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By Ann C. Logue

Special-purpose acquisition companies, or SPACs, have changed the IPO market and created interesting opportunities for investors. They’ve been around for years but have only recently become respectable. This week, SPACs were in the news because of volatility in Digital World Acquisition Corp. (NASDAQ: DWAC), which announced last week that it would be merging with Donald Trump’s media company, Trump Media & Technology Group. Some investors sold shares to take profits, some sold shares because they did not want to be associated with the former president, and others bought shares because they saw potential in the new business.

This week, the SEC settled with Akazoo S.A. for $38.5 million. The company claimed to be in the streaming media business when it came public in September of 2019, via a merger with Modern Media Acquisition Corporation. This SPAC counted Lew Dickey, the founder and former CEO of Cumulus Media, as its founder and chair, so it was logical to assume that he knew what he was doing. That assumption would be wrong.

Akazoo didn’t exist as a serious business. Although the executives claimed that it was a major streaming service with 5.3 million subscribers in 25 emerging markets nations, it was basically a scam. In May of 2020, NASDAQ delisted the stock. By September of 2020, the SEC filed to freeze company’s assets. The agency’s goal was to stop Akazoo’s management from spending the remaining cash balance so that investors could receive some restitution.

One of the problems with SPACs is that the money must be invested within two years. Otherwise, the company unwinds and returns funds to investors, a process that only a lawyer billing hourly could love. Modern Media Acquisition came public in 2017 and was running into its deadline when Akazoo’s founders knocked on the door. 

SPACs are already remaking corporate finance, but they still carry huge risks. The SEC’s fine against Akazoo pointed out one of them.

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