they had zero.
Anyone who ever started a business was at one point clueless on how to run it.
“An expert is a man who has made all the mistakes which can be made, in a narrow field. ”
The CEO of any new/growth company will of course be new and untested. That’s life. We start out dumb, make some mistakes, and get smarter.
At one point in his life Elon Musk was so dumb his mother had to shove baby food down his throat so he wouldn’t starve to death. Now he’s the second-richest person on the planet.
Wall Street will always trash talk a CEO when manipulating a stock because the CEO is an easy target. Their job is to grow the company and create shareholder value. “If the stock price is heading south, who else is there to blame?”
Some CEOs firmly defend their share price.
Some don’t. This isn’t a bad thing, it just means they’re unbothered by the day-to-day movements of the stock price. They’re looking a decade into the future, and you should too.
4. Associated SPAC Attack
This attack vector is linked to the sponsor. It’s an easy way to attack multiple stocks that have the same SPAC sponsor. Like how Chamath Palihapitiya brought $SPCE, $OPEN, and $CLOV to the market.
If one of the companies is having a bad day, then the paid bashers will make comments like, “Look at $CLOV, that’s what’s going to happen to $OPEN because Chamath is a liar and a cheat.”
It’s a whole bunch of logical fallacies rolled into one. And if both stocks are deep in the red, then your brain might be tricked into thinking the connection is real.
It’s not real. It’s an illusion. Wall Street is manipulating the price of both stocks, and fabricating reasons for the drop. They want you to think the drop is co-related. This serves several purposes.
1. It might push you into selling both stocks.
2. It might push you into avoiding future stocks by the same sponsor.
But if you take a step back and ask yourself, “Can the performance of a health-care company be related to the performance of a spaceflight company?”
No. Of course not. That’s ridiculous. If a Virgin Galactic spaceship were to blow up on the launch pad, this has no impact on Clover Health.
If they were to drop in tandem, that would make about as much sense as Canadian lumber shedding 10% because a Boeing 737 Max crashed in Ethiopia.
It makes no sense but you see it happen. Chamath SPACs sometimes drop together. And the bears claim it’s because “Scamath is a fraud!”
Wall Street will do everything they can to get into your head. Don’t engage the bears that post comments that are clearly logical fallacies. Their job is to manufacture drama and ruin meaningful discourse.
5. Comparing Modern SPACs to Older SPACs
When Wall Street is manipulating a stock, they’ll throw everything they can at you, even the history books.
Remember how we said SPACs have been around for ages, but there wasn’t a huge interest in them until 2020? Well some of these older SPACs didn’t perform great. A lot of them underperformed the indexes like the S&P 500 or the Nasdaq.
But this is a weird comparison because in 2020 there were more SPACs launched than in the previous decade combined. The sample size that Wall Street is using to tell you that SPACs are bad is just too small.
It also compares apples to oranges. If a mining company goes public via SPAC in 2007 and underperforms the S&P 500, how can that possibly be an indicator that an electric vehicle company going public via SPAC in 2020 is going to be a disaster?
It can’t.
Comparisons like this in the investing world are near worthless. Imagine you tried this comparison with people.
Let’s say In 2009 your friend Bob failed at building a backyard deck. It was a disaster. In 2021 your friend Ainsley is going to try and remodel her kitchen.
They’re both home improvement projects, but totally unrelated. Bob’s failure has zero impact on Ainsley. She might be successful, she might not. But she should be evaluated on her own merits, not Bob’s.
So, when you hear bears say “The SPAC bubble is bursting!” or “All SPACs are garbage!” because one SPAC once went bankrupt, you can safely ignore these idiots.
6. Tiny Problem Attack
This is one of the easiest ways that Wall Street tricks people into selling their shares for cheap. It usually requires a catalyst, like an earnings miss, manufacturing issues, key employees leaving, etc.
What occurs is obviously not an Armageddon-level event, but Wall Street will make it out to be.
They know how focussed many investors are on the day-to-day movement of the stock price. They’re too zoomed in.
A good example of this is Romeo Power. They revised their 2021 guidance downwards. Seems bad, right? Wall Street was pitching it as the end of the world.
But if you zoomed out a little, you would have read that the guidance was revised downwards because of supply issues. They’re having a hard time getting the materials they need to create their product.
If they can’t create products, they can’t sell products. Of course revenue will be lower. That makes total sense. But does that warrant a 50% haircut to the stock price? No. That’s ridiculous.
But that’s what people might see if they check the monthly performance of their portfolio. “If the stock dropped 50% then the news must be worse than they’re saying!” (That’s the idea Wall Street is trying to plant in your head.)
If you think Wall Street is running a Tiny Problem Attack on your stock, then just ask yourself this: Will this problem be solved within two years?
If the answer is yes, then don’t worry about it.
You’ll never see a headline like this:
CFO Departs Company Because It Sucks, Search for Replacement Expected to Take 10 Years
But paid bashers will make it sound like this. Ignore them.
7. Unknown Company Attack
Post-merger SPACs are easy to attack because most people have never heard of them. There are more than 11 million companies in the US alone. How many can you name?
It’s easier for Wall Street to manipulate relatively unknown stocks because they can be compared to OTC penny stocks. And “Everybody knows penny stocks are a scam.”
Imagine you went to your dad and told him, “Dad I just lost 50% of my investment.”
“What did you invest in, son?”
“A disrupter in the car market. They make electric vehicles.”
Now depending on how long ago you told him this, he might either think you’re an idiot, or have brain damage.
Either way he’d probably tell you it was a scam, and you should sell.
“Get out now before you lose everything.”
But that stock was Tesla. It’s dropped around 50% several times. Just take a look at the chart.
This is what you’re up against. Tesla was heavily manipulated for seven years before they finally let it run. You must have the patience to hold your manipulated stock for at least that long.
8. Not a Real Company Because They Didn’t IPO
Wall Street doesn’t like SPACs. They jump the queue and don’t play by the rules. Investment banks want their monster fees for helping a company go public. With SPACs they don’t get that.
When someone goes against the norm we call them weird. That’s what Wall Street accuses SPACs of being. Weird.
Shifty.
“If they were legit, they would have IPO’d the classic way.”
This is nuts.
Over time things change. We discover better ways of doing things. We trim the fat from processes that have become convoluted.
The classic method of taking your company has turned into a scam. Wall Street overcharges on fees and lowballs stock price estimates.
SPACs don’t play by these rules. So, in Wall Street’s view they must be punished. If you hadn’t noticed, a lot of SPAC stocks got crushed in February/March 2021. This is by design. Wall Street is doing everything they can to discourage future companies from taking the SPAC route.
This is turning into a protection racket. “IPO the classic way and we’ll protect your stock. Go through a SPAC and we’ll destroy you.”
By destroying a SPAC’s share price, it makes it more difficult for the company to raise money. It also takes longer for early investors to cash out. And Wall Street wins again. Because they’re the one shorting the stock into oblivion and posting fake price targets to keep a lid on the share price.
9. Sector Trashing
Have you noticed that when a stock in a certain sector drops for no reason, a lot of other SPACs in the same sector also drop?
These are coordinated short attacks.
When Wall Street senses weakness in a stock, they can exploit it in others. SPACs are especially vulnerable to this because the companies are small and unknown. If $TSLA drops 2%, it’s a good bet that $RMO, $FSR, and $HYLN are going -6%.
Or more.
The larger drops are often shakeouts. And you’ll usually see a quick recovery. Maybe even by the end of the day.
Bears will try to tie the drop to the sector, but their logic is flawed. “Tesla shipped less cars this quarter, therefore the demand for electric transport trucks in 2025 will be considerably lower. Sell your Hyliion now before it goes to zero.”
Like, what?
But then you look at the stock price of Hyliion and it’s down 6%. This price action doesn’t make sense, but you’ve already lost so much and so you sell.
And the parasites on Wall Street win again.
Sector trashing is easy for them to do, but often makes no sense from a logical standpoint. Just because one company is having difficulties, doesn’t mean others will.
10. Timeline Attack
This is the most frequent method used to manipulate stocks. We’ve touched on it a bit, but it’s worth expanding since this manipulation tactic can do the most damage to a SPAC.
Companies that choose the SPAC route versus the traditional IPO are usually newer companies. Many of them have little to zero revenue. Their future is uncertain.
When Beyond Meat did an IPO, they had revenue. They were signing contracts. Expanding. Cutting deals with restaurants and grocery stores. It was easier to build a case that Beyond Meat would be successful, so they got a higher valuation.
If you look at your post-merger SPACs you’ll notice most of them have tiny market caps. Usually between 500 million to a billion.
Market cap is a reflection of assets, revenue, and sentiment. If a company has 2 billion in cash, then it probably has at least a 2 billion market cap. (Unless something has gone terribly wrong.)
Once a company has matured into its semi-final form, it might have a market cap of higher than 50 billion. At this stage the growth has slowed, so the growth premium will shrink. Their market cap might be as low as five to seven times revenue. They also tend to trade pretty flat, and barely match the indexes.
In life, I’ve found that exaggeration and hyperbole are useful tools for poking holes in someone’s logic. So, let’s pretend for a minute that all future growth from your SPAC has been eliminated. It’s now a mature and flat-lining company.
Simply take your SPAC’s market cap and divide it by 5. If the bears are saying your company is bad and going nowhere, then this is the peak revenue numbers they are predicting.
500 million market cap = 100 million in sales.
1 billion market cap = 200 million in sales.
2 billion market cap = 400 million in sales.
If you’re looking at these numbers and thinking, “Well that’s ridiculous, obviously my company is going to eventually blow those numbers out of the water,” then congratulations, you’ve defeated the Timeline Attack.
Wall Street wants you to focus on the ultra short-term. They push quarterly earnings. Goals. Deadlines. They’ll shove every bit of negative news down your throat. Conference call transcripts. Geopolitical issues. Employee changeovers. Supply shortages. They’ll hit you with a million little negative details that will trick you into thinking that you’re screwed. And in the short term you might be. But investing in growth companies is about holding for at least seven years. It’s about holding for a lengthy chunk of time. Or in other words, going long.
You might think that short sellers have a lot of guts. But it’s you, the long investor, with the biggest balls on the boat. You who watched their stock drop 50% and didn’t panic.
If you can hold a stock through any turmoil, then you’ll be a hero. A hero is just someone who doesn’t panic when the shit hits the fan.
You can do this. Have faith and hold fast.
You believed in Santa Clause for eight years, you can believe in your stock for less than seven.
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