Legislation, Regulation, and the Retail Investor

retail Investors

Legislation, Regulation, and the Retail Investor

There has been much discussion this year about “protecting the retail investor”. In an effort to better understand how retail thinks about the SPAC asset class, we took a survey, which you can find at the bottom of this article.

In an effort to protect retail investors, there was yet another proposal put forth by House Democrats on Monday, focusing on SPACs. The gist of this latest bill is that it would only allow brokers and money managers to recommend SPACS to accredited investors, “unless the promote or similar economic compensation of the SPAC is 5 percent or less“.

Candidly, this shows a lack of understanding of how SPACs actually work.  Notably, that just because a sponsor team receives a 20% promote at IPO, doesn’t mean that is the percentage a sponsor owns at de-SPAC.  In fact, oftentimes the sponsor ownership at de-SPAC is less than 5%.  Frustratingly, the sponsor promote is largely and repeatedly misunderstood.

Additionally, it’s unclear how it was determined in this Bill that a “5% or less promote” would be safer for retail investors.  Was the thinking behind it that a lesser amount of promote provides some sort of protection to retail?  And is it a predictor of success?

Because look no further than Fortress Value Acquisition Corp II, which combined with ATI Physical Therapy (NYSE: ATIP), and is currently trading near $3.50.  In that deal, Fortress Value II took zero promote at combination close and instead subjected it all to price hurdles of $12, $14, and $16.  Conversely, ARYA Sciences Acquisition Corp. II, which combined with Cerevel Therapeutics (Nasdaq: CERE), kept ALL of their original 20% promote and it is now trading near $31.00.

According to the bill, only Fortress Value II would have been able to be marketed to retail, whereas ARYA II, would be institutional and accredited investors only.

However, the general sense is that this new Bill doesn’t pass. At least not in its current form.  And even if it did, all that means is that SPACs will “evolve” so that they receive 5% ownership at de-SPAC (which is what they’re doing already anyway), similar to Bill Ackman’s structure in Pershing Square Tontine.

Furthermore, by only letting 20% promote deals be marketed to institutions, and not retail, suggests that they’re not actually trying to protect ALL investors, just some of them.  Which seems counterintuitive if there was actually something wrong with the structure to begin with. Assuming they think it’s broken, why only fix it for some?  To be sure, some innovation around the promote is needed to improve the product, but the answer isn’t to lock-out investors. That’s like breaking your arm and instead of fixing it, the doctor just cuts it off.

But, the ability to evolve the asset class naturally is a SPAC’s secret weapon. The SPAC has evolved significantly throughout the years and, for the most part, that market efficiency has worked very well.  If the SPAC product isn’t working, it evolves its terms to bring back investor demand.  This is opposed to the traditional IPO, which has always had a fairly static mechanism for bringing companies public.  And as we’ve seen, SPACs arose out of companies finding the traditional IPO process unsatisfactory. As a result, we had the SPAC boom and the creation of the Direct Listing.

As for protecting investors, the other scenario that could happen if this Bill were to be passed is only the top teams would do 20% structures.  That would effectively shut retail out of the best quality deals leaving them only the lesser quality 5% deals which would further enhance retail losses. You can’t force evolution because you just end up creating monsters. The point is, natural selection is always going to be better than “genetically modified”.

Interestingly, there are also a number of other items on the agenda of both legislators and regulators right now, not just SPACs. Payment For Order Flow (“PFOF”), in particular, is a hot button topic.  However, I could not find any studies cited that definitively measured whether PFOF resulted in best or worst execution. Furthermore, no one has asked retail what they would prefer.

The same goes for SPACs.  If you recall, the SEC put out guidance on “celebrity SPACs” in March of this year because, again, they wanted to protect retail. But, no one has ever asked retail what they think and whether celebrities influence how they invest. Or, done any analysis on them as an investor group. Should legislators and regulators be making changes based on assumptions?

Well, we at SPACInsider, thought it might be helpful to actually ask retail directly.  So, this is a first crack at looking into retail investing for SPACs, writ large. We anticipate a follow up survey where we drill down even further in an attempt to get at the facts.

The below is a result of a poll circulated on Twitter, or “FinTwit”, in an attempt to figure out exactly how does retail think. Keep in mind, we are at another low point in the highly cyclical SPAC cycle, but even still, the responses overwhelmingly suggest retail does not want to be shut out of these deals via any new legislation. Read on for the results.

SPAC Retail Survey – October, 2021


As you can see, only 8.5% of respondents consider themselves a novice SPAC investor. In fact, the vast majority, or 47.1% consider themselves to have “Significant Experience” or “Expert” level. Granted, this is a self-determining question, but if you spend enough time on Twitter, you will know that retail has matured significantly. They are no longer, as a majority, novice investors. Now, instead of asking questions, they are citing SEC filings and referencing legal language, and inquiring about things like lock-ups or valuation metrics. 44.4% stated they have “some experience”, which was the largest sole group of respondents, but the point being that very few retail investors are getting into these deals without “some experience.


Only 6.1% of respondents elected “no”, they do not plan to continue investing in SPACs. The overwhelming majority, or 93.9%, do want to continue to invest in SPACs in the future. This is despite a very negative current SPAC environment suggesting despite current low returns, there is still appetite for investing in this asset class.


Once again, perception does not match reality. The suggestion has been that retail invests in SPACs because celebrity names are involved in some of these deals. However, retail investors, if you ask them, dislike the celebrity SPACs.  And sure enough, the numbers bear that out with ~92.3% saying celebrities do not influence their investment.


Interestingly, 36.6% of respondents consider themselves on par, or are better in their investing abilities, to institutional investors. A further 30.6% consider themselves just below the skill of an institutional investor. This means that 67.2% of respondents consider themselves pretty close or above institutional skill level when it comes to investing in SPACs. 32.8% consider themselves below institutional investors when it comes to their investing ability.


There is an ongoing perception that retail is “dumb money”.  Regardless, nearly 82% of retail investors think the media has portrayed them as not smart enough to invest on their own.


The biggest concern with retail investors and SPACS has been “at what price do they invest and when“? The other big presumption has been that retail is buying significantly above IPO price.  However, the data doesn’t seem to bear that out. Instead, retail investors are, as a majority, investing below or near cash-in-trust value. However, if they are investing above trust value, only 9% say they invest above $10.00 and only with strong conviction on the trade. Only 26% said they invest above $10.00, but from a “neutral position” and it’s deal dependent. Furthermore, over 63% stated they would invest above $10.00, but only if they had strong conviction and 21% said thy would “rarely” invest in a SPAC trading below cash-in-trust value.


This is where it gets interesting. The general consensus is that retail is investing based on teams, ala the Chamath deals. But lo and behold, SPAC teams ran a distant third, behind Company and Valuation, as it should.  Team is still important if they have the skill and experience to help guide a newly public company in a specific industry sector, but the actual combination company and its valuation are more important to retail investors.  Interestingly, PIPE investors ranked last.


Again, the presumption has been to protect retail from early stage companies, where risk is highest. Fully, 41.0% felt neutral, or neither uncomfortable nor comfortable, about investing in early stage growth companies. If we add in “Somewhat Comfortable” and “Very  Comfortable”, the numbers reach 73.2%, or nearly three out of four investors were okay with investing in early stage growth companies. Only 3.9% were “Uncomfortable” with deciding to invest.


As for the traditional IPO, only 19.1% of investors had a preference to invest rather than via a SPAC. Meanwhile, 80.9% would rather opt for a SPAC IPO.


The above is a “word cloud” of responses to this question, but the overwhelming response was that retail would much rather invest in an early stage growth company rather than a late stage IPO. The individual responses repeated over and over again were that they want exposure to growth companies because they felt there was better upside potential as compared to a traditional IPO.  Additionally, they seem well aware of the risks since that word came up frequently. Below are a few examples of responses.

 – “Later stage/established growth companies seem to have far too high of a premium attached by IPO. Banks/institutions get to pick the stock clean before retail gets a chance to buy.”
 – “Greater risk/reward especially vs an overpriced IPO that further jumps 50% on opening day.”
 – “Higher growth rate, lower valuation, more upside.”
 – “Potential for massive growth in a disruptive industry.”
 – “Ground floor, can see how the public reacts with limited downside.”
 – “Bigger risk bigger reward, just gotta do the DD”
 – “Higher risk, but also higher reward”
 – “I’d prefer the rare opportunity to access “private stage” companies.”
 – “Get in on the ground floor as opposed to the sky high ipo price once they go live.”


Lastly, should retail NOT be allowed to invest in SPACs? Nearly 97% said no, they do not want to be shut out of SPACs. This is despite one of the most difficult down-cycles for SPACs and 97% of retail respondents still want to be able to invest.

All of these answers suggest retail does not want to be legislated against participating in SPACs.  But then again, no one has ever asked them.



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