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| The SPAC Trap: How SPACs Disable Indirect Investor Protection |
Indirect investor protection makes investment in most public securities safe even without understanding their terms or the underlying business.
SPACs disable this protection by offering two alternative payoffs from the same security, the SPAC share, in the de-SPAC: the redemption value, or a share in the post-de-SPAC entity.
The former is usually higher and chosen by sophisticated repeat players, while unsophisticated investors elect the latter or receive it by default.
Before the de-SPAC, the SPAC share price reflects the higher payoff, such that unsophisticated investors systematically overpay.
This overpayment is captured, directly or indirectly, by SPAC sponsors and IPO investors.
This allows the latter to make money from SPACs even if SPACs create negative social value.
SPACs were probably not designed specifically for the purposes of trapping unsophisticated investors while enriching sophisticated sponsors and investors.
But that is what they have evolved into.
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