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Not only was Acorns' SPAC IPO felled like an oak but it'll pay a fat termination fee for release of liability

The Irvine, Calif., robo-advisor is blaming 'market conditions' but it's the one paying the penalty fee and praising its punisher

Wednesday, January 19, 2022 – 5:34 AM by Brooke Southall
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Noah Kerner: 'Acorns will be on the right side of history. We are not a grow-at-all-costs company.'

Acorns will pay a $17.5 million fee, lose about $565 million in backing and go fish for new funding after it became the latest firm to get burned by the lure of a back-door IPO. See: Acorns is raising $565 million to Robinhood-ize itself; lately, that includes self-direction options and buying fintechs

The Irvine, Calif., robo-advisor joins Apex Clearing and other firms that tried to rush through an unlikely door, opened by special purpose acquisition company (SPAC). See: Apex IPO goes kaput --potentially over crypto, SPAC ties--leaving close to $1 billion hanging and blood in the water for hungry M&A sharks

Essentially, it involved an IPO through a blind pool and a reverse merger, according to an 8k filing by SPAC Pioneer Merger Corp (PACX.O).

Acorns manages $5.8 billion of assets on behalf of six million investors, according to its ADV filed Dec. 21. 2021. It's IPO was valued at $2.2 billion but its "pre-money" valuation clocked in at $1.5 billion, according to an off-the-record source cited by Reuters.

Not all SPAC flameouts come with a termination fee.  Acorns gets absolved of all future liabilities and lawsuits by paying $17.5 million, according to the filing.

Glass half-full

Apparently, Acorns also had to give Pioneer the love despite the punishment.

“We really appreciate the partnership with Pioneer," Acorns CEO Noah Kerner said in a statement provided to Bloomberg. "They exceeded expectations and helped make Acorns public-company ready."

At the time the SPAC IPO was announced last May, he assured investors through The Wall Street Journal of his firm's resolve to grow patiently.

"Acorns will be on the right side of history. We are not a grow-at-all-costs company," he said.

Don't blame Acorns for the divorce, counsels Lex Sokolin

"I think this has little to do with Acorns, and everything to do with the melting down of the public markets and parts of the SPAC structure," he says. "It is punitive to go into the public markets right now for quite a bit of fintechs; you get a hammered valuation, new compliance requirements, and if the trust dissolves then no new capital. Paying a $17 million break fee can be preferrable to losing $500 million in enterprise value. There was always a delta between public and private valuations of the same things, and we are seeing an attempt to bridge those valuation differences creaking under the weight of the macro economy turning in a different direction.

 

Acorn's history is full of deals where glass half-full optimism about converting accounts of young investors to long-term asset growth, including a big one with multinational mass media and entertainment conglomerate NBCUniversal. The deal was valued at $860 million in 2019. See: NBCUniversal and Acorns join forces in $105-million mega-round in play to make two millennial quagmires into one big monetization play

Fever pitch

Where the need for patience is assured is Acorns' ability to grow its seedling clients into nut-bearing trees.

Its average client has only about $1,000 on account compared to $240,000 at Charles Schwab Corp. -- the result of its gimmicky approach to signing on "investors."

It gives them the option of rounding up credit purchases to the nearest dollar with the extra pennies deposited into robo-managed savings.

Acorns optimism hit fever pitch last year as Robinhood (HOOD) neared its presumed massive summer IPO. It opened at $38 a share last July and hit $85 before beginning a slow, steady slide. See: Robinhood got its $32-billion IPO after it parlayed a Wall Street rebel image into a way for the Wall Street elite to cash in

Now Robinhood shares are stuck in a multi-month downdraft and hit a new 52-week low today (Jan. 18) of $14.26 before closing at $14.40, down another 5%, amid a strong market selloff.  See: As Charles Schwab Corp. shares soar and Robinhood's crater, the mobile-first brokerage makes seminal move past its ‘casino' model and sells 'fiduciary' portfolios

Robinhood is also a company with a high investor count and low account balances that had convinced Wall Street to look past the downside.

Private capital pivot

Kerner responded to queries about the SPAC termination by saying his firm would go out and raise capital on the private markets then proceed over time to a conventional IPO.

“Given market conditions, we will be pivoting to a private capital raise at a higher pre-money valuation as we continue on our path to 10 million paid subscribers saving and investing for a better future.”

One way Acorns hopes to monetize accounts is to lure its investors into doing more trades by building out its discount brokerage infrastructure with the capital it raises privately. It would give it a second source of revenue.

Acorns only realized $71 million in 2020 revenue but projected $126 million for 2021 and $309 million in 2023, The Wall Street Journal reported at the time its SPAC IPO was announced in May.

The company also forecast that its user base would surpass 8 million subscribers by 2023. See: Mindful of 'Snapchat' dynamic, BlackRock takes big Acorns stake after the micro-robo wins 2.2 million investors in 12 month

Acorns launched as a specialist in 2014 with a hyper-idealistic bent of taking careful care of Gen Z investors with low financial literacy, low income, low balances and high debt.


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Brian Murphy

Brian Murphy

January 19, 2022 — 8:42 PM
Unfortunate turn of events for Acorns, but anyone with experience in the industry could see how precarious the whole SPAC boon-doggle was. SPACs were built on the idea of incentivizing private companies to go public through an alternative route (reverse merger). That incentive hits home to those companies that really aren't ready for the public markets - including Acorns, Lemonade, Money Lion, etc. The only way it works is for more naive (greedy?) investors to jump on the train and hold through the reverse merger. That worked for a few early SPACs, but it eventually became clear that many of these emperors had no clothes...and that's where we now sit, with a bunch of busted SPACs and shareholders scratching their heads on how such a vibrant company could be down 80% from its high.

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