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SPACs: a renaming of an old method of giving foreign businesses access to US capital. And expatriating large amounts of money.

BIScom Subsection: 
Author: 
Nigel Morris-Cotterill

The origins of the SPAC, an acronym that has taken on a life of its own with the actual name falling into disuse, are not recent. In fact, as a concept, it's 300 years old - originating in a time of corporate malfeasance, fraud and abuse of investors.

As a vehicle, then, it's perfectly suited to be recognised by regulators who think they are being progressive.

Oh, and it's a near magical route for the expatriation of funds generated by organised crime i.e. money laundering.

SPAC: Special Purpose Acquisition Corporation.

The history of such vehicles is explained in Essentials: Corporate Vehicles, Trusts and Other Structures at Financial Crime Risk and Compliance Training, our sister venture.

It's not even new within the USA where "envelope companies" were a feature of the booming over-the-counter market in the 1990s but fell out of favour with the dot com crash; then the term became more commonly used as a term in stock market trading where a company is said to be trading within or without its envelope i.e. is overbought or oversold, an indicator not of the value of the company but of the appetite of the market for its shares, so that definition isn't what we are looking at.

The Special Purpose Acquisition Company is, at its heart, this: "we're forming a company, it's going to do great things, give us money, we'll cut you in or pay you a return on your investment. But we aren't going to give any details at this time."

There is nothing new about special purpose vehicles: they have long been a tool for both capital raising and for tax planning and, importantly, as a method of reversing foreign companies into e.g. US corporations listed on light-regulation exchanges. They are a significant tool in allowing foreign businesses to raise capital in the USA by the simple expedient of forming a US company, raising capital within it, then effecting a takeover of all or part of the foreign company. The SEC, in its general lack of appreciation for basic English calls this a "merger." It isn't.

There are some technical issues but they aren't relevant to the essential principles of
a) creating a simple route for the placing of money into a US entity and the transfer of that money overseas
b) the opportunity for misleading those who are invited to place that money into that US entity
c) the near open-door for money laundering and other illicit purposes
d) if one takes a helicopter view, the SPAC is simply another investment fund albeit one with a single objective (or rather a single, publicly stated, objective). Think Real Estate Investment Trust (REIT) or "hedge fund."

While US, Singaporean and other regulators have made specific provision for SPACs, the old envelope company can still operate in the old way, especially on lighter regulated markets around the world.

SPACs are private companies which can, in due course, become listed.

Or disappear with the money they raised.

SPACS are not pre-IPO companies, at least not on paper. They are not required to comply with any stock exchange rules despite the fact that they are raising capital.

In short, from a legal and regulatory standpoint, there should be nothing special about the special purpose acquisition vehicle: it's raising money for a venture which may or may not be defined in its pitches which are, emphatically, not to be considered a Prospectus in the manner that a public offering would require.

The SPAC is supposed to attract what the USA used to call a "qualified investor" and then changed the name to "accredited investor." In short, pitches may be made to them, and their offers to purchase may be considered, in respect of unregulated securities provided they meet certain standards of income and available capital. Other countries and the EU have similar schemes but differ in the detail.

Think crowdfunding for people with a high disposable income and a stash of cash.

The obvious question is "what could possibly go wrong?"

The answer is this: exactly the same as went wrong in the early 18th Century in the coffee-houses of the City of London. Readers will know it best as "The South Sea Bubble" but the majority of the losses related to purely domestic companies formed for a single purpose: to develop an industrial process, for example.

But many of them never developed anything although the money was spent. The point wasn't the product: it was that shares were seen as something that went up but never down. Don't mention the bitcoin, to paraphrase Basil Fawlty.

There is always something that attracts those looking for a quick buck. We see waves in the property market, in various sectors of commerce and industry. We see shares moved by the power of a million tweets, or by a single tweet by a person with a million followers.

Yet, the issue of domestic fraud, which has at last come to the attention of the USA's SEC (see USA's SEC sues over SPAC) is only a part of the reason that such companies pose a risk.

They are also tailor made for the expatriation of illicitly obtained funds i.e. money laundering.

There's no need for detail here: just think of this. What better reason is there for sending money from the USA to another country than for investment in a company that will, ultimately, become a US company with an offshore subsidiary?

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