Here's how one SPAC-focused Reddit group is trying to prevent pump and dumps as retail traders throw markets into turmoil

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  • Last week, Wall Street was fixated on r/WallStreetBets, which fueled stocks for companies like GameStop and AMC.
  • Now, a community of online investors is homing in on SPACs, united by the r/SPACs forum on Reddit.
  • We spoke to moderators and members of the forum to get an inside look at how it works.
  • Visit Business Insider’s homepage for more stories.

If you were watching the battle between day traders and hedge funds that shook up Wall Street last week, chances are you weren’t alone if you felt like Reddit and Twitter had become the Wild West of investing.

Day traders coalesced on Reddit forums like WallStreetBets, egging each other on to either send stocks like GameStop and AMC hurtling “to the moon,” or to beseech one another to “hold the line” in the face of pressures to sell. (GameStop shares have since plummeted as of Tuesday.)

Last week, when Robinhood temporarily blocked users from purchasing shares of a group that eventually numbered some 50 companies, several SPACs were on its list.

Among them were billionaire tech investor Chamath Palihapitiya’s Social Capital SPACs; and former Citigroup exec Michael Klein’s Churchill Capital Corp IV, which has rallied following reports last month that it was in talks to acquire electric vehicle startup Lucid Motors.

Robinhood restricted purchasing of those SPACs to a single share. A representative for the brokerage declined a request for comment from Insider for this story.

Meanwhile, there’s another forum on Reddit which is also catching attention: r/SPACs, a rapidly-expanding community which counted more than 99,000 members as of Tuesday afternoon. Those users closely watch and study blank-check companies.

Two of the Reddit group’s moderators told Insider in a phone interview on Monday that they are running a forum that’s markedly different from WallStreetBets.

For one, r/SPACs is dedicated to sharing intel about a different kind of company than r/WallStreetBets, whose members last week trained their crosshairs on hedge funds which were shorting the stocks of struggling companies. 

“SPACs have had a pretty significant momentum since the beginning of the pandemic,” said Gal, 29, one of the moderators of the forum, who declined to disclose his last name and operates under the username u/Masculiknitty. “There’s just been a steady increase in the number of SPACs and the volume of their trading, just consistently since basically April.”

Gal and one of his fellow moderators Jon — a 32-year-old emergency medicine physician assistant who also declined to disclose his last name and operates under the handle u/NoeticOptions — spoke to Insider about their growing Reddit community, their plans to combat trolls, and how r/SPACs is different than r/WallStreetBets.

The SPAC frenzy was a defining characteristic of 2020, and is making waves in 2021

SPACs are, essentially, roving, publicly-held engines of capital that exist to buy private companies and bring them onto public markets, without all of the fanfare and roadshow touring that comes with conventional IPOs.

The r/SPACs forum first emerged in May 2020 — it’s much younger than r/WallStreetBets, which dates back to 2012 — as a response to an explosive year for SPAC activity.

In 2020, there were a record 248 SPAC IPO’s with an average IPO size of nearly $335 million, according to SPAC Insider. For comparison, there were just 59 SPAC IPO’s the year prior, in 2019, with an average IPO size of $230 million.

Now, just over one month into 2021, there have already been 96 SPAC IPOs, with an average of $291 million each. They’re showing no signs of losing momentum, either: Indeed, a Goldman Sachs projection estimated that SPAC mergers could drive as much as $300 billion in M&A activity in 2021.

Jon told Insider that SPACs have come a long way in shedding their “checkered history.”

“Up until 2020, they were viewed negatively as kind of like a back-door method of getting into the stock market,” he said. “Now, it’s a little bit different, because the IPO process is unable to accurately give a price target for a lot of these companies,” he added, referring to some of the big IPO pops for companies like Airbnb and DoorDash which rattled investors late last year.

But, by engaging in SPAC trades, Jon — who invests through the online brokerage Interactive Brokers — told Insider that he had grown his portfolio by nearly 130% in the past year. He supplied a screenshot, which was viewed by Insider, which demonstrated that growth.

“If you’re knowledgeable enough about SPACs and you understand options — or even if you don’t — you can find these very profitable, asymmetric risk-reward profiles, that you can make a significant amount of money,” Jon said. 

Why retail investors are interested in SPAC plays

There are a number of reasons why retail investors are so keen to discuss and trade SPACs. 

Before a SPAC does an acquisition — which is called “de-SPACing” — traders can buy into it for a relatively low share price, which typically hovers around $10 per share. (There have been a few cases in which SPACs like Bill Ackman’s SPAC Pershing Square have set their IPO price for $20 per share, but those are a rarity.)

Prior to de-SPACing, traders have the option to redeem their shares at the original net asset value, with a bit of additional interest on top of it. That makes investing in a SPAC almost like putting the money in a savings account – SPACs usually invest the proceeds in Treasuries – which makes buying into them almost as riskless as holding cash.

Another factor that makes the SPAC trade fertile ground for discussion on strategy: SPAC shares are generally issued with warrants that later on can be traded, which essentially introduces an option play into the equation and gives large hedge funds and growth funds a way to arbitrage the de-SPACing. If investors don’t like the acquisition target they can ask for their money back but keep the warrant, which acts in a way as a go forward investment in the merged company.

Once viewed as a mechanism to dodge regulatory scrutiny, the mainstream perception of SPACs has come a long way. Institutions like Goldman Sachs, SoftBank, and Richard Branson’s Virgin Group have been among the many to crowd into the SPAC gold rush, raising hundreds of millions of dollars for SPACs of their own.

Gal and Jon said that their users share insights on the management teams driving the SPACs, and which ones, by way of reputation, are worth staking plays on. Indeed, some retail investors are keeping track of high-profile management movements in the SPAC world like they would sports teams exchanging star athletes.

“Especially in the last month, at IPO, a lot of these newer SPACs that have very well-renowned management teams are actually trading already significantly above the net asset value,” he said. “It’s the belief that those management teams have the connection to engage in a very lucrative merger.”

Jon said that many of the users on forums like r/SPAC are more sophisticated and market-savvy than people might realize. 

“People really underestimate how intelligent these retail investors are,” Jon said, adding later: “The power of crowdsourcing in Reddit in general, and, in particular, our subreddit, is going to be far and away better than any analyst or group of even 10 analysts.”

SPAC retail investors are seeking certain investment verticals

While r/SPACs investors are open to investing in a variety of SPAC opportunities, the investors on the forum told Insider that they are keeping tabs on blank-check companies seeking to do business in a few primary sectors.

“It’s all basically mirroring the hot sectors that are concurrent to the market,” Jon said, naming markets like electric vehicle and green technology, cannabis, and financial technology.

Speaking of fintechs, a series of financial technology firms have already pursued the SPAC route in order to go public.

Recent examples including investor Palipahpitiya’s SPAC Social Capital Hedosophia Holdings Corp V agreeing to taking personal finance app SoFi public at a $9 billion valuation; and chatter about personal-finance app MoneyLion going public through Fusion Acquisition Corp., according to a Bloomberg report from late January.

In December, e-commerce fintech Katapult entered into an agreement to go public with the SPAC FinServ Acquisition Corp.; and in October, FinTech Acquisition Corp III completed its public offering for the payments processor Paya.

Fighting the ‘pump and dump’ effect

One issue that Reddit forums have faced is some users trying to deceive others in order to benefit their own stock positions.

While that effect can be problematic, Gal and Jon said it’s less prevalent than one might think — and that they’re taking measures to clamp down on attempted “pumps and dumps” when they do arise, such as through a user knowingly spreading a false storyline about a SPAC closing in on an acquisition, for instance.

But r/SPACs’ users quickly spot and flag questionable posts that make claims about SPACs which aren’t backed up by trustworthy sources like news articles, market research, or other verifiable sources, like a company announcement, the moderators said. Then, those posts can be swiftly removed.

A careful eye is also given to a particular stock ticker being strewn across the forum in post after post.

Gal explained why: “We want it to be: ‘Here’s the news of the day for SPACs; this merger was announced,'” he said. “We don’t want that announcement to be a thousand times in people’s face, because that has a psychological effect.

“It has this effect of like, ‘Oh, everyone’s posting about it. It must be something I should buy,'” he said.

The moderators are building bots using the coding language Python which will be able to handle everything from grouping together regulatory filings for users’ benefit; pointing users to mega-threads for specific tickers and stock data; and even banishing “YOLO-stonk”-focused memes from flooding the forum during the trading week. 

Plus, the bots can help police bad language on the forum

The r/SPACs forum has some ground rules: For instance, users are cautioned not to engage in “inflammatory political talk,” or spread “baseless claims or misleading posts.”

Those who break the rules multiple times could finds themselves eventually removed from the group through a strike system that the moderators are building.

The group forbids “uninformed or brazen speculation,” too. “If you think you have big info, please bring the facts to support it,” it says in another guideline. “The burden of proof is on you.”

And flagrantly uncouth language won’t be tolerated, Gal explained. While the r/WallStreetBets has become a cesspool for profanity and other offensive commentary — “it’s literally their language,” he said — that kind of talk will be a no-go on r/SPACs.

“We’ve banned the use of those words,” he said.

Jorge Fernandez has seen solid returns on his SPAC investments — but some risky retail plays, he said, ‘might end with all of us losing our money’

Last year, Jorge Fernandez — a 23-year-old immigrant from Spain who works as a mechanical engineer in San Diego, California — graduated from the University of Texas at Arlington.

Now, he’s hoping to enroll at the Massachusetts Institute of Technology for its one-year supply-chain management master’s program next year. 

But tuition for the program doesn’t come cheap: MIT says the academics alone are $77,000, with room, board, and other costs like the price of books running the cost up to as much as $107,220.

To afford it, Fernandez has been quietly amassing a small fortune by investing in SPACs and other stocks on Robinhood since last August. His total portfolio, which is invested across eight stocks, notched just over $20,000 on Monday, according to a screenshot that he shared with Insider.

Companies to which he’s allocated larger portions of his portfolio include SPACs like Churchill Capital IV; and Pine Island Acquisition, a SPAC that’s focused on the defense, aerospace, and government services sectors. On Monday, the only stock in his portfolio that was trending down was GameStop.

For Fernandez, retail trading is about more than an adrenaline rush. He’s on groups like r/SPACs in order to make money to put toward something larger: his education, and, by extension, his career.

At the same time, Fernandez is clear-eyed about the risks that he’s taking. 

“I don’t know how it ends. It might end with all of us losing our money,” he said. “Maybe we lose our money, but maybe shorts and hedge funds get regulated.”

If that’s the case, he said, the risk will have been worth the reward.