If you'd like an essay-formatted version of this post to read or share, here's a link to it on pluralistic.net, my surveillance-free, ad-free, tracker-free blog:
Funny thing about competition: there's both a pro-market and an anti-market case for a competitive system.
https://pluralistic.net/2026/08/13/one-chokable-throat/#too-clever-by-half
If your theory is that markets deliver prosperity by spurring businesses to provide the superior products and services at lower prices needed to attract and retain workers and customers, then competition is a must-have. Without competitors, companies are "too big to care":
Meanwhile, if you think that the pressure of greed will always drive companies to cheat, and want companies held in check by democratically accountable lawmakers and enforcers, then you also want competition, because otherwise, disorganized sectors of hundreds of small businesses collapse into oligarchic cartels. Members of these cartels cease to compete directly with one another and instead collude to rip off workers and customers, leaving them aslosh in ready cash they can mobilize to capture regulators, securing an enshittogenic policy environment that reflects the easily arrived-at consensus that's only possible when you boil a sector down to a small handful of firms, each of them "too big to jail":
In other words: if your ideal is a world of high-quality products and services, produced by workers laboring under fair conditions, delivered to consumers at a fair price, then you want competition. Competition scares some people into running their businesses ethically; and competition ensures than an unethical operator can be held to account by government agencies charged with protecting workers and consumers.
Once you understand the role of competition as a counter-oligarchic check on corporate power, the rise of Big Tech and its authoritarian turn becomes much easier to understand.
Tech is uniquely hospitable to competition thanks to the intrinsic properties of digital computers. Formally, computers are "Turing-complete, universal von Neumann machines," which is to say that every computer can run every valid program. This means that any enshittificatory gambit assayed by a tech company – say, locking generic ink out of your printer; or blocking third party app stores for your phone or console; or sticking a dozen extra ads before every Youtube video – is technically doomed.
Every time a tech boss introduces a 10' pile of shit to a digital product or service you rely upon, they induce rival technologists to create 11' ladders made of code that they can costlessly, instantaneously distribute to every one of the enshittifier's customers and suppliers:
This explains the dynamism of early tech, which saw companies rising quickly to conquer their markets, only to yield to the temptation to extract more from customers and/or suppliers while underinvesting in improvements to their products and services. When this happened, new digital companies sprang into being, reverse-engineering the incumbents' products and launching "complementary goods" – plug-ins and mods – that fixed the defects in dominant products, usurping the market leader's place in the workflows and pocketbooks of its customers and suppliers:
For many years, this "adversarial interoperability" worked its magic on the burgeoning tech sector, creating a state of constant ferment where people who wanted to improve and then supplant the state-of-the-art were able to cheaply enter and capture the market, only to be taken down by the next generation of disenshittifiers when they, too, inevitably yielded to the temptation to replace innovation with extraction. Every pirate wants to be an admiral – but every admiral must then confront the pirates who rush in to fill the vacuum they create when they switch sides.
But that system of beneficial disruption was itself disrupted – not by technology, but by policy. In 1998, Bill Clinton signed the Digital Millennium Copyright Act (DMCA). Section 1201 of the DMCA makes it a felony to practice adversarial interoperability, establishing penalties of $500k and five years in prison for people who reverse engineer and modify products:
DMCA 1201 created a one-way ratchet that progressively narrowed the possibilities for tech competition. As more and more US companies re-engineered their products so that modifying them would give rise to DMCA 1201 liability, American startups gave up on disrupting Big Tech, re-orienting towards "acqui-hires," when a startup's highest purpose is to be absorbed by a giant, sclerotic incumbent that mothballs its products and assigns its engineers to work on incremental maintenance (or worse, enshittification) for its dominant offerings.
Big Tech's pirates turned admirals, free to "disrupt" the weak and poor, while enjoying the legal entitlement to destroy anyone who dared to disrupt them. They embodied Frank Wilhoit's definition of conservativism: a class that the law that "protects but does not bind" alongside a class that the law "binds but does not protect":
It was fine for them to "move fast and break (our) things," but forbidden for us to "move fast and break kings." Disruption for thee, never for me.
Nor was this a merely American sickness. Having neutered domestic competitors that might threaten its tech incumbents, the US government set out to prevent other countries from challenging its world-girdling tech empires. For the past 25 years, the US Trade Representative has prioritized getting anticircumvention laws on the books of all of America's trading partners as a condition of free trade with the US, with the result that today, virtually every country in the world has a law that makes it illegal to disrupt American tech giants:
Anti-circumvention law is so obviously, manifestly an invitation to enshittify that when governments enacted these laws, they felt the need to include some kind of "safety valve" they could point to when critics raised anti-circumvention's potential for abuse. The world's would-be enshittifiers figured out a devious method to insert clauses into anti-circumvention that looked like anti-abuse measures, but which were, in practice, useless ornaments.
Many anti-circumvention laws – including DMCA 1201 – have a process for creating "exemptions" to the ban on reverse-engineering and modifying a device. The way these exemptions processes are written, they seem to say that if a company uses anti-circumvention law to block legitimate activity – say, if John Deere uses the law to stop you from fixing your own tractor – then you can go to some kind of governing body (in the US, it's the Copyright Office) and petition for an exemption to anti-circumvention. If that exemption is approved, then making that modification becomes legal.
Before I carry on, let me say here that even if that's how the system worked, it would still be grossly offensive. If you buy a device – a car, a tractor, a printer, a console, a phone – it is your property and you should not have to hire a lawyer to ask a government agency to create a legal exemption that lets you do otherwise legal things with it. You should not need to petition the government for the right to buy generic ink, use a third-party app store or take your car to an independent mechanic.
But this isn't how the system works. It's a scam. Anti-circumvention exemptions are a cheap trick. They only sound useful. A reasonable person who hears that the US Copyright Office has made it legal to use a third-party app store with your iPhone would assume that this means that if someone launches their own app store, they can give you the tools needed to unlock your iPhone and activate their store.
That's not how the DMCA exemptions process works. Under the statute, the US Copyright Office is only empowered to create "use exemptions," which allow you, the owner of the iPhone, to make use of a tool that unlocks your phone and installs the third-party app store. The Copyright Office does not have the power to create a tools exemption that would allow someone to make that unlocking tool and sell or give it to you. Making that tool remains a felony with a five-year prison sentence attached to it.
What this means is that if you want to use your own property in a way that was legal before DMCA 1201, that has been made legal again because you hired a lawyer who successfully petitioned the US Copyright Office to grant an exemption, you can only do so if you, personally reverse engineer your device effect the permitted modifications to it.
So: if the US Copyright Office legalizes alternative iPhone app stores, the only way to exercise this exemption is for every iPhone owner in the country to get a computer science degree, secure the use of a clean-room, decap the "secure enclave" on a spare iPhone's CPU, extract its cryptographic keys, and integrate them in a new version of iOS that they personally write and install on their phone. No iPhone owner is allowed to discuss how to do this with any other iPhone owner engaged in the same project, on penalty of a five year prison sentence.
Obviously, this is ridiculous, and iPhones are just the tip of the iceberg. It's also true if you want to enable independent repair of powered wheelchairs, whose manufacture is controlled by a duopoly of private-equity backed companies that have all but abandoned spending on repair, leaving wheelchair users stuck in bed for months while they await service:
This absurd situation is the same if you're blind and want to make use of an exemption that lets you reverse-engineer ebook formats so that you can run your ebooks through a Braille printer, screen reader or other assistive device. Under the exemptions rules for the world's anti-circumvention laws, every blind person is expected to personally reverse engineer the access control systems built into Adobe and Amazon's ebook formats, write an exploit that lets them extract the text of these restricted ebooks and then repackage that text in a new, open format:
This "use exemption"/"tools exemption" split is a near-perfect way of tricking people into thinking that these laws are more reasonable than they appear. When Canada passed its landmark right-to-repair and interoperability laws in 2024, many celebrated – missing the fact that under Canada's anti-circumvention law (Bill C-11, the Copyright Modernization Act of 2012), it remains illegal to undertake the reverse-engineering needed to exercise the rights these new laws (seemed to) enshrine:
For a quarter-century, I've made it my life's work to explain how bad and dangerous this system is, and, thankfully, I've started to make a little headway over the past few years. My core audience contains a lot of hackers who are rightly affronted at the existence of a body of law that criminalizes the kinds of exploration and modification that they've devoted their lives to.
Being hackers, they ponder this situation and start to think about how they can hack the law to escape it. Just lately, I've heard from a lot of people who think they can solve this problem by asking a chatbot to reverse-engineer and modify the firmware on their tractors, wheelchairs, ebooks, iPhones, what-have-you. You can't put a chatbot in prison for violating anti-circumvention law, right?
I regret to inform you that if you did this in a way that rose to the attention of a big corporate bully, they wouldn't blame your chatbot for writing the exploit: they'd blame you for prompting the chatbot to create this new tool.
Just yesterday, I heard from a reader who had a clever idea: what if you gave your unmodified iPhone to a hacker who knew how to install a third-party app store on it, and they modified that phone, and then sold it back to you for $10? The hacker would be making a use exemption, not a tools exemption.
This, too, will not produce the outcome we're seeking. Even if Apple can't convince a judge that selling you a modified iPhone is "trafficking" in a circumvention device (a very big "if"), this wheeze misses the wider point about how adversarial interoperability was able to disenshittify tech for the years when tech companies weren't just dishing out disruption, but also being disrupted themselves.
The interoperability-driven dynamism that disciplined or displaced tech companies that abused their market power was a mass phenomenon. The printer cartel doesn't need to be able to charge everyone $10,000/gallon for ink. If a few people at the margins figure out how to jailbreak their printers, that doesn't stop the grift. Even better if the people who do use generic ink have to depend on anonymous, shadowy businesses that don't have customer service departments you can call when your printer gets an update that breaks ink compatibility, or an address you can send a process-server to if you're stuck with thousands of dollars' worth of useless ink cartridges after one of those updates.
To make generic ink a viable check against the abuses of HP and its colored water mafia, you need a counter-industry. You need salespeople making calls on large enterprises who buy their ink by the ocean, offering them a better deal and a guarantee of uninterrupted service. To make good on that guarantee, you need an army of hackers who reverse-engineer every software update HP pushes out in a matter of hours, and you need another army of customer service reps who help people who can't figure out how to install that update.
As economists would say, you need "capital formation." You need the ability to raise or borrow money, a mailing address, an ad campaign, booths at conferences and free samples in the mail. You need to be able to show potential customers that you are insured in the event that you brick their devices, so switching to your product doesn't endanger their capital investments. You need to have a business whose doors can be beaten down by regulators in the event that you use your after-market mods as a tool to steal data or money from your customers.
To understand how this worked, cast your mind back to the Office Suite Wars of the early 2000s. Back then, Microsoft ruled the desktop world, controlling more that 95% of the PC OSes, a share so large and so ruthlessly acquired and maintained that they were convicted of violating anti-trust laws.
Microsoft used illegal tying and predatory pricing to push every one of those PC owners into using Microsoft Office, which meant that even if you used a Mac, 19 times out of 20, the people you needed to collaborate with on memos, spreadsheets and slide-decks were using MS Office.
Microsoft made a version of Office for the Mac, but it was the single most curséd piece of packaged software ever offered to the market. Merely waving the Mac Office floppy around a workplace would cause files to spontaneously go corrupt on random PCs in the vicinity.
For Mac users, this meant that 95% of the time, they could not reliably collaborate with other computer users. For people like me – then a freelance CIO-for-hire who was helping small businesses connect their computers to each other and the internet – it meant that increasingly, we made CEOs swap their Powerbooks for Thinkpads and designers swap their PowerPCs for Dells with beefy graphics cards, moving the whole business to PC/Windows.
Apple solved this problem by reverse-engineering MS Office and producing the iWork Suite: Pages, Numbers and Keynote, which could perfectly read and write Microsoft's Word, Excel and Powerpoint files. That adversarial interoperability saved the company, but the gambit wasn't one-and-done.
Microsoft spent the next several years maliciously introducing changes to the Office file formats that broke compatibility with iWork, which Apple countered by paying an army of coders to swiftly analyze these new formats and update iWork to maintain compatibility with them:
I think Apple was fated to win this expensive cat-and-mouse game, if only they could hang in there long enough. For every Mac in the field, Microsoft was supporting 19 PCs, and these computers ran a fragmented mosaic of Windows and Office versions. Every time Microsoft broke compatibility with Office to mess up one Mac user, they also messed up 19 PC users, all of whom had to be patched and updated to maintain compatibility. This gave Apple a powerful advantage that mounted with every turn of the game, so all they had to do was hang in there until the asymmetrical costs overwhelmed Microsoft.
Which is what happened. Eventually, Microsoft sued for peace and agreed to standardize the office file-formats at the International Standards Organization, ushering in an era of unprecedented compatibility. This ISO standardization is why you can now paste styled text from the Word application into a browser-based Google Doc or an application-based LibreOffice window. It's also a game Microsoft continues to cheat at, with a string of dirty tricks meant to leverage its dominance to shut out competitors altogether:
The rise (and impending fall) of a truly open format that lets every computer user collaborate on any document is an object lesson in the combined role that adversarial interoperability and capital formation play in disenshittifying technology. For Microsoft, a "competitor" isn't one hacker who can open a Word file in a program of their own devising, nor is a "competitor" the small number of users that single competitor can support.
Microsoft is an incorrigible, bullying cheat with a sick and rotten corporate culture: to stop the kind of ruthless princeling who rises to a position of power in a company like Microsoft from turning predatory requires severe, obvious penalties that follow directly from any extractive gambit.
To muster that kind of competition requires the kind of capital formation you only get from true legalization, not the anemic sham offered by anti-circumvention's "exemptions." Even where the competition is spread out across many shifting small businesses and individuals, the system of competition requires a stable backstop that produces the tools these small firms rely on.
In 2014, Ofcom, the UK's telecoms regulator, affirmed that Britons had the right to unlock their phones, even if their carrier had sold them a phone that was locked to its network. Overnight, every small shop acquired a phone-unlocking side-hustle. One morning as I walked from my flat to the tube, I passed three unlockers: one at a newsagent's, where they would take your phone and return it unlocked within a day; one at my dry-cleaner's, where a guy with a folding card table would unlock your phone while you waited; and another folding table guy right by the tube entrance who'd also work while you waited, and who charged £5 less than the guy at the dry-cleaner's.
None of these people were electrical engineers or software developers or hackers. They just followed recipes that were provided by one of a few well-capitalized firms that sold them a subscription to jailbreaking tools that were kept up to date for every make and model of every phone.
One frequent excuse for the ban on repair tools for cars or wheelchairs or tractors is that these devices are now so computerized that they require specialized knowledge if they are to be safely serviced. Even if that's true, that's exactly what a legal toolchain provides.
The guy who fixed my solar panels wasn't a software engineer, he was an electrician who had the customer-service phone number for the company that made my solar inverter. If that company had a viable competitor who could offer their own firmware for my solar installation and was hungry for my business, maybe that technician would have gotten through in three minutes rather than three hours.
And if that alternative firmware was defective, then I could join a class action suit and get made whole – something that is nearly impossible to imagine happening with solar OEMs, who face so little competition that they all put binding arbitration clauses in their terms of service that take away your right to sue, no matter whether they cheat you or burn your house down:
That's the amazing thing about digital tools. Through software, experts are able to package up their expertise into self-executing code, which can costlessly, instantaneously be distributed to everyone in the world who needs it. But paying those experts isn't cheap, and neither is supporting their tools.
I love William Gibson's maxim that "the street finds its own use for things," but if you can't neutralize a large, dangerous monopolist with individual tinkering – the best you can hope for is some measure of individual relief..
It's true that in these adversarial interoperability fights, the upstarts enjoy a tremendous advantage, but that advantage isn't infinite. For the guerrillas to outlast the empire, they have to be able to wage a long, persistent fight.
To marshal the resources needed to sustain that fight and to maintain the logistics demanded by its supply lines requires the good guys to be allowed to fight in the open, without the looming threat of criminal prosecution, a threat that forecloses on capitalization and mass adoption.
Enshittification isn't downstream of cruelty, it's downstream of greed. The point of enshittification is to exploit the control a firm can exercise over the customers, suppliers and workers it holds captive in order to extract more from them. The titanic profits this exploitation delivers are a powerful lure for would-be disenshittifiers and investors who would fund their liberatory revolution.
Don't get me wrong, I love my hackers and I sit in awe of the awesome leverage of writing code that can be costlessly, instantaneously distributed to everyone who needs it. But so long as governments and the law are on the side of extraction and enshittification, the disenshittificatory insurgency will be starved of resources, condemned to remain marginal and inadequate.
Under full liability, there would likely be no widely-held companies, because the shareholders might be bankrupted by the actions of employees over which they would have effectively no control; at a minimum you would have to give shareholders much more voice in the running of the company than annually electing a board which appoints the executive officer who hires the top managers. Nobody’s going to sign up for that if it exposes them to liability for oil spills; not for dividends in the few-percent range. Company ownership would be limited to a few partners, say ten at most.
However, there would still be a demand for ways to invest in companies without running them yourself. The obvious way, lifted straight from our current system, is that companies would issue way more bonds. If the company is bankrupted by having to pay out damages, the bonds might pay pennies on the dollar, or might be worthless, but the holders lose only the money they put in; they are not liable for the damages. It’s worth noting that this was the main way of raising capital until quite late in the industrial revolution. Widely-held companies were the exception, not the rule, until the 1920s, and of course we all know what else the 1920s were famous for. The Coca-Cola IPO, for example was in 1919, 30 years after the company was founded; until then it had been closely-held, and capitalised by a few partners and by bonds.
I would expect that there would be other ways of raising capital as well. Perhaps “shareholders” would buy a single machine tool from (or rather, for) the company, and lease it back to them? Or a single room in an office building? Then, presumably, they would only be liable for damage done by that precise machine tool, and perhaps not at all since the employee who used it would be the negligent one. Of course, if the company went bankrupt the machineholder would be faced with the problem of finding another lease for the machine; but this is just the capital-formation method I came up with after two minutes of thinking. No doubt there would be others.
If you'd like an essay-formatted version of this post to read or share, here's a link to it on pluralistic.net, my surveillance-free, ad-free, tracker-free blog:
"Capitalist realism" is the idea that the world's current economic and political arrangements are inevitable, and that any attempt to alter them is a) irrational; b) doomed; and c) dangerous. It's the ideology of Margaret Thatcher's maxim, "There is no alternative."
Obviously this is very convenient if you are a current beneficiary of the status quo. "There is no alternative" is a thought-stopping demand dressed up as an observation. It means, "Don't try and think of alternatives."
The thing is, alternatives already exist and work very well. The Mondragon co-ops in Spain constitute a fully worked out, long-term stable economic alternative to traditional capitalist enterprises, employing more than 100,000 people and generating tangible, empirically measured benefits to workers, customers and the region:
Proponents of capitalist realism will tell you that Mondragon doesn't count. Maybe it's just a one-off. Or maybe it's just not big enough. 100,000 workers sounds like a lot, but Amazon has over 1.5m employees and untold numbers of misclassified contractors who are employees in everything but name (and legal rights).
This is some pretty transparent goalpost moving, but sure, let's stipulate that Mondragon doesn't prove that there are broadly applicable alternatives to the dominant capitalism of the mid-2020s. Are there other examples of "an alternative?"
There sure are.
Let's look at limited liability. Limited liability – the idea that a company's shareholders cannot be held liable for the company's misdeeds – is a bedrock of capitalist dogma. The story goes that until the advent of the "joint stock enterprise" (and its handmaiden, limited liability) there was no efficient way to do "capital formation" (raising money for a project or business).
Because of this, the only ambitious, capital-intensive projects were those that caught the fancy of a king, a Pope, or an aristocrat. But once limited liability appears on the scene, many people of modest means can jointly invest in a project without worrying about being bankrupted if it turns out that the people running it are crooks or bumblers. That lets you, say, buy a single share of a company without having to keep daily tabs on the management's every action without worrying that if they go wrong, someone they've hurt will sue you for everything you've got.
Capital formation is a real thing, and limited liability unquestionably facilitates capital formation. There are plenty of good things in the world that exist because limited liability protections allowed everyday people to help bring them into existence. This isn't just stuff that makes a lot of money for capitalism's true believers, it includes everything from the company that makes the printing presses that your favorite anarchist zine runs on to the mill that makes the alloys for the e-bike you use to get to a demonstration.
This is where capitalist realism comes in. Capitalist realists will claim that there is no way to do capital formation for these beneficial goods without limited liability – and not just any limited liability, but maximum limited liability in which the "corporate veil" can never be pierced to assign culpability to any shareholder. The capitalist realist claim is that the corporate veil is like the skin of a balloon, and that any attempt to poke even the smallest hole in it will cause it to rupture and vanish.
But this just isn't true, and we can tell, because one of the largest economies in the world has operated with a perforated corporate veil for nearly a century, and that economy hasn't suffered from capital formation problems. Quite the contrary, some of the world's largest (and most destructive) monopolies are headquartered in this country where the veil of limited liability is thoroughly perforated.
The country I'm talking about is Brazil, which has had limited limited liability since 1937:
As Mariana Pargendler writes for the LPE Project, Brazil put limits on limited liability to address a common pattern of corporate abuse. Companies would set up in Brazil, incur a lot of liabilities (say, by poisoning the land, water and air, or by stealing from or maiming workers), and then, when the wheels of justice caught up with them, the companies would fold and re-establish themselves the next day under a new name.
Like I say, this happens all over the world. It's incredibly common, and even the pettiest of crooks know how to use this trick. I know someone whose NYC apartment was flooded by the upstairs neighbor, who decided that they didn't need to worry about the fact that their toilet wouldn't stop running – for months, until the walls of the apartment downstairs dissolved in a slurry of black mold. The upstairs neighbor owned the apartment through an LLC, which they simply folded up and walked away from, while my friend was stuck with a giant bill and no one to sue.
The limited liability company is the scammer's best friend. In the UK, an anti-tax extremist invented a tax-evasion scam whereby landlords pretend that their empty commercial buildings are tax-exempt "snail farms" by scattering around some boxes with a few snails in them:
When this results in inevitable stonking fines and adverse judgments, the "snail farmers" duck liability by folding up their limited liability company after transferring its assets to a new LLC.
Capitalist realists will tell you that this is just the price of efficient capital formation. Without total, airtight limited liability – the sort that allows for this kind of obvious, petty ripoff – no one would be able to raise capital for anything.
Brazil begs to differ. In 1937, Brazil made parent companies liable for their subsidiaries' obligations, with a system of "joint and several liability" for LLCs. This was expanded with 1943's Consolidation of Labor Laws, and it worked so well that the Brazilian legislature expanded it again in 2017.
Remember back in 2024, when Elon Musk defied a Brazilian court order about Twitter, only to have Brazil freeze Starlink's assets until Musk caved? That was the "joint and several" liability system:
As Pargendler writes, Brazil's liability system "represented a distributive choice: prioritizing Brazilian workers’ ability to enforce their rights over foreign capital’s interest in minimizing costs through corporate structuring."
Pargendler (who teaches at Harvard Law) co-authored a paper with São Paulo Law's Olívia Pasqualeto analyzing the impact that Brazil's limited liability system had on capital formation and corporate conduct:
Unsurprisingly, they find that there has been a steady pressure to erode the joint and several system, but also that some countries (the US and France) have a "joint employer" doctrine that is a weak form of this. Portugal, meanwhile, adopted the Brazilian system, 70 years after Brazil – this transposition of law from a former colony to a former colonial power is apparently called "reverse convergence":
More countries in the global south have adopted regimes similar to Brazil's, like Venezuela and Chile. Other countries go further, like Mozambique and Angola. Somewhere in between are other Latin American countries like Peru and Uruguay, where these rules have entered practice through judicial rulings, not legislation.
The authors don't claim that perforating the corporate veil solves all the problems of exploitative, fraudulent or corrupt corporate conduct. Rather, they're challenging the capitalist realist doctrine that insists that this system couldn't possibly exist, and if it did, it would be a disaster.
A hundred years of Brazilian law, and Brazil's globe-spanning corporate giants, beg to differ.
What Is a Special Purpose Acquisition Company and How Does It Work?
A Special Purpose Acquisition Company is a publicly traded investment vehicle created to raise capital for the purpose of acquiring or combining with an operating business. It is commonly referred to as a SPAC.
Unlike a traditional operating company, a SPAC typically does not begin with established products, services, or commercial operations. It is formed by a sponsor group with the intention of identifying a suitable private business after raising money through an initial public offering.
For private companies, completing a transaction with a SPAC can provide another route to the public markets. However, the process involves detailed financial analysis, regulatory requirements, investor considerations, and transaction planning.
Understanding how a Special Purpose Acquisition Company works can help business leaders and investors evaluate the structure more carefully.
How Is a Special Purpose Acquisition Company Formed?
A SPAC begins with a sponsor or management team. The sponsors may include experienced executives, investors, financial professionals, or industry specialists.
The sponsor group forms the company, develops an investment strategy, and prepares it for an initial public offering. The SPAC may identify a preferred industry or geographic market, but it usually does not have a specific acquisition target at the time of its IPO.
Investors who participate in the offering are often evaluating the experience, reputation, and proposed strategy of the sponsor team.
A Special Purpose Acquisition Company is therefore sometimes described as a blank-check company because investors commit capital before the final operating business has been selected.
How Does a SPAC Raise Capital?
A SPAC raises equity capital through a registered initial public offering. EarlyBirdCapital explains that SPAC proceeds are generally placed in a trust account while the company searches for and completes a business combination.
Investors usually purchase units during the IPO. Depending on the structure, each unit may contain a share of common stock and a portion of a warrant that can be used to purchase additional shares under specified conditions.
The funds raised are not immediately used to operate a traditional business. Instead, they are typically reserved for the future acquisition and related transaction expenses.
This structure provides the SPAC with a pool of capital that may be used when negotiating with a private company.
What Happens After the IPO?
After the offering closes, the SPAC begins searching for a suitable acquisition target.
The sponsor team may evaluate businesses based on factors such as:
Industry and market position
Revenue and profitability
Growth potential
Management experience
Competitive advantages
Financial reporting readiness
Regulatory requirements
Potential public-market interest
The search process may involve reviewing many companies before a suitable target is identified.
The SPAC generally has a limited period in which to complete a transaction. The specific deadline is disclosed in its offering documents. EarlyBirdCapital notes that many structures use an 18-to-24-month period, although individual terms can vary.
If a transaction is not completed within the required period, the SPAC may be required to return the trust funds to its public shareholders, subject to the terms of its governing documents.
What Is a Business Combination?
Once a potential target has been identified, the SPAC and the private company negotiate the terms of a business combination.
This transaction is often called a de-SPAC transaction. It commonly involves the private operating company combining with the publicly traded SPAC, resulting in the operating business becoming a public company.
The transaction may require:
Business valuation
Financial due diligence
Legal and regulatory review
Audited financial statements
Negotiation of ownership terms
Additional financing
Shareholder disclosures
Shareholder approval
Public-company preparation
The parties must agree on the company’s valuation, the ownership structure, and the financial terms of the combination.
A Special Purpose Acquisition Company may also seek additional financing to support the transaction. This can include private investment in public equity, commonly called PIPE financing, or other forms of committed capital.
What Rights Do SPAC Investors Have?
Public shareholders generally receive disclosures about the proposed business combination before it is completed.
Depending on the transaction and governing documents, shareholders may have the opportunity to vote on the deal and redeem their shares for a portion of the funds held in trust.
The redemption right allows eligible shareholders to recover their proportional share of the trust account rather than remain invested in the combined company.
The Securities and Exchange Commission requires disclosures addressing areas such as sponsor compensation, conflicts of interest, dilution, redemption rights, target selection, transaction financing, and the terms of the proposed business combination.
Investors should review these disclosures carefully because the economics of a SPAC transaction can change based on redemptions, warrants, sponsor interests, and additional financing.
Why Would a Private Company Consider a SPAC?
A private company may consider combining with a Special Purpose Acquisition Company because the transaction can provide access to public capital and an established public listing.
Potential reasons may include:
Raising capital for growth
Expanding access to investors
Supporting acquisitions
Increasing market visibility
Providing liquidity opportunities
Establishing publicly traded shares
Accelerating a broader financial strategy
A SPAC transaction may also allow the private company to negotiate its valuation directly with the sponsor rather than relying entirely on the pricing process used in a traditional IPO.
However, becoming public creates significant responsibilities. The company must be prepared for financial reporting, corporate governance, regulatory compliance, shareholder communication, and ongoing public disclosure.
What Risks Should Be Considered?
A SPAC transaction is not automatically appropriate for every company or investor.
Important risks may include:
The SPAC may not find a suitable target
Shareholders may redeem a significant number of shares
Warrants and sponsor securities may create dilution
Additional capital may be required
The transaction may face regulatory delays
Financial projections may not be achieved
The combined company may struggle in public markets
Integration and operational challenges may arise
The SEC adopted rules in 2024 designed to enhance investor protections and disclosures in SPAC IPOs and de-SPAC transactions. These rules address areas including conflicts of interest, sponsor compensation, dilution, projections, and transaction terms.
Careful due diligence is essential for sponsors, target companies, boards, and investors.
The Importance of Experienced Financial Guidance
A Special Purpose Acquisition Company involves multiple parties, including sponsors, underwriters, investors, target companies, attorneys, accountants, and regulators.
Experienced financial advisors can help coordinate the process, structure the offering, assess potential targets, arrange financing, and support the business combination.
EarlyBirdCapital is a boutique investment bank specializing in SPAC IPOs, acquisitions, and related transactions. The firm identifies itself as a pioneer in the modern SPAC structure and has served as an underwriter or advisor across numerous SPAC offerings and business combinations.
A SPAC can create meaningful opportunities, but success depends on selecting the right target, developing a sound transaction structure, providing transparent disclosures, and preparing the operating company for life in the public markets.
Contact EarlyBirdCapital to learn more about Special Purpose Acquisition Company IPOs, acquisition strategies, and business combination transactions.
EFG Hermes Leads Cherry Trading IPO on Saudi Exchange, Boosting Mobility Sector
EFG Hermes, an EFG Holding Company and the region’s leading investment bank in the MENA region, announced that its investment banking division has successfully completed its role as joint financial advisor, joint bookrunner, and joint underwriter on Cherry Trading Company’s initial public offering on the Saudi Exchange (Tadawul). The deal underscores grand market ambitions in equities and marks a…
Auditing serves several essential purposes, both within an organization and in a broader societal context:
Financial Integrity and Reliability: At its core, auditing evaluates the accuracy, completeness, and compliance of financial statements. This helps stakeholders—investors, creditors, and regulators—rely on the financial information companies present.
Enhance Accountability and…
Capital formation is an area of top most vitality. It is an activity that has a lot to do with the accomplishment of business goals. In the financial industry – no entity could survive without maintaining an optimum amount of cash. Raising money always remains a matter of great concern and especially for small to medium entities.
Effectiveness of Aggregate Determinants of Deficit Financing on Capital Formation in Nigeria An Approach Based on the ARDL Model
by Justin. C. Alugbuo | Emeka Eze "Effectiveness of Aggregate Determinants of Deficit Financing on Capital Formation in Nigeria: An Approach Based on the ARDL Model"
Published in International Journal of Trend in Scientific Research and Development (ijtsrd), ISSN: 2456-6470, Volume-5 | Issue-3 , April 2021,
Paper URL: https://www.ijtsrd.com/economics/market-economy/39820/effectiveness-of-aggregate-determinants-of-deficit-financing-on-capital-formation-in-nigeria-an-approach-based-on-the-ardl-model/justin-c-alugbuo
ugclistedjournals, paperpublication
In Nigeria, despite the huge expansion of public expenditure based on the budget deficit status over the years, the expected level of economic growth as a result capital formation has not been achieved and it is against this backdrop, that this study investigated the effectiveness of aggregate deficit financing on capital formation in Nigeria for the period 1981 2019 with the help of the ARDL model of estimation. Based on the issues covered in the literature review, empirical investigations were carried out on the effect of deficit financing on capital formation in Nigeria. Results showed that External Debt Stock LNEXDBT had a positive relationship with GCF GDP in the current year, 1st and 2nd lags but statistically insignificant in the long run, Domestic Debt Stock LNDMDBT had a negative relationship with GCF GDP in the current year, 1st and 2ndyear lags and long run, Aggregate Gross Savings LNADBTS had a positive significant relationship with GCF GDP in the current year and in the long run, Aggregate Debt Service LNADBTS had a positive relationship with GCF GDP in the current year and in the long run while Total external reserves had a negative relationship with GCF GDP in the current year and in the long run. Based on the findings, the study recommended that the Government should demonstrate a high sense of transparency in its monetary and fiscal operations to curb high prevalence of external and domestic borrowing, improved gross savings to reduce the incidence of inflation which will translate to economic prosperity.
