It’s chic to be bearish about China these days. You don’t even need to look at the stock charts. Just sample a few of the headlines.
At an open meeting on March 30, 2022, the Securities and Exchange Commission proposed far-reaching changes to the regulations of special purpose acquisition companies, or SPACs, that could eliminate many of the advantages the vehicles have enjoyed over traditional IPOs.
Heading into the audit season for 2021 financial reports, expect independent public accountants to take a hard look at how many of the bumper crop of special purpose acquisition companies (SPACs) are likely to be still viable twelve months from now.
At the end of June 2021, Chinese IPOs were on track to post a record-breaking year. Didi Chuxing had completed the most eagerly awaited listing from China since the debut of Alibaba. Companies from the technology and healthcare sectors were flocking to NASDAQ and the NYSE, where they could bypass the long waiting list for the Mainland’s exchanges and achieve higher valuations and greater liquidity than what Hong Kong typically offered.
For two decades, IPOs by most Chinese companies on U.S. stock markets have existed in a regulatory no man's land. Technically, investment in the sectors most enticing to overseas investors — including internet, media, telecom, and education — was off-limits to foreign ownership. But beginning with the listing of Sina Corporation in 2000, Western lawyers and investment bankers were able to successfully skirt these rules using a variable interest entity, or VIE, structure. Foreign investors could not own the assets of or exert direct control over the Chinese operating company but theoretically had a claim on the profits and cash flows and the right to acquire ownership should Chinese law change to make that permissible in the future.
If you look at the headline numbers, SPACs appear awash with cash. In 2021 alone, 436 SPACs have raised $126 billion, for an average of $289 million apiece, according to SPAC Insider. Today, over 450 SPACs are scouring the universe for an enticing private company target into which to deposit their bag of money.
With 417 funded SPACs currently in search mode for the perfect private company to merge with, 2021 is becoming the “Year of the de-SPAC” following the “Year of the SPAC” in 2020 that carried over into the exuberance of the first quarter of 2021. These SPAC sponsor teams are sitting on about $140 billion of capital in trust, supplemented by tens of billions more in PIPE investments, which could theoretically generate a trillion dollars of market capitalization for newly formed public companies.
A High-Growth Debutante Ball of sorts is months away. Dateless SPACs (i.e., special purpose acquisition companies) would be wise to fix their gaze on the hot young Southeast Asian start-up market if they don’t want to be left without a dance partner.
Carson Block is the most famous short-seller of his generation, known for tome-length, densely researched short reports that eviscerate companies where he believes management is lying and taking shareholders to the cleaners. He is not afraid to use the f-word — “fraud” — in his reports. And as you will discover in this interview, his views on the market are laced with f-bombs and salty stories as well. So, trigger warning, folks: if you are squeamish about looking under the rock that is sometimes Wall Street, this interview may not be for you.