Canada's SPAC 'debacle': How a shortcut to market has spelled trouble for companies and investors

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.