Canada's SPAC Debacle: The High Cost of a Market Shortcut
Half a decade after the pandemic-fueled investment frenzy, a troubling pattern has emerged across Canadian financial markets. Special purpose acquisition companies, once hailed as revolutionary vehicles for market access, have left a trail of corporate failures and investor losses in their wake.
The SPAC Phenomenon: Promise Versus Reality
Special purpose acquisition companies, commonly known as SPACs, emerged as shell entities designed to raise capital through public listings before seeking private companies to acquire. Marketed as "the poor man's private equity," these vehicles promised retail investors unprecedented access to emerging sectors alongside experienced dealmakers.
During the early 2020s, this investment craze swept across North America, raising more than $245 billion in the United States alone while pushing Canadian SPAC market totals beyond $6 billion since 2015. The structure offered companies in buzz-worthy sectors like electric vehicles and online technology what appeared to be quicker, cheaper access to public markets with reduced regulatory scrutiny compared to traditional initial public offerings.
The Canadian Collapse: Notable Failures
The aftermath has been particularly devastating on Canadian exchanges, where 28 SPAC IPOs have occurred. A disturbing number of companies that utilized this shortcut to market have since sought bankruptcy protection, with many facing class-action lawsuits from disillusioned investors.
Among the most prominent Canadian casualties are several companies that once commanded billion-dollar valuations:
- Lion Electric Co.: The Saint-Jerome, Quebec-based electric school bus manufacturer received tens of millions in government investment before its collapse
- Li-Cycle Holdings Corp.: A Mississauga, Ontario-founded lithium-ion battery recycler that failed to deliver on its promise
- Sonder Holdings Inc.: The Montreal-based hotel chain that couldn't sustain its public market presence
- Taiga Motors Corp.: An electric recreational vehicle maker that joined the growing list of SPAC failures
Structural Flaws and Investor Concerns
The widespread failures have prompted serious questions about whether the problem lies in the reduced regulatory oversight, the fundamental structure of SPACs themselves, or both. Retail investors, who often participate directly or through secondary markets, may not fully comprehend the complex mechanics of these investment vehicles.
According to Daniel Wilson, an associate dean at the University of Calgary's faculty of law, the Canadian situation presents a particularly bleak picture. "There has not been a single Canadian SPAC that completed its qualifying acquisition and currently trades at higher than the SPAC IPO price," Wilson noted, highlighting the systemic nature of the problem.
Incentive Misalignment and Market Realities
Critics point to fundamental flaws in the SPAC model, including incentive structures that encourage sponsors to complete deals—any deals—to recoup upfront costs and realize profits. This pressure to transact regardless of target quality has contributed to numerous problematic mergers.
Furthermore, industry observers note that SPAC investments may be fundamentally unsuitable for buy-and-hold retail investors. The most successful outcomes have typically been realized by those who sell shares immediately following the merger between the SPAC and its acquisition target, a strategy that requires timing and sophistication many retail investors lack.
As Canadian markets continue to grapple with the aftermath of the SPAC boom, the fundamental question remains: Can this shortcut to public markets be reformed to protect investors, or does its very structure contain inherent flaws that make it unsuitable for the average market participant? The answer may determine whether SPACs have any future in Canadian capital markets beyond their current reputation as a cautionary tale.
