The growing of dark money in SPACs and NTFs and a warning to investors
Recent headlines of billions of dollars exchanging hands so far this year thanks to the latest creation in financial ingenuity. SPACs, special purpose acquisition companies, and NTFs, non-fungible tokens, were responsible for raising $156b and $338m, respectively. Large sums these days don’t make news but the way in which these transactions occur are a signal of things to come and a warning to investors who practice the status-quo.
SPACs are “blank cheque” companies built for the sole purpose of quickly launching and bringing to market a tech innovation that would normally take many years to raise needed funding. Unlike private equity, SPACs bring themselves to market by listing themselves as an IPO on the exchange. This raises public investment, protecting the SPAC’s initial investors, and only putting public investors’ capital at risk should it not work out. Down the line, they identify opportunities to invest, all the while limiting their own downside risk. Celebrities have had a hand in this, including Former NBA star Shaquille O’Neal and Former U.S. Speaker, Paul Ryan, who launched their own blank cheque companies. In 2020, half of all IPOs were SPACs^1.
New companies normally take many years to design, test, and bring a product to market. SPACs bring a fundamental change to how investors should evaluate a new company; as the normal steps to analyze a company is no longer appropriate. More importantly, investment in a SPAC, a company without a clear mission or market, is putting their own capital at risk before the SPAC’s initial owners and taking an active role in insulating them from any downside risk.
NFTs are another crypto-product that uses digital art as a store of value, driving up its value quickly and substantially simply due to its unique limited supply of just one. The artist Mike Winkelmann, aka Beeple, sold an NFT for $69m, the largest so far in a single transaction. Similar to having a certificate of ownership of the artwork, the NFT using crypto to substantiate the authenticity of the art piece. The NYT reported, “Jack Dorsey, the co-founder and chief executive of Twitter, is currently selling his first tweet as an NFT in a timed charity auction. Bidding had reached $2.5 million by Thursday.” ^2.
Large sums in crypto are becoming less of a rarity as its money pool becomes larger and darker, meaning that in order to prevent taxation, it will remain with the crypto universe of investments. Crypto investors are, I suspect, like all other investors, and will diversify as much as they can without moving to the US dollar or other currencies that may trigger a taxable capital gain and expose them to other tax reporting requirements. (Although even a swap to another crypto may be taxable; investors should consult a tax advisor.)
Investors should take note of the many changes in financial markets and how these might affect them. Dark money, whether in the form of a blank cheque company or digital artwork will exist with even less due diligence and oversight. While SPACs can simply raise public capital in the form of an IPO without a business plan, NFTs can exist for no reason at all other than benefit from simply participating in the crypto dark-money universe.
At Eureka Wealth Management, I keep my clients informed of the latest trends in investments and help analyze risks involved before a potential investment. I also do retirement planning, tax & estate strategies. Call for a free, initial consultation at (760) 537-0791 or online at eurekawealthmanagement.com.
FT 3/27/21 “NFTs are the latest get-rich-quick scheme for the ‘cryptosphere’”