Famous SPAC Busts

Between 2020 and 2022, Special Purpose Acquisition Companies (SPACs) captured investor enthusiasm like few financial vehicles in history. Dozens of high-profile investors—former politicians, sports figures, tech celebrities—raised billions in SPAC funds to acquire private companies and take them public through "back-door IPO" mechanisms. For a moment, SPACs seemed like a superior alternative to traditional IPOs, combining founder-friendly terms, reduced regulatory scrutiny, and investor enthusiasm into a formula for wealth creation. Yet within two years, the SPAC boom transformed into a bust of staggering proportions. Companies acquired through SPAC mergers traded significantly below IPO prices, destroyed shareholder value at a rate exceeding even traditional IPO underperformance, and in many cases involved fraud or misrepresentation by SPAC sponsors. Understanding the SPAC bust is essential for investors seeking to avoid similar patterns and for recognizing when financial innovation becomes financial excess.

Quick Definition A SPAC bust occurs when a Special Purpose Acquisition Company (blank-check company) merges with a private company and that merged entity subsequently collapses in value or fails to achieve promised business outcomes. SPAC busts typically involve shareholder value destruction exceeding 50–80%, often accompanied by governance failures, misrepresented business projections, or fraudulent claims by SPAC sponsors or merged company management. The 2020–2022 SPAC bust cycle destroyed billions in investor wealth.

Key Takeaways

• SPAC mergers in 2020–2022 generated returns far exceeding traditional IPO underperformance; median SPAC merger returns were deeply negative
• Major SPAC busts included Nikola, Lordstown Motors, Unclear, and numerous others involving overstated technology claims and impossible production timelines
• SPAC sponsors and underwriters had misaligned incentives; they earned fees regardless of post-merger performance, creating perverse incentives to complete deals quickly
• Retail investors in SPACs were often unsophisticated and lacked tools to evaluate private company valuations, making them vulnerable to overpricing
• SPAC merger agreements allowed sponsors to earn "earnouts" (additional compensation) based on post-merger stock performance, sometimes creating conflicts with public shareholders
• Regulatory changes and investor backlash have reduced SPAC activity and shifted terms toward investor protection, though the vehicle remains viable

What Went Wrong with SPACs

SPACs were marketed as solving problems in the IPO process. A private company founder might avoid the scrutiny of a traditional IPO roadshow, achieve a higher valuation through sponsor negotiation, and benefit from the SPAC sponsor's connections and expertise. Public investors got access to high-growth private companies without waiting for traditional IPO windows.

The incentive structure was fundamentally broken. SPAC sponsors raised capital in the form of blank-check IPOs, earning immediate management fees. They then had 24 months (sometimes extended to 36) to find and close a merger. If the deal succeeded (regardless of subsequent performance), sponsors pocketed their fees plus the sponsorship stake they received for free. If the deal failed to close, investors redeemed their shares at the initial price, but sponsors still earned fees for the time spent.

This created a powerful incentive to complete deals quickly at almost any valuation. Sponsors rushing to beat deadlines were willing to accept inflated private company valuations. The faster the deal closed, the faster sponsors could collect fees and move on to the next SPAC.

Valuation discipline evaporated. Private company founders, when negotiating with SPAC sponsors, demanded valuations that reflected rosy future projections. A EV (electric vehicle) startup claiming it would produce 100,000 vehicles annually within 5 years might demand a $5 billion valuation based on those projections. In a traditional IPO, underwriters and institutional investors scrutinize such claims. SPAC sponsors, eager to close deals, often agreed to valuations that public market investors would have rejected.

Disclosure and fraud risks were underappreciated. SPAC mergers involve disclosure documents (SPAC proxy statements) but less underwriter due diligence than traditional IPOs. Some SPAC sponsors and merged companies made fraudulent claims about technology status, production timelines, or business fundamentals. In traditional IPOs, underwriters face litigation risk if IPO prospectuses are materially misleading; in SPAC deals, liability was often unclear.

Retail investor sophistication was low. SPAC IPOs were heavily promoted to retail investors through brokers, with messaging emphasizing that high-profile sponsors guaranteed quality. Retail investors lacked tools to evaluate private company valuations and business prospects. Many chased momentum and brand names, buying SPAC stocks at inflated levels.

Secondary market dynamics amplified losses. SPAC IPO shares were often offered at $10 each, then trading above $10 in secondary markets if enthusiasm was high. Retail investors chased momentum, buying at $12–$15. Weeks or months later, when the merger announced, the valuation was revealed to be inflated, and shares crashed to $3–$5. Momentum chasers who bought at inflated levels were devastated.

The Nikola Collapse

Nikola Corporation was perhaps the most infamous SPAC-merger failure. Nikola was founded by Trevor Milton, an entrepreneur who claimed to be developing revolutionary hydrogen fuel cell and electric truck technology. The company raised capital through private funding and then merged with Vector Acquisition Corp (a SPAC) in June 2020, with Vector shareholders approving the $2 billion valuation.

Fraudulent claims about technology emerged post-merger. Milton and Nikola had claimed to have proprietary hydrogen fuel cell technology and advanced truck prototypes. In reality, much of the claimed technology was licensed or acquired from others, and the "truck" in promotional videos was a stationary mock-up, not a functioning vehicle.

The stock initially soared. Nikola traded as high as $93 per share in June 2020, shortly after the merger closed. Nikola's market capitalization exceeded $30 billion despite having zero revenue and no functional products.

Short-seller Hindenburg Research exposed the fraud in September 2020. In a detailed report, Hindenburg documented that Nikola had misrepresented its technology development, overstated the functionality of its prototype trucks, and made false claims about partnerships and licensing agreements. The report was devastating.

The stock collapsed. Nikola fell from $93 to below $15 within weeks. Trevor Milton was eventually charged with fraud and convicted in 2022. The merged company filed for bankruptcy protection, and public shareholders lost nearly everything. Early SPAC IPO investors who redeemed shares at $10 were among the few who avoided catastrophic losses.

Lordstown Motors: Another EV Bust

Lordstown Motors, which merged with DiamondPeak Holdings (a SPAC) in October 2020, claimed to be producing electric trucks for fleet customers. The company projected significant revenue within years and demanded a multi-billion-dollar valuation.

Misrepresented customer orders were the primary fraud. Lordstown claimed to have secured fleet customer orders for thousands of vehicles. In reality, these "orders" were non-binding memoranda of understanding or contingent on the company actually delivering vehicles. Without actual binding orders, the company's revenue projections were pure speculation.

Production timelines were unrealistic. Lordstown had no manufacturing facility and relied on a leased former General Motors plant. The company projected ramping production to 2,500 vehicles monthly—a scale that required massive capital investment and supply chain development. Those timelines and production levels were never achieved.

The stock collapsed from $10 (IPO price) to below $1. The company faced SEC investigation and charges against executives for fraud. Like Nikola, Lordstown's shareholders lost nearly everything.

SPAC Bust Lifecycle

Unclear (formerly Rumble): Another Tale of Overvaluation

Unclear acquired a cloud streaming company (later rebranded as Unclear Corp, a proposed AI/data analytics company) through a SPAC merger in early 2022. The merged company was valued at over $1 billion despite limited revenue and unclear business model.

Vague business model descriptions characterized the company's public disclosures. It wasn't entirely clear what the company actually did—ostensibly something involving cloud computing and AI, but actual revenue-generating business was undefined.

The stock collapsed from post-merger prices above $10 to below $1 as investor scrutiny revealed the fuzzy business model and lack of revenue. Retail investors who bought during the merger announcement suffered catastrophic losses.

Multiple SPAC Busts in EV and Proptech Spaces

Multile SPAC mergers in the electric vehicle space generated similar failures:

• Canoo (merged with Hennessy Capital) claimed to develop electric vehicles for consumers and fleets but failed to achieve production timelines, raised insufficient capital, and eventually suspended production and laid off employees.
• Fisker Automotive (merged with Spartan Energy Acquisition Corp) claimed to develop electric vehicles but faced production delays and supply chain challenges, eventually filing for bankruptcy.
• Arrival (merged with CIIG Evertech Corp) claimed to develop electric vans for delivery companies, raised massive capital, but never achieved production scale and ultimately ceased operations.

Proptech (property technology) SPACs also experienced significant busts:

• Opendoor (merged with Social Capital Hedosophia) offered to buy homes directly, disrupting traditional real estate. The company went public through SPAC merger at a multi-billion-dollar valuation but struggled with unit economics and losses, subsequently laying off 25% of employees and reducing near-term growth projections.
• Zillow Group's iBuying division (different from SPAC) attempted a similar strategy to Opendoor, buying and reselling homes. Zillow ultimately abandoned the business after losses exceeded $500 million.

Why Investors Lost Billions in SPACs

Misaligned incentives created perverse outcomes. SPAC sponsors earned fees for closing deals, not for post-merger performance. Merged company founders sometimes had earnout agreements that provided additional compensation if the stock hit certain prices within years, incentivizing them to overpromise and underdeliver to meet short-term targets.

Lack of underwriter accountability meant less due diligence than traditional IPOs. SPAC sponsors hired banks to facilitate mergers, but those banks often lacked the underwriter liability that IPO underwriters face. Banks collected fees and moved on; investors suffered losses.

Retail investors were unsophisticated about private company valuation. A private company trading at a $5 billion valuation might seem expensive to someone familiar with traditional public companies, but retail investors lacked frameworks for valuation assessment. SPAC sponsors, positioned as sophisticated investors ("Look, this is Chamath Palihapitiya's or Bill Ackman's deal!"), provided false reassurance.

FOMO (fear of missing out) drove momentum buying. Retail investors saw stocks pop on merger announcement and chased them, not realizing the pop reflected uncertainty resolution, not quality. Once the actual business plan and financials were revealed, stocks collapsed.

Earnout structures created conflicts. Some SPAC sponsors and merged company founders had earnout agreements (additional shares or cash if the stock hit certain prices). This aligned them with short-term stock price inflation rather than long-term value creation. Founders would pump projections to drive the stock up, trigger earnouts, and then face execution problems when reality didn't match projections.

Regulatory Responses and SPAC Reform

The SEC became skeptical of SPAC claims and projections. In 2021, the SEC issued guidance on SPAC projections, warning that forward-looking statements in SPAC merger documents must be substantiated and carefully disclosed. This reduced the ability of SPAC sponsors and founders to make wild claims without basis.

Stock exchange rules tightened. NYSE and NASDAQ increased governance requirements for SPAC IPOs and mergers, mandating independent director approval of merger valuations and requiring more detailed disclosure of conflicts of interest.

Underwriter standards shifted. Banks became more cautious about SPAC sponsors and were less willing to underwrite SPACs with unproven track records or fuzzy merger targets. This reduced SPAC IPO supply.

Investor appetite collapsed. After the 2020–2022 boom and subsequent bust, retail and institutional investors became wary of SPACs. SPAC IPO volumes collapsed from hundreds per year to dozens.

De-SPAC rates improved but remain concerning. Newer SPACs are more likely to find legitimate merger targets and achieve reasonable valuations than the 2020–2021 wave. However, SPAC merged companies still underperform traditional IPOs on average.

Real-World Examples of Modest SPAC Successes

While SPAC busts dominate headlines, some SPAC mergers have been functional.

DraftKings merged with Diamond Eagle Acquisition Corp in April 2020, becoming the public sports betting and gaming platform DraftKings. The company successfully executed its business plan, achieved profitability improvements, and delivered positive returns to post-merger investors (though not to those who chased momentum at peak valuations).

Virgin Galactic merged with Social Capital Hedosophia in 2019, giving the space tourism company access to public capital. Despite challenges and delayed launches, Virgin Galactic has maintained its status as a going concern and some early investors achieved positive returns.

SoFi (Social Finance) merged with Apex Technology Investment Corp in 2021, becoming the public fintech lending and banking platform. Despite initial struggles with profitability and regulatory challenges, SoFi has worked toward profitability and some long-term investors may achieve positive returns.

These successes were exceptions rather than rules. Most SPAC mergers from 2020–2022 significantly underperformed expectations.

Real-World Case Study: Comparisons to Traditional IPOs

Comparative performance reveals SPAC underperformance.

• Traditional IPOs average approximately -10 to -20% excess returns over 3 years post-IPO.
• SPAC merged entities average approximately -50 to -80% excess returns over 3 years post-merger.

The SPAC bust was worse by an order of magnitude. This reflects both excessive valuation at merger and worse-than-expected business execution.

Common Misconceptions

Believing high-profile SPAC sponsors guarantee deal quality. Chamath Palihapitiya, Bill Ackman, and other celebrity sponsors created an aura of expertise that was often unjustified. Some made good deals; others made terrible ones. A famous sponsor is not a guarantee of quality.

Assuming SPAC mergers are less risky than traditional IPOs. In fact, SPAC mergers are riskier due to less underwriter due diligence, misaligned incentives, and lower information quality. Investors shouldtreated them with greater skepticism, not less.

Thinking you can time SPAC pop and dumps. Many investors tried to trade SPAC momentum, buying after merger announcement and selling after the pop. In reality, timing these is difficult, and transaction costs can eliminate gains.

Underestimating execution risk in unproven companies. SPAC targets were often private companies with unproven business models, limited operating history, and technology that didn't yet exist at scale. Investors sometimes underestimated how difficult execution is.

FAQ

Are SPACs still viable investment vehicles? SPACs still exist, but in reduced numbers and with better governance. Modern SPACs (post-2022) have higher underwriter standards, more investor protections, and more realistic target valuations. However, they remain riskier than traditional IPOs on average.

How can I identify SPAC risks before merger? Evaluate the SPAC sponsor's track record, read the merger agreement carefully, assess the private company's competitive position and business model, and discount rosy management projections. If claims seem too good to be true, they probably are.

Should I ever invest in SPACs? If you have expertise in evaluating private companies and understand the governance risks, SPACs can offer opportunities. Otherwise, traditional IPOs and established public companies are less risky and require less expertise.

What happened to all the SPAC investors who lost money? Most losses were absorbed by retail investors who had no recourse. Some initiated litigation against SPAC sponsors and merged company directors, but recovery has been limited. Insurance and indemnification provisions limited sponsor liability.

Can fraud charges help SPAC investors recover losses? Criminal fraud charges (like those against Trevor Milton of Nikola) established that fraud occurred, which supports civil lawsuits. However, recovery depends on whether defendants have assets to pay damages. Many SPAC busts involved fraud, but victim recovery has been limited.

How do SPAC earnouts work and why are they problematic? Earnouts provide SPAC sponsors or merged company founders with additional compensation (shares or cash) if the stock hits certain price targets. This incentivizes pumping near-term stock price rather than building sustainable business value. When earnout targets are hit, recipients sometimes unload shares, pushing prices down.

Will SPACs make a comeback? SPAC activity will likely remain lower than the 2020–2021 peak unless regulatory changes shift. The 2020–2022 bust demonstrated that the vehicle can be abused, reducing investor enthusiasm. However, some SPAC mergers work well, and the structure may persist at lower volumes.

Related Concepts

Blank-Check Companies and regulations governing their formation, capital use, and de-SPAC timelines.

Earnout Structures in M&A transactions create alignment issues and can incentivize poor long-term decision-making.

Forward-Looking Statements and SEC guidance on projections in SPAC merger documents and liability for misstatements.

Pipe Investments (private investment in public equity) often accompany SPAC mergers, sometimes locking in institutional investors who later regret their participation.

Lock-Up Provisions in SPAC mergers; founders sometimes face lock-ups that expire after specific dates, creating selling pressure on schedules.

Summary

The SPAC boom of 2020–2021 and subsequent bust of 2022–2023 represents one of the largest wealth-destruction episodes in recent market history. Billions in investor capital were deployed into private companies through SPAC mergers at valuations that proved unjustifiable, driven by misaligned sponsor incentives, limited due diligence, and retail investor momentum chasing.

Famous SPAC busts like Nikola, Lordstown, and others involved fraud or misrepresentation by sponsors and company founders. But even the non-fraudulent SPAC mergers typically underperformed traditional IPOs by 30–60%, reflecting excessive valuations and poor execution.

The regulatory response has made SPACs somewhat safer through improved disclosure requirements and governance standards. However, the structural incentives that drove the SPAC boom remain: sponsors still earn fees regardless of post-merger performance, and private company founders still prefer SPAC valuations to traditional IPO underpricing. Future SPAC booms are likely if enthusiasm returns.

For investors, the SPAC bust illustrates a critical lesson: beware of financial innovation that lacks proper checks and balances. SPACs promised to democratize access to private company investment; instead, they democratized access to risk and overvaluation. Understanding the SPAC failure pattern helps investors recognize similar risks in emerging financial products.

Next Steps

Explore how to evaluate public listing options for private companies and understand when traditional IPOs, direct listings, and SPAC mergers are appropriate choices.