Tax Benefits Arrive Too Late for Numerous SPACs

A ray of hope arrived too late for struggling SPACs that were forced to liquidate at a record pace last month.

Special-purpose acquisition companies (SPACs) have been hit hard by the market freeze and the possibility of new taxes. In December, 85 SPACs were closed, resulting in losses of nearly $750 million.

Last week, the Treasury Department and Internal Revenue Service announced that SPAC liquidations wouldn’t be taxed under a new federal buyback levy. This came as a surprise to the market, with many blank-check companies trying to beat the tax and ending up locking in their losses. SPACs that didn’t liquidate have more time to try to find a deal and potentially squeeze out a profit if market conditions shift.

"This is a really tough time for the SPAC liquidators," said Julian Klymochko, who manages a SPAC-focused fund at Accelerate Financial Technologies.

The possibility of a 1% buyback tax for the cash returned to investors led more SPACs to shut down in December than at any other time in the market's history. Creators have lost about $1.25 billion from winding down SPACs in the past year, according to data from SPAC Research.

Analysts say that the clarification from the federal government is unlikely to shift sentiment in the once-booming SPAC market. Roughly 300 SPACs holding more than $70 billion face deadlines by midyear to reach deals, including some that have already announced mergers but haven’t closed them, according to Dealogic. Many SPACS will likely shut down, analysts said.

"It just offers a bit of relief for a really struggling asset class," Mr. Klymochko said.

A SPAC is a shell company that raises money from investors and lists publicly with the sole intent of combining with a private company to take it public. After regulators approve the merger, the company going public replaces the SPAC in the stock market. Such deals became popular alternatives to traditional initial public offerings in 2020 and 2021, fueling a bubble as creators minted tens of millions of dollars on average by taking hot startups public.

As interest rates rose and inflation increased last year, SPACs (special purpose acquisition companies) performed poorly. Shares of companies that went public through SPACs, such as electric-vehicle startup Arrival SA and real-estate technology platform Opendoor Technologies Inc., fell sharply.

Now it is difficult for creators such as venture capitalist Chamath Palihapitiya and banking veteran Betsy Cohen to convince companies to merge with SPACs. That sparked a string of liquidations before worries about the possible tax implications accelerated the trend last month.

The recent IRS guidance gives companies information as they begin complying with the law. The agency still plans to write formal regulations, but the guidance provides companies with a good starting point.

The guidance also clarified that investor withdrawals before SPAC deals are completed might avoid the buyback tax depending on the timing of the merger and other conditions. That could make it easier for some mergers to get done this year.