Oct. 17, 2022
October 17, 2022 One issue I have not seen mentioned by much of the academic research on SPAC regulation is the affect that technical trading issues have on the on the de-SPAC trading. This often comes from the hedging that comes from securities linked to the SPAC common i.e. warrant holders and in other cases, the very PIPE/Convertible investors that helped finance the transaction. This is exacerbated during periods of high redemptions. Upon closing of a SPAC merger, if there is a large number of common redemptions, the public \"free\" float will be very small and thus so will the ability for investors to hedge or find borrowable shares. Those able to locate a borrow and pay the fee, will put downward pressure on the common. Recall, all other shares, often very sizeable in relation to the remaining free float (PIPE investors, insiders and founders of targets, sponsors) have SEC mandated lockup period for a variety of timeframes before they enter the free float liquidity of the de-SPAC. Thus, this early hedging can drive down the price of the stock, regardless of the disclosure proposed by the rulemaking. This phenomenon has nothing to do with proper public disclosure, financial projections or conflict-of-interests, which can be corrected by the SEC in a manner deemed appropriate, but rather is a technical issue that does not entirely exist in a regular way IPO. Since the redemption number remains unknown until the transaction closes, if any warrant or convert investor decides to hedge, there will be downward technical pressure on the de-SPAC shares post close. Think 99% redemptions and millions of warrants. Furthermore, high redemptions can often come as a surprise to the most sophisticated investors that just earlier helped finance the de-SPAC via a PIPE, Convert or some other security. This investor may also find themselves rushing to protect their investment by hedging. Many have written about the pricing differential on these financings, which is simply pricing in the risk of this phenomenon. If this was properly disclosed (i.e. the reason for the discount), investors would be more informed about not redeeming and sponsors would be more cognizant of the message sent to investors by de-SPAC financings. Moreover, the large redemptions will often create an orphaned stock or a \"free float micro-cap\" and ignored by large institutional investors for a variety of other regulatory reasons, but not by retail investors. It is not that the retail investor has been intentionally prejudiced, but rather the retail investor can trade at a different scale relative to many institutions. The SEC should take these trading issues into account as it tries to improve this product, which can offer an alternative to many private companies in need of funding. What may appear to be due to the regulation of one set of issues may simply be caused by a large public market cap and no free float available. The opposite but similar phenomenon that historically contributes to the \"pop\" in regular way IPOs.