After its failed 2019 Initial Public Offering (“IPO”) attempts, WeWork announced, on March 26, 2021, it has agreed to go public with a special purpose acquisition company (“SPAC”). (Reuters Staff, Reuters). This past year, SPACs have become the hottest trend in finance. (Tom Huddleston Jr., CNBC). According to a PricewaterhouseCoopers analysis, roughly 230 SPACs went public in 2020, raising about $71 billion in funding, a new record for SPACs in a single year. (PricewaterhouseCoopers). The number of SPACs that have gone public in 2021 is more than the annual total for IPOs in past years for both traditional IPOs and SPACs combined. (Rani Molla, Vox). Companies like DraftKings, Nikola Motor Co., Opendoor, and Virgin Galactic have all used the popular method of taking companies public through SPACs. (Tom Huddleston Jr., CNBC). SPAC mania is still booming, and WeWork is just one of many newbies on the expanding list of companies targeted by SPACs. Id.

What exactly is a SPAC? Here is what you need to know: SPACs are shell companies set up by a team of institutional investors that do not have commercial operations— the company’s sole purpose is to raise funds to ultimately acquire or merge with a business. (Catherine Thorbecke, ABC News). SPACs raise money by selling common stock to investors for the IPO without having exact plans on who or what the ultimate acquisition company will be. (Tom Huddleston Jr., CNBC). This is why a SPAC is also referred to as a “blank check company.” Id. Once a SPAC acquires or merges with a company of interest, it provides an accelerated route for that private company to become public without going through the lengthy and expensive IPO or direct listing processes. (Catherine Thorbecke, ABC News).

WeWork leases office real estate, converts it to a shared workspace, and then subleases the space to companies and individuals for a short-term. (Rani Molla, Vox). In 2019, the office-sharing startup was valued at $47 billion before its failed IPO due to concerns over WeWork’s corporate governance and its co-founder Adman Neumann’s management style. (Paul R. La Monica, CNN Business). A year and a half after its high-profile disappointment to become a publicly traded company, in lieu of attempting another traditional IPO, WeWork is set to merge with California-based blank-check firm, BowX Acquisition, sponsored by Bow Capital Management. (Eliot Brown, Maureen Farrell, The Wall Street Journal). The new deal, which values WeWork at $9 billion including debt, marks a steep decline from the company’s former almost-hectocorn status (Rani Molla, Vox). Of the $9 billion—$800 million will come in the form of private investment in public equity (“PIPE”) from major investors that include BlackRock, Insight Partners, and Starwood Capital Group. (Paul R. La Monica, CNN Business). PIPE funding comes from the sale of shares of stock to private investors at a lower price than to the public. (Mike Stenger, Money Morning). PIPE’s save companies time and money, and result in raising funding faster because investors have less strict regulatory requirements than public offerings. Additionally, the deal will provide WeWork, with approximately $1.3 billion that can be used towards its growth plans. (Joe Dyton, Connected).

WeWork may have hoped to stay as the “hip” rental workspace for young entrepreneurs to organize; however, given the global pandemic, traders should be wary of WeWork’s business model. Employers nationwide will likely continue to allow employees to work remotely for the coming years. On one side of the coin, people who are cooped up at home and are itching to get out may use WeWork space as full-time offices. On the flip side, after a year of COVID lockdown restrictions, many may be less inclined to breathe the same air as an outsider. During the pandemic, WeWork went through massive layoffs and reportedly lost $2 billion. (Mike Stenger, Money Morning).

Moreover, while SPACs are the new craze, their newfound popularity has raised some concerns. SPACs have been around since 1993, and in the past, have been linked to scams defrauding investors. (Catherine Thorbecke, ABC News). Even though the SPAC process is not as taxing as a traditional IPO, it has a complex structure that many investors do not understand. (Tom Huddleston Jr., CNBC). SPAC sponsors have the responsibility to find a feasible acquisition within two years but do not have a fiduciary duty to find the best deal. Id. Furthermore, sponsors are not incentivized to avoid having the SPAC overpay for the target company. Id. Because SPACs are blank check companies, investors go in blind and run the risk of overspending for a company valued at less. Id.

Although SPACs may be the buzzword on Wallstreet and be the Hail Mary WeWork needs to get back on its feet, investors should assess their risk-tolerance before climbing on board the SPAC train.