TechCrunch’s Kirsten Korosec reported today that the autonomous vehicle startup Aurora is on the verge of signing a merger agreement with one of three blank check companies previously founded by renowned entrepreneurs Reid Hoffman and Mark Pincus and a third partner in these transactions, Michael Thompson, who managed special funds for a long time.
The development is intriguing for many reasons, including because Aurora’s founders are big wheels in their industry (no pun intended), and after Aurora already acquired Uber’s self-driving unit in a complicated deal, Aurora, as a publicly traded company, could snap up even more rivals because it would have a more liquid currency than it is now.
Aside from the deal’s potential merits, the deal is also interesting because of Hoffman’s involvement. His venture company Greylock is an investor in Aurora and has been leading its Series A round since 2018, after which Hoffman joined the board as director. Now Hoffman’s SPAC is trying to bring Aurora to the public with a much, much higher rating than it was then rated. In fact, Korosec reports that one of the sticking points with this new deal is the company’s potential value announced as early as next week.
This is not the first time a SPAC sponsor has targeted an existing investment. In only one related case, famous VC Chamath Palihapitiya was investor in insurance company Clover through his firm Social Capital, and as industry watchers know, one of his blank check firms merged with Clover last year.
A Palihapitiya representative declined to tell Bloomberg whether or not he sold the stake prior to the SPAC deal, but legally it doesn’t matter anyway. All a SPAC sponsor has to do right now is write a long disclosure when starting a SPAC that ends up saying, ‘Hey, I could use the capital I raise for this blank check company to build a buy another company that I already have a financial stake in and that’s how it will work. ‘
The question is whether such rules of potential conflict – or the lack of rules – will continue indefinitely. The SEC is currently taking a closer look at SPACs, and while it offered guidelines specifically on conflicts of interest last December, it said it could make the agency a little nervous about asking sponsors to disclose as much as possible to anyone involved in a deal there is a new administration in Washington and a new agency chief in SEC chief Gary Gensler, and it would not be surprising if more is done on this front than we have seen so far.
Maybe there should be. SPACs already have a bad rap for investors losing money on most of them, and regardless of the appreciation of people like Hoffman, these obvious conflicts of interest – let’s face it – generally smell bad.
Yes, there is a strong argument that a SPAC sponsor who has long been associated with a target company knows the value of that company better than anyone. However, this inside knowledge goes both ways. The goal could be an amazing company that just needs one way to go public faster than a traditional IPO could do. For now, let’s assume that Aurora falls into this camp. But the target may also have to be saved by SPAC sponsors who have a legitimate interest in the company and know that its prospects could otherwise be bleak.
Do most retail investors know the difference between the two? It’s dubious, and in this go-go market, they seem to be hurt if regulators continue to turn a blind eye to the practice. That makes many industry watchers ask about the SEC: What is it waiting for?