In the deal-frenzied months after the onset of the pandemic in 2020, hundreds of companies across North America took advantage of an investment craze promising quicker, cheaper access to stock markets with less regulatory scrutiny.

Special purpose acquisition companies, or SPACs

for short, are essentially shells that raise capital and list on public markets first, and then seek out promising private companies to buy later.

Billed as the “poor man’s private equity,” SPACs offer retail investors an opportunity to invest alongside a roster of sponsors or founders with dealmaking or sector expertise, who, as the pitch goes, should be well positioned to suss out worthy merger targets.

The rush that took place in the early 2020s raised more than $245 billion in the United States, outstripping traditional

initial public offerings (IPOs)

and pushing the Canadian SPAC market’s haul to more than $6 billion since 2015. In the process, it thrust dozens of companies in buzz-worthy sectors such as

electric vehicles

and online technology onto public markets and into the hands of retail investors.

But over the past few years, a discouraging number of those companies have sought bankruptcy protection, with many facing class-action lawsuits as a result. Many of the most prominent Canadian companies to go public via the vehicle — some of which reached valuations in the billions of dollars — now litter the landscape of failed SPACs. Among them: Saint-Jerome Que.-based electric school bus manufacturer

Lion Electric Co.

, which received tens of millions of dollars in investment from the Quebec government;

Li-Cycle Holdings Corp

., a lithium-ion battery recycler founded in Mississauga Ont.; Montreal-based hotel chain Sonder Holdings Inc.; and electric recreational vehicle maker

Taiga Motors Corp

.

The fallout has led some to question whether the less onerous regulatory approach or the structure of the investment vehicle itself is a problem and whether retail investors who sometimes participate directly but may also buy into the companies on secondary markets fully understand the way SPAC deals work.

Among the criticisms is that there is an incentive to do a deal — any deal — because that’s how the founders make money after bearing the upfront costs and risk.

Others say the investment is not suited for buy-and-hold retail investors because the best outcomes have been reaped by those who sell their shares as soon as the acquired company is merged with the SPAC.

While there are plenty of examples of companies that became public via SPAC trading below the investment vehicle’s IPO price, the situation is particularly dire on Canadian exchanges, where there have been a total of 28 SPAC IPOs.

“There has not been a single Canadian SPAC that completed its qualifying acquisition and currently trades at higher than the SPAC IPO price,” said Daniel Wilson, an associate dean at the University of Calgary’s faculty of law.

“In other words, (it’s) a debacle.”

Wilson, who wrote a comprehensive paper on the performance of the investment vehicle for the Canadian Business Law Journal in 2024 and updated his Canadian market data in February of this year, says only two Canadian-listed companies, Sagicor Financial and Glass House Brands, trade anywhere close to their IPO price, at a five per cent and 15 per cent discount, respectively.

“Every other one has either been unwound, cease-traded, delisted and taken private at a major loss or trades at more than a 50 per cent discount to the IPO value,” he said.

Several of the Canadian companies using U.S.-listed SPACs to gain access to stock markets in the United States have also done poorly, facing similar fates.

Lion Electric set aside plans for a traditional IPO in 2021 when presented with an opportunity for a quick route to market and US$500 million in cash that would fund growth plans for the next five years by merging with a New York Stock Exchange-listed SPAC, its former CEO said in a 2021 interview.

Interest in electric vehicles was high, with Elon Musk’s

Tesla Inc.

on its way to inclusion in the S&P 500, and Lion, which was founded in 2008 and a major beneficiary of the Quebec government’s mandate that all new school buses purchased in the province be zero-emission and made in Canada, peaked at a valuation of more than US$4 billion in 2021. The company’s star rose on the promise of a fleet of electric trucks and deals to be inked with the likes of

Amazon.com Inc.

and

Canadian National Railway Co.

But the plans did not pan out. Developing electric trucks took longer than expected, limiting Lion to pursuing short-haul clients. In addition, the company was beset by manufacturing issues, delivery delays and customer complaints about slow service for the electric buses.

Exacerbating the situation was concern that the policies of U.S. President Donald Trump’s administration would thwart momentum on electric vehicles, prompting the Quebec government to refuse to provide additional funding to Lion.

By December of 2024, Lion, which had also secured a listing on the Toronto Stock Exchange, was in bankruptcy protection proceedings and the New York Stock Exchange had moved to delist its shares. The Quebec government, which had provided funding to what appeared to be a promising company in the province, revealed that it stood to lose more than $100 million, while the federal government had $30 million on the line. Investors launched a class action against the firm’s former officers and directors, alleging they were misled about the company’s financial health.

After struggling to find a buyer, and with the Quebec government refusing to put up any more money, most of Lion’s assets were eventually bought by a group of Quebec investors for a fraction of their previous value.

The trajectory was similar for Li-Cycle Holdings Corp., a lithium-ion battery recycler founded in 2016 in Mississauga, Ont., part of the Greater Toronto Area. Li-Cycle gained a listing on the New York Stock Exchange in 2021 after merging with a U.S.-based SPAC, Peridot Acquisition Corp. The company made headlines by picking up financial backers including Glencore PLC and Koch Industries. But a shift in U.S. policy away from sustainable energy plus cost overruns to get new facilities built led to steep declines in Li-Cycle’s shares and a bankruptcy filing in 2025. The company, once valued at $1.7-billion, sold its assets in the United States and Germany and its intellectual property to Glencore for US$46.4 million last August.

A proposed class-action lawsuit against Li-Cycle on behalf of Canadian investors, brought by law firm Berger Montague (Canada) PC, alleges that the company failed to provide timely disclosure about conditions underpinning a loan from the U.S. Department of Energy, which did not materialize, and problems with engineering designs and cost-overruns into the hundreds of millions on a Rochester, N.Y., facility.

The list of Canadian companies that went public via SPAC during the pandemic-era boom and have similarly landed in bankruptcy proceedings also includes Sonder, a lodging and rental company founded in Montreal in 2014. Sonder went public on the NASDAQ exchange via a SPAC in 2022, but promises of melding the comfort of an apartment stay with the convenience of a hotel fell short when the company filed for bankruptcy protection last November.

The company had achieved a public listing without positive cash flow, according to receiver Ernst and Young LLP. And though its fortunes had appeared to be on the upswing in 2024 when it struck a licensing agreement with Marriott International Inc. that would have added Sonder’s rentals to Marriott’s digital platform and booking apps, that agreement was terminated abruptly last year. The bankruptcy filing soon followed.

Some academics have suggested that companies taken public through SPACs tend to be smaller, with fewer resources, making them a good fit for an investment vehicle with less onerous regulatory requirements but also inherently riskier.

But Wilson said it’s not that simple. Prior to the SPAC boom that kicked off in 2020-2021, there is evidence that while companies that entered public markets via the investment vehicle were at a less mature stage of development, they had similar or even higher growth rates in both market capitalization and revenue than companies going public through traditional IPOs, he said.

When he looks at how the SPAC market has evolved, particularly in Canada, what he sees as a major impediment is a misalignment of incentives built into their design.

For one thing, sponsors can usually buy stakes at a substantial discount in exchange for covering the early legal and brokerage costs, which can run into the millions of dollars. The promotional stakes, often 20 per cent, are also meant to compensate the founders for taking on the full risk of searching for and completing the acquisition of a company to roll into the SPAC.

However, these holdings don’t vest until an acquisition is made and, if there’s no suitable acquisition done within a specified time frame, the founders have to give all the money back to investors who bought into the SPAC, which is wound down.

“It encourages them to sell a story,” Wilson said. “If you don’t get a deal done, you’ve lost everything.”

Moreover, because they’re getting their stock at a steep discount, the shares can trade significantly lower while the sponsors are still ahead.

“That’s the biggest problem — it gives them this massive … incentive to get a deal done because not getting a deal done is a dead cost and getting a deal done means that they can make money even if the stock trades (below the issue price),” Wilson said.

This structure incentivizes founders to overpay for companies, he said, because their promotion stake gives them a disproportionate return compared to other investors in the SPAC.

“It’s fundamentally misaligned incentives,” Wilson said. “It gives every incentive to do bad deals because sponsors financially benefit even if the SPAC ultimately trades significantly down.”

In Canada, he said the more limited availability of quality companies can result in bidding wars, with sponsors willing to pay undeserved premiums simply to get a deal done.

A veteran mergers and acquisitions lawyer said fees generated for investment bankers and law firms at each stage of the SPAC are another incentive that keeps the “whole deal machine” rolling.

“An investment banker wants to sell the deal because they get a commission. The investment banker (then) wants to complete a qualifying acquisition because it gets a bigger fee,” said the lawyer, who spoke on condition of anonymity because their firm does business with SPACs and they were not authorized to speak on the subject.

“(And), sure, the law firm gets a bigger fee if it gets to do it. The whole deal machine is incentivized to get deals done.”

Some who have looked at the SPAC market in detail have found problems beyond the incentives — with the structure itself.

Snehal Banerjee, an associate professor at the University of California’s San Diego Rady School of Management, said his research has shown that warrants, typically granted alongside SPAC shares, contribute to poorer outcomes, especially for retail investors.

SPAC IPO units that combine a share and a warrant give investors the option to redeem their shares at the time a qualifying acquisition is completed for a return of their initial investment, while retaining the warrants for potential upside.

Research that Banerjee co-published in the Harvard Law School Forum on Corporate Governance after the pandemic boom showed that SPAC investors who sold their shares early and rode the warrants had much better outcomes than those who held onto the shares.

However, he found that retail investors were willing to pony up for the “optionality” of a share plus a warrant but were overconfident in their ability to track and weigh incoming information to determine whether it was prudent to sell the shares once a company was identified to be acquired and merged into the investment vehicle.

“The unique features of SPACs, such as redeemable shares and the bundling of shares and warrants, may lead investors to overvalue the SPAC units, which generates the observed negative returns,” Banerjee said in the paper he co-authored with Martin Szydlowski, now an associate professor of economics at The Hong Kong University of Science and Technology’s school of business.

One reason for the poor outcomes over time, their model revealed, was that investors who left their money in the companies gave founders access to relatively low-cost capital, which encouraged overpaying for acquisitions.

“If redemptions are low because many overconfident investors hold on, those investors are overpaying — and the sponsor may use that cheap capital to pursue targets that wouldn’t receive financing otherwise,” Banerjee said.

“So fewer redemptions can actually indicate over-investment in marginal deals, not necessarily better outcomes.”

Low interest rates and the popularity of meme stocks at the time, such as AMC Entertainment Holdings Inc. and

GameStop Corp.,

helped bring high retail investor participation to the SPAC market during the pandemic period, he said, which increased the pool of available capital from less sophisticated investors.

“With more overconfident retail capital available, sponsors could finance riskier, more speculative targets — ones with ‘lottery-like’ payoffs,” Banerjee said. “This (led) to a lot of investments that didn’t end up paying off.”

The conclusions lined up with his model’s prediction that more unsophisticated investors would lead to riskier targets, more overpricing and worse average returns for buy-and-hold investors.

“When most investors are sophisticated, the SPAC structure works well because it protects against bad deals,” Banerjee said. “The problem arises when it attracts too many unsophisticated investors, which is likely what happened in 2020-22.”

For some of the companies, the structure and the investors it draws in provided an avenue to raise capital and go public when a traditional IPO was not an option, he said.

“Some of these firms are profitable, but others are not likely to be. So while SPACs do not necessarily lead to poorer outcomes for companies, the average company that is financed using a SPAC is likely to be riskier than the average company that is financed using an IPO.”

An abundance of unsophisticated capital contributed to such outcomes, he said.

“It’s not surprising that some SPAC-listed companies have struggled…. The SPAC process makes it easier to take public marginal, risky companies which might not have survived the traditional IPO scrutiny,” he said. “The bankruptcies … may be consistent with this: the SPAC boom likely brought public some companies that weren’t ready for it.”

Banerjee and his co-author recommended that limiting or eliminating warrants as part of the initial unit issuance could mitigate the poor outcome for investors that buy and hold. He pointed out that any subsequent investor who buys shares after the merger with a private company, also known as a “de-SPAC” event, would be vulnerable to a wave of dilution from the warrants.

“Since the owner of the warrant can choose whether or not to exercise the warrant, they will only do so if it allows them to buy shares at a discount relative to the share price,” Banerjee said. “In this sense, they are dilutive for other shareholders, even new ones who buy shares after the merger.”

The

U.S. Securities and Exchange Commission

rolled out new disclosure rules for SPACs in 2024, effective the following year, that require more information to be provided to investors about sponsor compensation and dilution that could occur if shares are sold.

“(This) should help investors understand the structure of the SPAC, in principle,” Banerjee said. “However, this depends on whether investors are sufficiently sophisticated in understanding the implications of such disclosures.”

The rules did not change for Canadian exchanges, according to Wilson, who noted that the revised U.S. disclosure rules are aimed simply at disclosing potential conflicts of interest and do nothing to better align the interests of all stakeholders in a SPAC.

Richard Frankel, an accounting professor at Washington University’s Olin Business School who dug into the performance of SPACs following the pandemic boom, pushed back on the notion that the lighter regulatory touch was responsible for the failures, noting that his research found no evidence this led to misleading disclosures in SPAC filings.

In fact, he suggested that given the popularity of SPACs, which made up nearly 60 per cent of initial public offerings in 2020 and 2021, it might make sense for regulators to lighten some of the disclosure burden on traditional IPOs to encourage more public financing.

“Our research centred around whether revenue and income forecasts in SPAC IPO filings were misleading. We did not find evidence of this,” Frankel said.

The performance of SPACs isn’t that surprising when one considers that companies merged into the investment vehicle tend to be smaller, a segment of the market that did not perform well compared to the S&P 500 in the two years following the declaration of the pandemic in 2020, he said.

The Russell 2000 index that tracks small-cap stocks, for example, fell about 20 per cent in 2022.

“Many SPACs were issued during this time so like other small stocks, they underperformed,” Frankel said.

Some of the SPAC flameouts during the pandemic boom exposed some big names in investing.

Hedge fund billionaire

Bill Ackman

raised US$4 billion in one of the largest SPACs, but was forced to return the money to investors in 2022 when he was unable to find a suitable company to take public through a merger with the investment vehicle. Such stumbles aren’t unique to the early 2020s. In Canada, two of the earliest SPACs were wound down in 2017 without securing a business to underpin the exchange listings. The money returned to investors, leading to premature obituaries for the investment vehicle.

One of the highest-profile Canadian SPACs to run into trouble in those early days involved some of the country’s biggest corporate names. Acasta Inc. raised $400 million in 2015, boasting founders including Belinda Stronach, former politician and president of

The Stronach Group

, and Geoff Beattie, who was previously president of the billionaire’ Thomson family’s private holding company Woodbridge Co. Ltd.

Other notable sponsors included Air Canada CEO Calin Rovinescu and Canadian Pacific Railway Ltd. CEO Hunter Harrison, alongside Rick Waugh and Gord Nixon, former CEOs of Bank of Nova Scotia and

Royal Bank of Canada

, respectively.

Acasta announced its intention to buy three businesses in 2016, including an aviation finance advisory and asset management operation. But less than a year after the acquisitions were completed, Acasta was losing money. Executive changes followed and the company took on debt. By 2019, the shares had plunged and assets were sold off for less than the company had paid.

Wilson said he’s seen iterations of this pattern on repeat since.

“In a heady market, everybody was rushing to do a SPAC, thinking they could make a lot of money, and they were getting encouraged to do it by the brokers,” he said. “After they’ve run out of extensions, they’ve got two options: they either do a sh—y deal, that is, a speculative deal, and just get it done in order to not unwind, or they unwind. And if they unwind, they’ve spent, on average, like $15 to $20 million in expenses that that have come completely out of their pocket.”

Wilson, however, also suggested that investors may finally be recognizing the risks of holding onto shares after the SPAC folds in an acquired company. According to his data, recent SPAC deals on Canadian exchanges have triggered a larger proportion of shareholders to sell their shares than in the early days.

“I think as time went on, they’re getting wise,” he said.

That those who sell wind up better off may itself be an indictment of the structure. Rather than a strategy for long-term retail investors, Wilson suggested the best-case scenario would be to vote against every qualifying acquisition, redeem the shares and ride the warrants for the minority of U.S. SPACs that trade higher over the post-deal period.

The biggest beneficiaries of the more realistic scenario in which only some investors redeem their shares may be institutions that step in to close the financing gap created by the redemptions, who often receive “sweeteners” for doing so, he said.

“If 85 per cent of a SPAC redeems, (the sponsors) now have to go out and do a private placement,” he said. “What you’re seeing on these deals is that the founders are so desperate to get a deal done that they’re actually handing over to the standby financiers a number of their discounted shares — to give them an incentive.”

Now everyone can make money even if the shares trade below the SPAC IPO price, he said, except the initial non-founder investors who didn’t sell their shares when a company was merged into the investment vehicle and those who bought in after the merger with the private company.

“It’s not a lesser standard of review (that’s the problem),” Wilson said, “but a system that creates a perverse incentive to tell the story on a promotional basis, to keep as many of those investors in as you can.”

“Because those are the guys that you don’t have to pay, you don’t have to give them a sweetener. And this is the criticism that’s been levelled at SPACs: they have been frequently overly promotional and optimistic in talking about the qualifying acquisition, and they haven’t lived up to it.”

To be sure, not every deal has been a bust.

A bright spot for a Canadian-listed SPAC emerged last fall when Sagicor Financial Company Ltd., a Bermuda-based fintech company with banking, insurance, pension and investment management operations in Canada, the United States, the Caribbean and Latin America, received an upgrade from Fitch Ratings.

An Oct. 21 news release issued by Sagicor said the upgrade meant the company’s senior debt was investment grade in the unanimous view of its credit rating agencies, with Fitch citing the company’s strengthened core profitability and a strong capitalization profile.

“This is further validation of Sagicor’s strong capitalization as we pursue stable and profitable growth,” Andre Mousseau, the company’s chief executive said in the news release. “This upgrade will provide Sagicor with enhanced access to capital as we execute our strategy.”

Beyond the glimmers of hope on Canadian markets, there are still plenty of people who find SPACs appealing, particularly in the U.S. Two Canadian tech companies are on track to gain U.S. listings this year using the investment vehicle, with a combined estimated value approaching $5 billion.

In November, Toronto-based quantum computing firm Xanadu Quantum Technologies Inc. announced it would go public on both the Nasdaq and the Toronto Stock Exchange this year by merging with Crane Harbor Acquisition Corp., a Philadelphia-based SPAC. The gross proceeds are expected to be about US$500 million, assuming no redemptions by Crane Harbor’s public stockholders, and the market capitalization is anticipated to be US$3.6 billion. The transaction includes a lockup for existing shareholders, prohibiting them from selling or transferring their shares for “for a period of time” upon closing.

In an interview published in Betakit in November, Xanadu’s chief executive Christian Weedbrook said the firm decided to pursue a public listing via a SPAC deal after seeing excitement around quantum stocks and the ability of peers secure more money faster as public companies.

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Xanadu is not alone in seeing opportunity to ride the ongoing SPAC wave. Richmond, B.C.-based General Fusion announced plans in January to become the first publicly traded pure-play fusion company through a merger with Spring Valley Acquisition Corp. III, a NASDAQ-listed SPAC and a targeted equity value of US$1 billion.

“There’s still SPACs happening in the U.S.. But the pace is a tenth of what it was a couple years ago,” Wilson said, adding that the most import thing for investors thinking about buying in is to be — and remain — as informed as possible about the investment vehicle’s structure and any built-in incentives.

“My foundational problem with the structure is that (investors) have the right to get out … but there’s every incentive for the founders to tell a great story, to keep them in, and if they stay in, now they’re at risk.”

• Email: bshecter@postmedia.com