Editor's note: The hottest financial trend of 2020 has gone bust...

We're talking about special purpose acquisition companies ("SPACs").

In the past year, the index that tracks these uniquely structured businesses has fallen 70% from its peak. But according to Stansberry Venture Value editor Bryan Beach, as the pile of left-for-dead SPACs grows, so does our opportunity...

Today's Masters Series is the first in a two-part overview of today's SPAC market from a recently updated Stansberry Venture Value special report. In this essay, Bryan reviews how SPACs got their start... explains what sets them apart from initial public offerings ("IPOs")... and details why some early investors prefer SPACs over the traditional IPO...

The Evolution of the 'Blank-Check Company'

By Bryan Beach, editor, Stansberry Venture Value

Henry Villard – former Bavarian aristocrat, family outcast, and 19th-century American titan of industry – had one very pesky thorn in his side...

A competitor threatened to topple the railroad and steamship monopoly he had established in the Pacific Northwest.

And so, in a move that would never fly in our modern regulated era, Villard began a clever plot to covertly take over his only regional competitor... Northern Pacific.

Villard began accumulating shares of Northern Pacific on the sly. But even with his vast wealth, he couldn't accumulate enough to gain control of the company. He needed to raise more money.

Villard knew that if he revealed his intentions, shares of Northern Pacific would skyrocket, and he wouldn't be able to accumulate a controlling stake. So he devised a brand-new financial structure – one that would change the trajectory of public stocks for the next 200 years.

He christened this new structure the "blind pool." He sent out a newsletter, or "circular," to some buddies... asking them to give him money for a secret venture. In effect, these investors would buy a share of Villard's reputation, as opposed to a particular business.

His memoirs describe what happened next...

The effect of the circular was astonishing. The very novelty and mystery of the proposition proved to be an irresistible attraction... a regular rush for the privilege of subscribing ensued, and, within twenty-four hours of the issue of the circular, more than twice the amount offered was applied for.

The plan worked perfectly. Villard got his controlling stake and ended up with a near-monopoly on transport in the Pacific Northwest.

Villard went on to gain and lose a couple fortunes in his lifetime. Northern Pacific – and most of the rest of his transportation empire – is now part of Warren Buffett's Berkshire Hathaway (BRK-B).

But more than the man or the business, it's the blind pool that became the most important part of this old story. As the Los Angeles Times put it...

Someone on Wall Street ought to erect a statue to Henry Villard.

Villard made the discovery that if you don't tell investors how you're going to spend their money, they get more eager, not less.

This blind-pool concept evolved into something called a "blank-check company." Today, we call it a special purpose acquisition company ("SPAC").

You probably recognize the term. It became arguably the sexiest financial buzzword of 2020. In that year alone, nearly 250 SPACs raised more than $83 billion from investors who paid up without any idea of what they were buying.

The SPAC momentum continued into 2021, with more than 600 SPACs raising around $163 billion. But the shine eventually wore off...

If you Google the word "SPAC" now, you'll find pages of articles with buzzwords like "bubble" or "greed" or "excess." In February 2022, things only got worse for SPACs, as war broke out in Europe and investors fled uncertain markets. From February 2021 to April 2022, the Bloomberg SPAC Index fell an incredible 70%.

It sounds bad. And it's proof that, 140 years after Villard's blind pool, a full-on SPAC bubble inflated – and then burst – in around 18 months.

But investors can make a fortune by sifting through the scraps left over when bubbles burst. If you've got a contrarian streak, the next few quarters could be a defining moment...

What Is a SPAC?

A private company can go public in a handful of ways.

The most common way is through an initial public offering ("IPO"). Before even starting the process, a company with ambitions of going public must invest considerable cash beefing up its finance, regulatory, and legal departments and spend a year or two scrubbing its past financial statements.

With its back-office ducks in a row, the company aspiring to IPO needs to find an investment bank to help connect it to potential investors. Then comes a rigorous "road show" wherein management pitches its story to would-be IPO investors in the hopes of finding enough interest to sell shares to the public.

SPACs are an alternative way to go public. With a SPAC, a "sponsor" – a modern-day Villard – raises a bunch of money to buy out an operating business. However, unlike Villard, SPAC sponsors often don't have a specific target in mind when they raise the money.

While raising the cash, sponsors go through the trouble of setting up a publicly traded shell company. They jump through all the regulatory hoops, set up all the legal entities, do their own IPO, and park the cash in the shell company's bank accounts. When the dust settles, the shell has a ticker symbol and can be traded in any normal brokerage account.

With the logistics out of the way, sponsors set about finding a private business with which to merge. Once the sponsors identify a target, negotiate a purchase price, and consummate the merger, they can drop this operating business into the publicly traded shell.

For their trouble, sponsors get to keep 20% of the newly combined company. If they can't find a target within two years, the cash goes back to investors.

It's important to understand these dynamics. If the sponsors can find a target and complete a merger, they get 20% of an operating business. If they can't, all their efforts building out a public shell and raising cash are lost.

From the private company's perspective, the process of going public via a SPAC merger is generally quicker and cheaper than the traditional IPO process. A lot of the tough sledding – like the administrative paperwork and the regulatory approvals – has already been handled.

So in a perfect world, a SPAC transaction is a win-win for both the sponsors and the acquired business.

I've covered SPACs since launching my Stansberry Venture Value newsletter in 2017. But it's only recently that, despite a relatively long history, they became all the rage, ballooned, and then burst.

The SPAC boom was silly. But I believe the SPAC sell-off we're witnessing right now is also an overreaction. Tomorrow, I'll explain why so many SPACs go bust – and what that means for your money.

Good investing,

Bryan Beach

Editor's note: Bryan says the moment he has been waiting for in SPACs is finally here. In short, the growing SPAC scrap heap is creating a chance to lock in unprecedented gains. And you don't have to wait to take advantage of the current setup...

Now that this misunderstood corner of the market has had its moment to shine – and come crashing back down – Bryan sees the opportunity of a lifetime. He says when a select few SPAC "diamonds" recover from their recent lows, investors could stand to make up to 1,000% gains in as little as two years.

He's sharing all the details of his unique SPAC approach in a brand-new interview... including why this could be one of the most reliable moneymaking strategies he has ever discovered. Get the full story right here.