University at Buffalo Associate Professor of Accounting, Michael Dambra joins Yahoo Finance Live to discuss why SPAC deals with Forbes and SeatGeek are being terminated, the outlook for SPACs, and protections for investors.

Video Transcript

BRIAN CHEUNG: The broad market volatility is affecting the world of SPACs, those Special Purpose Acquisition Companies that were all the rage during the post-pandemic run-up in stocks. And just today, two high profile SPAC deals involving ticket reseller SeatGeek and media company Forbes collapsed. For more on all this, let's bring in Michael Dambra, University at Buffalo associate professor of accounting. It's great to have you on the program.

Again, this was kind of the darling, if you will, of the market activity during 2021 and most of the pandemic recovery. But it seems like now, concerns about, A, not only SPAC deals not getting done, but perhaps SPAC deals that were done not even making it only a few years out. What do you see as the biggest issues facing the SPAC world right now, Michael?

MICHAEL DAMBRA: So, I would say there's a couple of different things going on right now with SPACs. Number one, the way these things got priced, oftentimes, was based on revenue projections. And the revenue projections were extremely high. And so you had firms going from $0 of revenue to $0 of revenue to $0 of revenue, $4 billion. And so there was a lot of-- during that spike, there was a lot of interest in SPACs.

And when we watched the cash flows come in, they're just not coming in as projected. And since these things are priced based on those forward multiples, it creates expectations that aren't getting realized. And so cash flows aren't coming in, which makes firms-- which gives a little substantial doubt that these firms will sort of continue and be able to stay active in public markets.

AKIKO FUJITA: Michael, let's talk about some of the numbers here. At least 25 companies that have issued going concern warnings, 10% of the total number of SPACs that went public between 2020 and 2021. How much of this do you peg to a lack of regulation, guardrails? I mean, we know the SEC has since come out and proposed these additional disclosures. Do you think the number would have been pulled back significantly if those disclosures were in place?

MICHAEL DAMBRA: I would hope so. But the problem, when you look at those investor presentations, when they actually project out revenues, you see huge amounts of growth, but there's not a lot of historical information. So the SEC is really pushing for comparative disclosures, both on revenue projections, versus what the company has done previously. And where the real activity was, where those merger announcements really generated a lot of positive returns, a lot of retailers are buying. And so, if there was more equivalent disclosure, that might have sort of prevented this sort of pop we're seeing in SPAC markets and then the subsequent decline we've seen now.

MICHAEL DAMBRA: Michael, you talk about regulation and kind of the ways by which there are guardrails around the SPAC world. One interesting thing I know that you flagged before is just kind of safe harbor protections, which have existed for SPACs, perhaps some interest from the SEC to remove those protections. What would that do? Do you think that's a good policy to address some of the things that we've been talking about so far?

MICHAEL DAMBRA: Yeah, that's a two-pronged question. I mean, first, if the safe harbor goes, a lot of these firms are going public through a SPAC for that very specific reason. They're very speculative. And so there's an opportunity or a window to actually tell a story through projections that you can't do through a traditional IPO. If you get rid of the safe harbor proposal or the safe harbor protection the SEC has proposed, I think that'll sort of kill that sort of avenue for these firms to go public. And I think that will decrease IPO volume.

Whether I feel like that's appropriate or not, I'm sort of mixed because it did bring more firms to the public market. But I think the issue was, I think a lot of retail investors in particular are misled into these crazy growth stories. Not every one of these SPACs is going to turn into DraftKings or Virgin Galactic. A lot of them are going to be like these flying helicopter companies that just can't stay in business.

AKIKO FUJITA: So let's talk more about those retail investors, Michael, because there's a lot that are watching who are saying, look, I bought into one of these SPACs, and yet, they didn't end up acquiring a company specifically. Then what happens?

MICHAEL DAMBRA: I mean, if it's still in the SPAC process, they have an opportunity to get their initial investment back, so there is some protection if the actual-- if the merger goes through. But if the SPAC liquidates, there should be enough capital to get back to retail investors. However, if the acquisition happens, it's an already acquired company, that's where we see a lot more problems. Since 2021, the firms that have gone public via SPAC are down at least 60% as of last week. And so, the initial investment you made when you held on during the SPAC acquisition, you're not getting that back once you're a traditional public company.