SPAC Social Capital Hedosophia Holdings VI Is Not Really Your Friend

If it weren’t for the terribly destructive novel coronavirus, 2020 may very well have been known as the year of the SPAC, or special purpose acquisition company. Offering a way to skip an initial public offering and yet still be a publicly traded company, SPACs generated all kinds of headlines. Social Capital Hedosophia Holdings VI (NYSE:IPOF) and IPOF stock may be the ultimate litmus test for the sustainability of this craze.

A man holding two puzzle pieces surrounded by more, smaller puzzle pieces. SPAC IPOs
Source: Pasuwan/

For one thing, Social Capital Hedosophia Holdings VI, the sixth SPAC offering under the tutelage of venture capitalist Chamath Palihapitiya may be golden because the sponsor himself apparently has the Midas touch. An early senior executive of Facebook (NASDAQ:FB), Palihapitiya knows a good deal when he sees one. And that’s an important component of banking on a SPAC play like IPOF stock.

As my InvestorPlace colleague David Moadel mused, this is about betting on the jockey as opposed to the horse (as you would in a traditional investment).

Second, and I believe just as importantly for IPOF stock, Palihapitiya represents the new guard in high finance. Lately, we’ve seen an uprising in trading circles against the typical image of privileged boomer Wall Street elites. Please just check out finance-related posts on social media platforms like Reddit if you don’t believe my characterization of the present dynamics.

Now take a look at Palihapitiya — he’s basically the exact antithesis of a privileged boomer. I mention this because he’s almost surely regarded as a hero among many millennials and the Generation Z cohort, who are more diverse than prior American generations.

Honestly, when you don’t know what the underlying target acquisition is for IPOF stock, these extracurricular details — no matter superficial they may appear — matter. A lot.

IPOF Stock Is Compelling But Watch Your Blindside

Let’s back up for a second. SPACs are essentially blank-check companies. They don’t have a business of their own. Instead, their “job” is to raise money as a blank-check entity and find — usually within a two-year period — a startup firm to acquire.

Since the SPAC is already public, the acquired firm does not have to deal with the traditional hassles of an IPO, such as going on a roadshow and begging multiple investors for money. As well, the regulatory standards are far less stringent, and the process much quicker and direct.

Hence, this is why SPACs are also known as reverse mergers. It’s the backdoor way of going public.

Obviously, there are benefits for the target acquisition to enter the capital markets in this manner. As I just mentioned, startups can enjoy access to investor (your) dollars sooner. Also, when I discussed this topic for Benzinga last week, I wrote that disruptive events like the 2018 government shutdown and the Covid-19 pandemic made “the direct approach of SPACs attractive.”

At this point, you might think that SPACs are like electric vehicles, superior to combustion cars in every way imaginable. But you may want to cool the hype train if that’s your thinking: you just might have SPAC fever!

Seriously, there’s no such thing as a free lunch. And you have no friends on Wall Street. Remember these two concepts before going crazy with SPACs, especially investments like IPOF stock where you’re depending on the person as opposed to the product (or the sponsor as opposed to the service).

I noted earlier that Palihapitiya knows a good deal when he sees one. That’s an easy thing to say with SPACs because usually structured in a way where the sponsor is generously compensated — even if the target acquisition is less than ideal.

What does the sponsor care? He’s getting a fat piece of the SPAC pie while you’re left on the bottom rung of this story — speculating that the target startup (assuming the deal even goes through) moves higher than the price you paid for it.

No, You Really Are at the Bottom!

One of the smartest people I know is a gentleman named Don Harrold, who made some brilliant calls on precious metals back in the day. He gave me — and his YouTube audience when his channel was still up — advice I’ll never forget.

When you’re buying a commodity (or stock), you’re the last person in line. In other words, everybody else in the asset’s supply chain has already made their money before it reaches you. True, by speculating, you can end up being the biggest winner of them all. But chances are higher that you’ll end up losing.

I’m not trying to be a downer. This is just life.

When it comes to SPACs, you really, truly, deeply are last in line. Heck, you don’t even know what the proposed acquisition company is going to be! Maybe that’s why a Wall Street Journal article suggested that the SPAC bubble may burst and not a day too soon, using the authors’ words.

Of course, this is the internet, so my words will probably be misinterpreted as an attack against Palihapitiya. That’s not the case at all. What I’m trying to say is that you need to be careful.

While SPACs are convenient vehicles for startups looking to go public, there is a cost associated with this convenience. If you’re not careful, you may end up paying it.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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