The ‘SPAC King’ Is Over It

Not long ago, Chamath Palihapitiya could be called the Jim Cramer of SPACs.

A Facebook executive turned venture capitalist, Mr. Palihapitiya talked up the special purpose acquisition companies — shell entities that provide companies a backdoor entry to public markets — to everyday investors with the same fervor that Mr. Cramer has long pitched stocks on television.

Mr. Palihapitiya found an eager audience in 2020, when millions of people were stuck at home during the pandemic lockdowns, flush with stimulus checks and looking for new excitements. He launched 10 SPACs — one before the pandemic and nine since. He promoted several on CNBC and social media platforms as a path to riches for small investors. From 2019 to early 2021, his Twitter following swelled from 147,000 to more than one million.

Mr. Palihapitiya was the “evangelist and the apostle of SPACs,” said Usha Rodrigues, a professor at the University of Georgia School of Law. “He was spreading the word and getting the attention. For a while it felt like he had the Midas touch.”

Now, the SPAC boom has ended, throttled partly by new regulations. The Federal Reserve’s sharp interest rate increases have made such speculative betting less enticing for big investors, who can now get higher returns from safer assets.

In recent months, some of the stocks of Mr. Palihapitiya’s SPACs have dropped nearly 90 percent from when they listed. By selling most of his shares early, he roughly doubled the $750 million he put in, mostly into the entities he backed. But many small investors who followed his advice may not fare so well.

Mr. Palihapitiya — once known as the “SPAC king” — said that he was promoting SPACs at a time when investors were embracing all kinds of risky trades, and that he wasn’t responsible for the cratering stock prices of the companies he took public.

Instead, he blames the Fed’s policies.

“Nobody forced anybody to invest in anything,” Mr. Palihapitiya, 46, said in an October interview.

A Wall Street innovation, special purpose acquisition companies list on stock exchanges, raise money from investors and use the funds to buy a private company. They have a primary backer — sometimes called a sponsor — when they list. Once a SPAC finds an operating business to merge with, it gets far less regulatory scrutiny than a company selling shares through a traditional public listing.

Long seen as dubious, SPACs went mainstream in 2016 when private equity firms embraced them as an easier way to take their portfolio companies public. By 2020, they had become a legitimate alternative route to the public markets, especially after DraftKings, Hostess Brands and other familiar names used them to go public.

The involvement of celebrities like Jay-Z and Martha Stewart gave SPACs extra sparkle. In 2007, 66 SPACs raised $12 billion. Last year, 613 SPACs raised $163 billion. Major Wall Street banks reaped more than $4 billion in fees last year, according to Dealogic.

Mr. Palihapitiya was an early cheerleader for SPACs. Born in Sri Lanka and raised in Canada, he arrived in Silicon Valley after the dot-com bubble burst, joining Facebook in 2007. By the time he left, he had a fortune worth hundreds of millions of dollars, some of which he plowed into Social Capital, a venture capital firm he co-founded in 2011.

The firm raised more than $1 billion and backed some successful start-ups, including the messaging company Slack. For a time, its fund was a top performer.

Mr. Palihapitiya started his first SPAC, Social Capital Hedosophia, in 2017, teaming up with Ian Osborne, a British technology investor. The vehicle raised about $600 million from investors. At the time, many entrepreneurs said the traditional process for initial public offerings was onerous, and Mr. Palihapitiya began pitching SPACs as an easier way for high-quality companies to go public.

He called his vision “I.P.O. 2.0.”

In 2018, Mr. Palihapitiya wrote in a Medium post that Social Capital had become too much like a traditional venture firm and would stop taking money from outside investors.

The following year, Social Capital Hedosophia found its merger target: Virgin Galactic. The spacecraft company, founded by Richard Branson, told investors that by 2022, it would operate 170 flights to space annually, generating $398 million in revenue. Wall Street analysts said Virgin Galactic — the first publicly traded spacecraft company — held the promise of Tesla. The company’s stock skyrocketed.

To prevent them from influencing investors, companies going public through I.P.O.s are largely barred from making projections. But SPACs have no such restrictions because the Securities and Exchange Commission treats the deals as mergers.

Encouraged by his success, Mr. Palihapitiya launched two more SPACs in April 2020, raising roughly $1.2 billion. For companies hesitant to go public in the early days of the coronavirus pandemic, when the market was volatile, Mr. Palihapitiya’s pitch became more attractive because his vehicles were already trading.

To whip up interest, Mr. Palihapitiya began targeting everyday traders, posting incessantly about SPACs on Twitter and on his podcast. He was also a frequent guest on CNBC, one of the country’s top-rated business television networks and the longtime home of Mr. Cramer.

In September 2020, after one of his SPACs agreed to buy the real estate platform Opendoor Technologies, Mr. Palihapitiya announced his deal on CNBC. He co-hosted the network’s morning show, Squawk Box, and thanked the anchors “for letting me do this with you guys.”

Then, for the next six minutes, he walked viewers through a slide presentation on his plans for SPACs and why Opendoor would be a winner, outlining revenue projections. The anchors later expressed skepticism about his numbers on the show. (Andrew Ross Sorkin, an employee of The New York Times and a business columnist and the editor at large of the DealBook newsletter, is a co-anchor on Squawk Box.)

By the end of that trading day, shares of Opendoor soared more than 30 percent.

Mr. Palihapitiya followed a similar playbook the following month, teaming up with CNBC to announce his third SPAC’s merger with Clover Health Investments, a health care technology firm. He told the audience that he expected the company’s shares to rise tenfold in 10 years, but by the end of that trading day, the shares fell.

Soon after, Mr. Palihapitiya took three other SPACs public, raising roughly $2.2 billion in total. By December 2020, he told his Twitter followers that if they had bought shares in each of those companies on the day they went public or when he posted about them, “your return would have been 355 percent. My commitment to you is to continue to find investments, put a bunch of my money in it and share them with you.”

Retail investors were so taken by Mr. Palihapitiya’s SPAC talk that his advisers used it as part of their pitch when discussing potential mergers with target companies. Any company that merged with Mr. Palihapitiya’s SPAC would get a “Chamath premium,” they said, because retail investors pushed the stock up, according to two people with knowledge of the firm’s pitches.

By February of last year, the SPAC market was booming. Virgin Galactic, Opendoor, Clover Health and SoFi — a personal finance company Mr. Palihapitiya took public — were up 440 percent, 246 percent, 20 percent and 130 percent.

Lincoln Daniel, a 29-year-old software engineer who started making investment videos on YouTube in 2020, was among those who followed Mr. Palihapitiya’s lead and bought into his SPACs and other investments he pitched. In an interview, Mr. Daniel said he did well with his investments because he sold out at the right time.

“People like Chamath gave us the opportunity to invest on equal footing with them,” he said.

But they weren’t on equal footing.

Michael Klausner, a professor at Stanford Law School, has written about the difference between those who back SPACs, like Mr. Palihapitiya, and investors who buy their shares after the listing. A backer can put in a small amount of money but still gets 20 percent of the shares, essentially for free. Ordinary investors don’t get the same terms.

“Sponsors make a killing, and public shareholders take a bath,” Mr. Klausner said.

Even as he was pitching his newest SPACs, Mr. Palihapitiya was selling out of his older ones. In March 2021, he sold his personal stake in Virgin Galactic for roughly $200 million, according to public filings, saying he would put the proceeds into fighting climate change. (He invested in Palmetto, a clean energy platform company.) Virgin’s stock was trading around $33 a share, more than triple its $10 I.P.O. price.

But as lawmakers started scrutinizing SPACs in the fall of 2021, the mania began to subside. Several Democratic senators sent a letter to Mr. Palihapitiya and other SPAC sponsors requesting information on their deals.

“We are concerned about the misaligned incentives between SPACs’ creators and early investors on the one hand, and retail investors on the other,” the letter said.

Reze Wong, a spokesman for Mr. Palihapitiya, said none of his deals were singled out and that he was in favor of increased regulation.

In November 2021, Mr. Palihapitiya raised questions on Twitter about the fate of the SPAC market and said he sold 15 percent of his stake in SoFi. Less than a year later, he said he was shuttering some of his SPACs that hadn’t found merger targets and returning money to investors, although he still had two looking for biotech deals.

Virgin Galactic has generated less than $2 million in revenue this year and racked up $346 million in losses. It launched just one spaceflight last year with four people onboard, including Mr. Branson. Its stock was down more than 50 percent on Tuesday.

Opendoor, Clover and SoFi were down 88 percent, 86 percent and 57 percent. While the market was reeling, Mr. Palihapitiya spent much of the summer at a chateau in Italy.

At a conference in Manhattan in late October, he told the crowd that SPACs weren’t the problem. Instead, he blamed the Fed for creating the mania around SPACs when interest rates were low and investors were hungry for returns.

“The long-term regime in which we operate has changed,” Mr. Palihapitiya said. “That is not in the control of one human being except Jerome Powell,” he added, referring to the Fed chairman.

After his talk, Mr. Palihapitiya entered a large black van while his security team followed in a second van. They were headed to Teterboro, N.J., where they would board the private jet he purchased in late 2020 to meet with potential investors.

He was mostly done with SPACs, but according to people familiar with his plans, he was reopening his venture firm Social Capital to outside investors.