The deep problem with SPACs is the sponsors' and warrant holders' cuts, paid by the target company or the SPAC shareholders, leading to a bad deal for both
SPAC SPAC SPAC — Simplifying a bit, the way a special purpose acquisition company works is that the sponsor of the SPAC raises …
Context & Ripple Effects
This piece closes the loop on an arc the coverage has been tracing since 2020, when SPACs were pitched as lowering companies' cost of capital versus traditional IPOs improved terms for targeted companies. What followed was a financing squeeze — deals funded with pricier instruments like convertible bonds once institutional cash dried up more expensive financing — and then the bill came due: nearly half of small-revenue startups that went public via SPACs in 2021 missed their targets missed their earnings or revenue targets, and by early 2023 at least eight had filed for bankruptcy with dozens more trading below $1 filed for bankruptcy since June 2022.
The Bloomberg argument here is diagnostic rather than descriptive: the failures aren't just market timing, they're structural. Sponsor promote fees and warrant dilution are paid by the target company or the SPAC shareholders themselves, so every deal is born underwater for both sides — a mechanism that explains why the cohort underperformed even before rates turned.
First-order effects
- Target companies going public via SPAC absorb the sponsors' and warrant holders' cuts directly, meaning they raise less usable capital than headline deal values suggest.
- SPAC shareholders — the retail and institutional trust holders — bear the same dilution, which is why redemptions and the loss of institutional PIPE money forced SPACs into convertible bonds hit deal economics twice.
Second-order effects
- Targets gain leverage to demand better terms or walk, extending the shift already visible in 2020 toward improved negotiating positions for companies choosing between SPACs and traditional IPOs improved terms for targeted companies.
- Sponsors competing for fewer viable deals must either shrink their promote or accept costlier structures like convertibles, compressing the very economics that made SPACs attractive to launch.
Third-order effects
- If the bankruptcy-and-sub-$1 pattern holds, SPACs survive only as a niche route for companies that can't access traditional IPOs — reversing their 2020 positioning as the cheaper path to market.
- The New Yorker's framing that investor skepticism and regulation would determine whether SPACs become a fixture points to the likely endgame: fee-structure reform or disclosure rules aimed squarely at sponsor compensation, since the promotion-vs-IPO asymmetry fewer restrictions on promoting stock only amplified the misalignment.
The trend: SPACs are repricing from a 2020-era alternative to IPOs into a structurally disadvantaged one, as the built-in sponsor and warrant costs that this analysis isolates surface as the cohort's bankruptcies and sub-$1 listings pile up.