Special Report: How Wall Street banks made a killing on SPAC craze

Investment banks have raked in billions of dollars by feeding the frenzy for blank-check companies, and they have done so largely without risking any of their own money on hundreds of deals that have left many investors with punishing losses.

A look at one of these deals shows how.

In late 2020, Acies Acquisition Corp tapped into investor demand for blank-check companies – formally known as special purpose acquisition companies, or SPACs – with an initial public offering that raised $215 million. Among the investment banks Acies signed up to underwrite the IPO were JPMorgan Chase & Co, Morgan Stanley and Oppenheimer & Co.

When the offering closed, Acies, essentially a shell company, followed the SPAC template. With the cash it had raised, it had two years to find and merge with a private company seeking a stock market listing, or return the money to investors. Acies' management team announced it was on the hunt for a business in the "experiential entertainment industry."

The team didn't have to look for very long. Hours after the IPO closed, bankers advising Playstudios Inc contacted Acies managers to tell them the Las Vegas-based maker of mobile casino games was for sale, regulatory filings show. Those bankers were also with JPMorgan. In early 2021, the two companies announced plans for a merger that valued Playstudios at $1.1 billion.

In the run-up to the merger and the listing of the combined company's shares, Playstudios touted a rosy future. It forecast that surging ad sales, a new role-playing game and cross-marketing offerings to game players would bring a 20% rise in revenue in 2021 and a 33% jump this year.

Since then, the company has scrapped the new game, and revenue fell far short of predictions. Retail investors suffered the consequences. The stock is down more than 50% since shareholders approved the merger last June.

"Playstudios is one that looks like crap right now," Dan Ushman, a 37-year-old Chicago-area entrepreneur, said earlier this year. He put about $26,000 into Acies after it announced its deal with Playstudios and soon saw his investment drop more than 35%.

Investment banks involved in the deal fared much better, having risked none of their own money, based on a Reuters review of regulatory filings.

JPMorgan JPM.N, in particular, pocketed hefty fees for its dual role as an underwriter for the Acies IPO and as an adviser to Playstudios – perfectly legal, despite the apparent conflict of interest, if the bank discloses its role, as JPMorgan did.

The bank has not disclosed its fees, but financial data provider Refinitiv estimates that JPMorgan earned $4.7 million in underwriting fees and $14.2 million as a sell-side adviser. It also received $1.6 million for helping Acies raise additional capital through a maneuver known as private investment in public equity, or PIPE, according to financial research firm Morningstar Inc and a Reuters analysis. PIPEs, which tap big institutional investors, are often necessary to close a SPAC merger.

Morgan Stanley earned about $5.9 million and Oppenheimer about $1.2 million in underwriting fees, according to Refinitiv estimates. Each bank also got about $1.6 million in PIPE-related fees, according to Morningstar and a Reuters analysis. LionTree Advisors, another Playstudios adviser, earned $6.2 million on the deal, according to Refinitiv estimates, plus $1.6 million in PIPE fees, according to Morningstar and a Reuters analysis.

JP Morgan, Morgan Stanley and LionTree declined to comment. An Oppenheimer spokesman said the bank had a minor role in the Acies IPO.

Playstudios MYPS.BLUE noted that the JPMorgan teams it and Acies worked with came from separate divisions of the bank. The company said it has "a robust framework for evaluating, approving, executing and optimizing its game initiatives," and that it is continually "revisiting the conditions and decision to either advance or suspend an initiative."

A curious pattern

The disparate outcomes of the Acies-Playstudios deal – big bucks for the investment banks that sold it and big losses for retail investors who bought into it – are typical of many SPAC deals.

For this article, Reuters analyzed hundreds of SPACs spanning roughly two years, reviewed banks' internal documents and regulatory filings, and interviewed more than two dozen bankers, investors, SPAC managers, lawyers and corporate executives. The examination found that investment banks turbocharged to their benefit what turned out to be a speculative bubble in companies that have often failed to live up to their pre-listing hype.

The SPAC market has sagged since the collapse of some high-profile blank-check listings amid overall grim market conditions. And in March, the US Securities and Exchange Commission (SEC) proposed new rules that would increase disclosure requirements and potential legal liability for SPACs and their banks. Facing these market and regulatory challenges, some banks have been pulling back from the business.

Whatever happens to the SPAC market, the Reuters examination reveals in detail for the first time how, over the past couple of years, Wall Street banks have enriched themselves by aggressively promoting the deals in the absence of the legal guardrails and financial risks associated with traditional IPOs.

Credit Suisse summed it up last year in a confidential client presentation reviewed by Reuters: SPACs "bend the rules" of the IPO market. The Swiss bank has had a role in 136 blank-check deals since the beginning of 2020 through the end of March, according to a Reuters analysis of SPAC Research data.

A Credit Suisse spokesperson said the language in the presentation pertains to SPAC "market conventions" that give companies and investors more flexibility than in traditional IPOs. The bank is committed to "recommending strategies that conform to all applicable rules," the spokesperson said.

In a traditional IPO, underwriters can be held responsible under securities law for any misleading forecasts, projections or other statements made to investors. To protect themselves against liability, banks perform rigorous due diligence on companies whose IPOs they underwrite, and those companies generally do not issue public forecasts about their performance. Banks also buy big chunks of an issuing company's new shares, risking losses if they can't resell the stock for more than they paid.

With a SPAC, a bank's role as underwriter ends once the blank-check company completes its IPO, but the bank receives a portion of its fee only after the SPAC makes an acquisition. By the time the SPAC announces a merger, SPAC underwriters aren't responsible for forecasts and other claims about the performance of the company to be acquired and publicly listed. And because blank-check IPOs are typically priced at a nominal $10, banks don't run the risk of having to sell new shares that fall in value.

For investment banks, blank-check deals create "moral hazard" – an incentive to take on risk because of little exposure to it – according to Usha Rodrigues, a law professor at the University of Georgia who studies SPACs. That's because they "don't have the same liability with a SPAC that they have with a traditional IPO, but banks do get to collect fees if they can get a deal done," she said. The "companies that merged with SPACs … don't have the same level of vetting," which most retail investors do not realize.

Shares of companies that obtained a stock market listing in a SPAC merger from 2019 through the beginning of March were down roughly 36% on average from when their deals closed, according to data provided by Jay Ritter, a professor of finance at the University of Florida. That's even worse than the 14% decline in shares of companies that went public through traditional IPOs during the same period, according to Nasdaq Inc. All told, according to Vanda Research, retail investors lost $4.8 billion, or 23%, of the aggregate $21.3 billion they plowed into SPACs from the beginning of 2020 to the first week of April 2022.

Yet the deals that brought those shares to market have yielded a bonanza for investment banks. Industry tracker Coalition Greenwich estimates that banks booked about $8 billion in SPAC-related fees in 2020 and 2021. That represents roughly 6.5% of total US investment banking fees that major banks collected in that period, according to Coalition Greenwich.

"The bank has an incentive to push the deal to get closed, at any price, because they want their 3.5% of the SPAC IPO proceeds," said Mike Stegemoller, a professor of banking and finance at Baylor University, referring to the fees underwriters receive only after a SPAC merger closes. "I think the conflict is with retail investors who are buying common shares of stock … Do you really think banks care about these retail investors? I think there are good incentives not to."

Many banks amped up their take by working for both sides of deals, as JPMorgan did with Acies and Playstudios. Reuters identified roughly 50 such cases from early 2020 to November 2021.

Soured sentiment

As the SPAC bubble has deflated, debate over responsibility for investor losses has focused on the executives of blank-check companies. These founding investors – referred to as sponsors – risk losing all of their investment if they can't find a company to take public through a merger within the two-year window.

However, founders acquire their shares at deep discounts to the typical $10 offering price, thanks to preferential treatment and fees that can dilute retail investors' holdings. Likewise, the hedge funds and other institutional investors that account for a lot of the money behind SPACs often obtain their shares in an IPO or subsequent PIPE under favorable terms that put them at an advantage relative to retail investors.

The SEC put SPACs on notice last year with several enforcement actions against specific companies and their sponsors for allegedly misleading investors about their prospects. Then, in late March, the regulator announced its proposed rules, which would, among other things, establish that investment banks that underwrite SPACs could be held legally liable for false or misleading forecasts or statements about blank-check deals. The SEC will vote on the rules after the public-comment period ends later this spring.

The SEC declined to comment. In a 30 March  statement on the proposed rules, SEC Chair Gary Gensler said "gatekeepers" such as underwriters "should have to stand behind and be responsible for basic aspects of their work" and "provide an essential function to police fraud and ensure the accuracy of disclosure to investors."

In its proposed rules, the SEC said that the fees underwriting banks receive when a SPAC closes a deal could indicate participation in the merger, and that banks also have a "strong financial interest" in making sure a SPAC inks a deal. For these reasons, the regulator said, it is proposing increasing banks' liability.

To date, investors have not sought to hold major Wall Street banks responsible for false or misleading information alleged in any of the 47 SPAC-related class action shareholder lawsuits filed since 2021, according to a Reuters analysis of a public database maintained by Stanford Law School and attorney Kevin LaCroix, who follows the cases. None of those cases have yet succeeded in court.

One aspect of SPACs that has already drawn regulatory scrutiny is undisclosed dealings between blank-check companies and their targets before a merger is announced. That's because investors could be misled if a SPAC privately shakes hands with an acquisition target while publicly stating it is still seeking the best possible merger partner.

Communications between a SPAC and its acquisition target are part of an SEC investigation of former US President Donald Trump's $1.25 billion deal, announced last October, to list his new social media venture on the stock market.

In a December filing, Digital World Acquisition Corp, the SPAC that is merging with the former president's Trump Media & Technology Group, disclosed that the SEC had asked for documents relating to communications between Digital World and Trump Media and meetings of Digital World's board, among other things. The SEC stated in its request that its investigation did not mean the agency had concluded that anyone violated the law, Digital World said.

Trump Media has since launched the Truth Social platform to lackluster effect.

Trump Media and Digital World Acquisition Corp did not respond to requests for comment. The SEC declined to comment.

In the Acies-Playstudios deal, pre-existing relationships raise the question of whether the two companies already had a merger in mind, potentially precluding better deals for investors.

Acies told investors when it launched its IPO that it had not identified a company to merge with and that it would pursue the best opportunity it could find. However, Andrew Pascal, chief executive officer of Playstudios, co-founded Acies with Jim Murren, who was chief executive officer of MGM Resorts Inc when that casino operator invested in Playstudios, as was disclosed in a securities filing.

Playstudios said it "considered all viable SPAC proposals and eventually made the decision it believed was the best of the available options for the company." Responding to Reuters inquiries on behalf of Murren and Pascal, Playstudios noted that MGM Resorts, not Murren personally, invested in the company, and that Pascal recused himself from "all Acies deliberations concerning Playstudios" once talks began and "forfeited his economic interest in Acies to avoid even the appearance of having conflicting interests."

Backwater to bonanza

For decades, SPACs were a backwater of Wall Street, connecting speculators with companies that had no other means of going public. That changed in late 2019 and early 2020, when shares of Richard Branson's spaceflight provider Virgin Galactic Holdings Inc and sports betting operator DraftKings Inc surged more than 600% after going public through SPAC mergers. Investors stuck at home during the Covid-19 pandemic and flush with cash from government stimulus payments helped drive those gains, and they clamored for more.

Wall Street banks were happy to oblige and began aggressively promoting the business. In client presentations and other documents reviewed by Reuters, they repeatedly acknowledged the tainted reputation of SPACs and boasted of their ability to bring quality companies to market through blank-check deals.

In a 2020 presentation, Morgan Stanley [RIC:RIC:MSMSG.UL] said there was a "historical perception of lower quality companies picking (the) SPAC route, although views have improved somewhat." For its part, Morgan Stanley said it associated "only with the highest quality partners."

Some of its past partners include Acies, the SPAC that brought Playstudios to market. Shares of the 51 companies that Morgan Stanley has helped take public through SPACs either as an adviser or by raising money to close the deal since the beginning of 2020 were down 28% on average through late March, according to a Reuters analysis.

Morgan Stanley declined to comment on the presentation and the performance of shares in companies that went public through its SPACs.

Citigroup C.N, in a 2019 presentation, said that while SPACs historically had been considered a "four-letter" word, synonymous with poor outcomes, that perception was changing as investors' appetite for new alternatives grew.

Companies that Citi helped bring to market through SPACs since 2020, either as an adviser or by raising money to close the deal, were down 38% on average at the beginning of May, according to a Reuters analysis of SPAC Research data.

Among its many deals, Citi was an underwriter for the IPO of a SPAC called Spartan Acquisition Corp II and an adviser to the company Spartan subsequently acquired, Sunlight Financial Holdings Inc, a financier of solar energy systems. The bank helped Spartan determine its valuation of Sunlight at $1.3 billion, based on Sunlight's own profit estimates, securities filings show.

Sunlight later slashed its profit estimates. The shares, after peaking at about $14.33 in early 2021, are now trading at less than $5.

Citi and Sunlight declined to comment.

Credit Suisse CSGN.S, in a fourth-quarter 2020 presentation to corporate clients, pointed out that the latitude companies enjoy when issuing business forecasts in SPAC deals can "help improve investor perception of the company." That would be particularly helpful, it said, for companies that "may have struggled to go public via a traditional IPO."

In the same presentation, Credit Suisse highlighted the "creative marketing tactics" it used in the Virgin Galactic deal. These included flying investors and analysts to tour Virgin Galactic's factory and Spaceport America complex, which the bank said added "a 'wow' factor that a regular-way IPO process could not have provided."

When Virgin Galactic went public, it wasn't generating any revenue. Its shares soared in the months after the listing, peaking at $62.80. They subsequently tumbled amid delays in some product testing and are now trading below $10.

In a 2021 presentation, Credit Suisse asserted that the surge in blank-check deals was being driven by "high quality sponsors" that "seek to partner with blue-chip assets." Quality aside, share prices of the 56 companies Credit Suisse helped bring to market through SPACs in the past two years were down on average about 32% at the end of March, according to a Reuters analysis of data from SPAC Research.

A Credit Suisse spokesperson said the bank is "very selective when it comes to choosing SPAC clients," and that it treats SPAC mergers "much the same way as regular IPOs" in terms of the bank's internal approval process. When working for a company that could merge with a SPAC, the bank evaluates alternatives and helps identify the "most suitable course of action," regardless of whether Credit Suisse underwrote the blank-check firm's IPO, the spokesperson said.

Virgin Galactic declined to comment.

Another company Credit Suisse helped bring to market is Paysafe Ltd. The online payments platform was valued at $9 billion in a March 2021 merger with a SPAC. Credit Suisse had underwritten the SPAC's IPO and acted as an adviser to Paysafe on the subsequent merger.

The $9 billion valuation was based in part on Paysafe's forecast that its digital wallets business would see double-digit growth from 2020 to 2023. Securities filings show that banks were involved in discussions on establishing the valuation.

After Paysafe went public, it had to write down its digital wallets business and make technological improvements to it. The shares are down more than 80% from their January 2021 peak.

Paysafe decided to go public through a SPAC because it was the "best route to take to public markets," and hired Credit Suisse because it had worked with the bank on prior deals, according to a company spokesperson. Paysafe has put in place a turnaround plan for its digital wallets business that is "well underway" to "deliver on a new growth trajectory," the spokesperson said.

A representative for Foley Trasimene Acquisition Corp II, the SPAC that acquired Paysafe, declined to comment.

Waiting in the wings

The deal that took car retailer CarLotz Inc public underscores the aggressive tactics banks adopted in their pursuit of SPACs.

The Richmond, Virginia-based company, which sells used cars on consignment online and through retail outlets, began looking for a buyer through a conventional sale in late 2019 but failed to find one at the $1 billion price it wanted, a source familiar with the matter said.

Several months later, Deutsche Bank DBKGn.DE pitched itself as a sell-side adviser to CarLotz LOTZ.BLUEd, pledging to find a SPAC buyer, according to a person familiar with the situation. The bank sought SPAC buyers that would value CarLotz at a minimum of $750 million, based on the $730 million paid for rival Shift Technologies Inc in a recent SPAC merger, and possibly as much as $2 billion, a source familiar with the matter said.

And Deutsche Bank already had a bidder waiting in the wings, a SPAC called Acamar Partners Acquisition Corp. Deutsche Bank had advised Acamar as an underwriter on its launch more than a year earlier, and the blank-check company was running out of time to secure a merger. Less than a month after CarLotz hired Deutsche Bank, the bank suggested to Acamar that it make an offer for CarLotz, according to regulatory filings.

Acamar made a winning offer of $827 million, less than CarLotz had hoped for, but beating out two other bidders, the filings show.

In anticipation of its stock market listing, CarLotz started wooing investors with glowing forecasts. It projected it would have almost $1 billion in sales in 2022, nearly nine times its estimated 2020 revenue. It could meet demand, it said, from a diverse supplier base of used cars from corporate fleets.

About seven months later, a supplier representing more than 60% of CarLotz's cars sold in the prior quarter paused its relationship with the company. Sales dried up. Revenue for 2021 came to only $259 million.

CarLotz shares are down more than 90% since they were listed, giving the company a market value of less than $100 million.

Deutsche Bank did far better. It received fees of approximately $6.7 million as an underwriter and $14.1 million as an adviser, according to Refinitiv estimates.

CarLotz and Acamar did not respond to requests for comment.

In an interview, Eric Hackel, head of equity origination solutions at Deutsche Bank, declined to comment on the CarLotz deal specifically. In general, he said, the bank's due diligence for a traditional IPO is "a little bit more thorough" than for a SPAC, but it does "a tremendous amount of diligence on companies we underwrite."

On deals for which the bank is advising the private company and has also underwritten the SPAC acquiring it, "there's usually another bank advising," Hackel said. Ultimately, he said, "it's up to the company" if they hire the same bank that underwrote the SPAC to advise them on a deal.

He noted that retail investors enjoy some of the protections institutional investors have – such as the right to redeem shares for $10 before a deal closes. However, once a deal is done, Hackel said, retail investors "have to make their own decisions. They have to do their own diligence."

Kyle Brown, a 30-year-old accountant in Groton, Connecticut, invested in CarLotz. "We lost the totality of our investment with the exception of $35," he said. "It was about $11,000, $12,000." Brown had hoped his investment would help pay for a new house, but he ended up having to find other ways to fund a down payment.