Why Wall Street Insiders Are Ditching the IPO as We Know It

DraftKings finds an 'old' way to go public... These 'blank-check' companies are NOT too good to be true... Why Wall Street insiders are ditching the IPO as we know it... A 'new' way for you to buy pre-IPO shares... The only SPAC insider you need...

DraftKings CEO Jason Robins was looking to take his company public...

It was September of last year, and DraftKings – the sports-betting and fantasy-sports company that Robins created with two partners in 2011 out of a spare bedroom in Boston – had grown into a juggernaut of a business.

Sports gambling started becoming legal in more and more states over the past several years (because governments need money to come from somewhere to pay for all their spending)... And DraftKings grew into a multibillion-dollar company, becoming one of the leaders in the gambling industry, by constantly innovating and being the first mover on things like sports-betting apps and other digital products.

Now, Robins wanted to buy a company called SBTech, a provider of digital sportsbook services with products in 15 European countries and five U.S. states. SBTech was largely unknown to most regular folks, but it was a big rising player in the sports industry.

As he thought of ways to possibly finance the deal, Robins started to consider taking DraftKings public to raise money... but he saw some challenges ahead in 2020.

Of course, Robins couldn't foresee a pandemic – but he saw enough to grow concerned...

A 10-year-plus bull market run continued, but needed to end, he thought... A presidential election was coming up... And he didn't know how long it would take to finance two different transactions, or if it might be more difficult than usual to raise venture capital or debt in a choppy market.

Plus, Robins was still scarred from when the Federal Trade Commission shot down a proposed merger between DraftKings and industry rival FanDuel in 2017, after two years of negotiations.

That whole debacle rattled company morale and forced the then-37-year-old CEO to regroup.

So, in thinking about "going public" and trying to buy another company at the same time, Robins wanted the smoothest ride possible in what he thought could be choppy waters this year.

That's when an 'old' idea occurred to him...

It was called a special purpose acquisition company ("SPAC"). You heard our friend Enrique Abeyta from our corporate affiliate Empire Financial Research talk about SPACs in last Friday's Digest and in our Masters Series essays over the weekend.

In short, a SPAC is a company that is essentially a big, publicly traded pool of cash... And its only purpose is to use that cash to buy another company and take a private firm public through an initial public offering ("IPO").

SPACs have been around for decades, but they're largely unknown to most investors today. And to those who do know about them, they've generally had a shady reputation as "blank-check" companies.

Here's how Enrique described the structure in Sunday's Masters Series essay, using a hypothetical example...

At first, it sounds too strange to be true...

A team of investors form a business – let's call it Really Smart Acquisition Corporation ("RSAC") – designed to raise capital to take a private company public. But RSAC can't tell you what company it wants to take public. It might not even know yet.

RSAC's management goes out and raises a pool of money, telling investors, "We're going to go out and find a great investment idea for this money."

The process of raising money is similar to an ordinary IPO process. The underwriter (a brokerage or bank) raises the funds by selling common stocks (i.e., regular shares of ownership in the company).

But unlike a normal IPO, instead of buying shares in a restaurant chain or e-commerce company, for example, you own a share of RSAC's pool of money.

In the meantime, RSAC will hold the money in an account while management – known as the "sponsor" – goes out and looks for a deal.

If you've never heard of this type of business, you're not alone. Robins only knew about the structure because of an old Wall Street acquaintance, Harry Sloan, who ran his own SPAC.

Sloan introduced the concept to Robins back when he was trying to merge DraftKings with FanDuel... kick-starting the talks with the idea of using the setup.

Now, a couple of years later, Robins phoned Sloan to tell him he wanted to work together again on taking DraftKings public and helping with the merger and acquisition of SBTech. In a recent interview with noted venture capitalist and StockTwits co-founder Howard Lindzon, Robins told the story...

In the second half of 2020, I [thought I] might not be able to do it in two transactions. I might have to get this whole thing done faster. It occurred to me a good way to do that was through a SPAC.

We could basically take what would have been two transactions, put them together in one, and arguably it's an even faster public process to do it through a SPAC.

DraftKings eventually went public through this very setup. The parties privately reached an agreement on how to split up stakes and take the company public in an IPO. The mainstream media called it a "three-way deal" between DraftKings, SBTech, and Sloan's Diamond Eagle Acquisition Corporation when it was announced in December.

The company traded under the DEAC ticker until the transaction was completed in late April, shortly after the pandemic hit the U.S. The combined company now trades under the DKNG ticker, and it has a $19 billion market cap after closing today at more than $53 per share.

Robins turned out to be exactly right about how best to get the deal done. And by doing it that way, he shined a big light on SPACs. As Robins said...

I never thought DraftKings' claim to fame would be invigorating the SPAC market, but here we are.

DraftKings isn't the only SPAC success story...

Over the last year alone, we've seen several high-profile companies go public via SPAC – including space-tourism company Virgin Galactic (SPCE). The SPAC process has become a new way of doing a merger or acquisition.

The negotiations can be done in private and away from the mainstream media... The investors in the company being bought can keep a stake... And SPACs typically have two years from their IPO date to complete a merger.

Wall Street is falling in love with SPACs (which gives us an uneasy "bubble warning" feeling, on a certain level). As Enrique wrote recently in the free Empire Financial Daily newsletter...

Over the past few years, the market for these IPOs and number of SPACs has grown dramatically.

From 2014 through October 2020, more than 300 SPAC IPOs raised approximately $92 billion.

SPACs are becoming an increasing percentage of the IPO market. Last year, SPACs represented 27% of all IPOs and 23% of the capital raised. Over the past three years, they made up 20% of the entire IPO market.

And 2019 was the biggest year ever for the industry, with 59 SPACs raising $13.6 billion... But 2020 has broken many records in the red-hot SPAC market. By early October, nearly 150 SPACs were actively searching for a target, with more than $50 billion of cash ready to deploy.

But here's the important part, and why we're talking about them today... They're opening up a unique opportunity for Main Street investors.

SPAC shares are available to individual investors. They're listed on the New York Stock Exchange and buyable through regular brokers... And unlike other investments, they allow you to take a "preview" of the company before you decide to buy.

Take the DraftKings example... If you knew what the heck "Diamond Eagle Acquisition Corporation" was and that it was working on a deal to take DraftKings public in an IPO, you could've bought into DEAC for $10 per share, the price that most SPACs trade for.

From there, we'll refer to what Enrique wrote in Sunday's Masters Series...

Once management finds its target, the owners of the common shares can vote on whether to participate in the deal. If you vote "yes," you'll own shares in the new company once the transaction is completed. (The ensuing process of transforming into an operating company is called a "de-SPAC transaction" and typically takes three to five months.)

If you vote "no," you'll get your original $10-per-unit investment back... even if every other owner votes "yes."

This is what makes SPACs a uniquely fantastic deal for investors: If you own shares of the SPAC, you basically get a free look at the investment... and if you don't like it, you get your money back.

In other words, while this stuff makes sense for Wall Street, a SPAC is also the individual investor's best chance to own pre-IPO shares.

But please note, not all of these SPACs are created equal.

Some will sound too good to be true, and they will be...

Electric-truck maker Nikola (NKLA) is one of them. Stay away! The same went for the now-delisted music-streaming service Akazoo. They were examples of how not to do things.

If you ask us, the very fact that SPACs are becoming more popular today tells us something concerning about the frothy market in general. (And Enrique actually agrees with that idea, saying that the current environment in SPACs reminds him of the stock market in 1999.)

But some SPACs will be very good to investors... You're going to hear more about them.

This year alone, investors who bought shares of DraftKings and Virgin Galactic at the outset had the chance for quick, multibagger returns. Virgin Galactic rose 270% five months after its SPAC took it public. DraftKings soared 500% in nine months.

The important thing is knowing the difference between the good SPACs and the bad SPACs, which are just bad companies in different packaging. And unless you have some pretty great connections, you won't know about which of these companies are worth investing in.

That brings us to the only SPAC 'insider' you need...

In recent weeks, Enrique has shared details about these opportunities with anyone who will listen – including during the exclusive Alliance portion of our annual and first-ever virtual Stansberry Conference earlier today.

And we haven't heard anyone else in our industry talk about SPACs in-depth anywhere close to how Enrique has...

A Wall Street veteran with plenty of stories and a track record to prove it, he told a group of us earlier this year that the SPAC investments he's talking about aren't coming from the Long Island "chop shops" of the past that you wouldn't want to be associated with.

And as he wrote yesterday in Empire Financial Daily...

SPACs have a shady history, but they've come a long way from those early days. Today, SPACs are a well-regulated and increasingly liquid area of the market.

They have drawn in more and more qualified investors, regulators, brokers, lawyers, and others. The SPAC market is now a fully developed, institutional-class sector, making it perfectly safe for investors.

Like anything you put your money into, you want to know the people involved in handling it, and Enrique has a wide network of connections and intimate knowledge of the industry. As he continued yesterday...

SPAC sponsors are far from small-penny stock brokerages on Long Island at this point. Rather, they're an impressive group of institutions. In addition to legendary investor Bill Ackman, sponsors include investment bank Goldman Sachs (GS), billionaire Mario Gabelli, private-equity giant TPG Capital, Daniel Loeb's Third Point Management hedge fund, and Howard Marks' Oaktree Capital Management hedge fund.

At 8 p.m. Eastern time tomorrow night, one of these Wall Street insiders will join Enrique during a special event. That's Ackman, who has made tons of headlines lately for his SPAC investments and is a longtime friend of Empire Financial Research founder Whitney Tilson.

Enrique, Bill, and Whitney will get into all the details about SPACs, why Wall Street is falling in love with them today, and how and why individual investors should consider investing in them, too.

This is a big story that's still just starting to play out in the stock market... We've been hearing about SPACs all year long ourselves, but the vast majority of investors have no idea what's happening, even though they should.

Enrique says this trend is an incredible, once-in-a-generation chance for investors to make 500% to 2,500% returns over the next few years.

And it's already happening... For instance, during his event tomorrow night, Enrique will share how one man has already made nearly $10 million on his first SPAC recommendation.

Their event – the SPAC Investment Summit – is 100% free, and you're guaranteed to learn about this lucrative opportunity that most investors likely won't know about for years, if it all.

Enrique and Whitney only ask that you register in advance to make sure you don't miss it. You can do that right here.

New 52-week highs (as of 10/6/20): New Oriental Education & Technology (EDU), Comfort Systems USA (FIX), Sea Limited (SE), and The Trade Desk (TTD).

In today's mailbag, a recommendation for John Doody's work in response to yesterday's Digest about why gold is going to $3,000. Do you have a question or comment? Let us know what's on your mind by e-mailing feedback@stansberryresearch.com.

"Over the years, I've done some drive-by investing in precious metals. Had no idea what I was doing, simply wanted to hit a couple of home runs. Fell flat on my face each time.

"John Doody has completely changed my approach to gold and silver investing. He taught me the power of asset leverage and operating leverage. That's a very bright light when it finally comes on! Now, rather than try to find the needle in the haystack, that one gold miner that goes parabolic, I own the whole farm.

"I bought the entire gold portfolio in August 2019. Today this portfolio is up 45%, and that's after the recent pullback in the sector. I bought the entire silver portfolio in April of 2020. Today this portfolio is up 72%.

"Annualized, these returns are 41% in gold and about 157% in silver. And there's still no one investing in this space! When the masses catch on to the bull market in precious metals, the returns will be off the charts. Months ago I jokingly said that John Doody's picks would occupy the entire Top 10 Stansberry Open Recommendations List. I'm not joking any longer.

"With John's guidance, I'm now investing in precious metals rather than speculating. Sure, it's a bumpy ride, but the returns are worth the volatility." – Paid-up subscriber Terry G.

All the best,

Corey McLaughlin
Baltimore, Maryland
October 7, 2020