CBA Newsletter March 2021

InvestmentfundsatWallStreetstartedtospotanexcitingtreasurein2020,claimingithas“virtuallyzero-risk” andeven“freemoney”.Asaresult,SPACshavebeenmorepopularthaneverbefore,withfoundersrangingfrom fundmanagerstocompanyexecutives.Whileafew mergesgainedfamebypromisingprofits,risksareslowly floatingtothesurface.TheCurrentBusinessAffairsNewsletter(MarchIssue)ofTheBusinessStudents'Union, HKUSTSUistakingyoutoanoverviewofSPACs. OriginandstructureofSPAC AftertheIPO,theSPACisnowrequiredtoseekfora suitableprivatecompanytomergewithin24months. SPAC stands for Special Purpose Acquisition Ifthefoundersfailtodoso,theSPACmustrefundthe Company,whichisdifferentfrom normalcompanies shareholders,andinvestorsmayneedtotradethe withdailyoperationthat,itspurposeistomergewith sharesatdiscount.Sincethetargetcompaniesof aprivatecompany.Itfirstappearsin1990sasshell SPACsareneverdisclosedorpromised,SPACsare corporations,providingopportunitiestoundermined alsocalled“blank-chequecompanies”. privatecompaniestogopublicdirectly,skippingthe traditionalIPOprocess. AdvantageovertraditionalIPO AnewlylaunchedSPACwillfirstraisecapitalthrough TraditionalIPO wasapainfulandslow processfor IPO(InitialPublicOffering),whereearlybackerssuch manymedium sized companies.Investmentbanks asinvestmentfundsaretypicallyallocatedunitsat$10 collectaround7%ofproceedsasanunderwritingfee, apiece,whileotherinvestorsbuysharesintheopen nottomentionthediscountimposedonIPOpriceof marketoncethecompanyislisted.Themoneyraised shares.Althoughthesharepriceissupposedtorise30 willthenbekeptinatrustthatearnsinterest.Units to40 percent,thegainsarecompensatoryforthe willbesplitintosharesandwarrant,givinginvestors expenses.Apartfrom entrancefees,theinvestment theoptiontoredeem cashorsellinthemarket.Hedge banksarebeingconservativeinhardtimeslikethe fundsusuallyselloncethereisasurgeinpriceand pandemic,asaresultcompaniesareunder-priced makeprofitbeforethedealislockedforinvestors. throughtraditionalIPO. Sources:OrtencaAliajandSujeetIndap.“CanSpacsshakeofftheirbadreputation?”FinancialTimes,13August2020, www.ft.com/content/6eb655a2-21f5-4313-b287-964a63dd88b3 OrtencaAliajandMilesKruppa.“HowhedgefundsarefuellingtheSpacboom.”FinancialTimes,11March2021, www.ft.com/content/812b243b-4831-4c65-92b2-f72bfdc6eff6

Fishermen,FishesandtheSea EvolutionofSPACs TherearethreemajorconcernsaboutSPACs.Thefirst Improvements and attempts regarding the SPAC oneisthat,investorsareriskingontheassumptionthat structure appear under fierce competitions.Bill thefoundersarededicatedtoseekforgoodcompanies. Ackman raised 5.6 billion dollarsfrom Pershing CommonlySPAC foundersareentitleda“promote”of SquareTontineHoldings,whichisbyfarthesecond 20% oftheshellcompanyforfree,servingascreditsto largestSPACintermsofmarketcapitalisation.He theireffortinsearchingcompanies.Thereward,however, gave up hispromised 20% sharesforfounders, hasnothingtodowithactualresult,whichmeansthe instead hepurchasesunitsofPershingSquareat foundershavenomonetaryincentivetoproperlyperform marketpriceto obtain trustfrom investors.This theirduties.Therefore,investmentsarebuiltontrustto methodeliminatesthelackofincentivesforfounders thefoundersin person,usuallytheirexperiencesand toseekqualitycompaniesand servetheordinary reputation,yetpublicinvestorscanhardlyverifyone’s shareholders,notthesponsors. abilitiesandvision. InSiliconValleywheretechcompaniesconcentrate, Apartfrom thefounders,thetargetcompanymaybea SPACsarealsobeingrebrandedasafinancialtool deteriorating firm in disguise,or even a fraud.In insteadofagimmick.Seeingthesuccessfulexamples September2019,ModernMediaAcquisitionCorpmerged ofSPACs,morestarttorealizethekeyfeatureof withAkazoo,aGreekmusicstreamingservicethatbilled SPACs:visionandimagination. itselfastheSpotifyofemergingmarkets.Thefounderof ModernMediaLewDickeyboastedthestreamingservice “It’stheimagination,that’swhatcapturespeople,” as“aterrificcompany”,yetascandalwassoonrevealed saysMrNoel,thelawyer.“It’snotaboutwhatitis.It’s thatAkazoofakeditsclaimed5.5millionsubscribers.Itis whatpeoplebelieveitcouldbe.” possiblethat,SPACsfallintoscamsbypoorlymanaged companies,especiallywhentheSPACmeetsitsdeadline YourFeedback…… for searching a company or it has to refund the shareholders. YourfeedbackwillhelpalottoimproveourCBA Newsletter,ifyouhaveanyenquiriesorsuggestions, Itissaidthattherearegoodcompaniesfullofpotential please do nothesitate to contactThe Executive buttheylack opportunitiesto belisted,hencefund Committee of the Union through email by managersandexecutivesfallovereachothertolaunch [email protected],orby mailto Mailbox #15,LG5 new SPACsandmakeafortune.Thefactisthat,there StudentAmenities,TheHongKongUniversityof mightnotbeasmanyworthycompaniestobespotted. ScienceandTechnology,ClearWaterBay,Kowloon, Whentheyrecklesslydrawblankcheques,theymightbe HK. searchingfornothing,endinguplearningalessonby sufferinglosses.