Shareholders Reeling in Wake of Miami SPAC-Merger Deals

South Florida has been a poster child for big-ticket speculation gone sideways over the last two years as Miami's campaign to become the palm tree-lined crypto capital of the world teetered, and investors sought higher ground amid economic uncertainty.

The retreat hasn't been limited to SoFlo, of course. The first prolonged bear market since the financial crisis of 2007 has slowed folks' appetite for unproven investments across the country. But the sheer scale of investor exuberance for the Miami metro area during the boom time makes the fall a little more bruising and the financial hangover that much more head-splitting.

While Miami's cryptocurrency landscape caught much of the flak during this back-to-reality phase, the share value collapse in so-called SPAC (special purpose acquisition company) ventures born in South Florida has shown how quickly and viciously sentiment can shift.

Perhaps no one knows this better than Miami attorney and collegiate marketing guru John Ruiz and his partner in speedboat company Cigarette Racing, Ophir Sternberg.

Ruiz's medical claims-collection company MSP Recovery, now known as LifeWallet, became one of the most dramatic examples of a Miami SPAC-spawned deal in steep decline, when its projected $32 billion valuation melted away within weeks of the company going public. It was go big or go home for MSP: the deal was billed as the largest SPAC merger on record in the U.S., at least in terms of paper valuation.

Trading at 70 cents a share as of April 26, LifeWallet is now facing stock-market delisting after falling far short of the billions of dollars in revenue it claimed it would make in 2022.

Sternberg was chief executive of Lionheart Acquisition Corp. II, the SPAC that merged with Ruiz's company. At the time of the announcement of the merger, Sternberg appeared to have high hopes, saying, "MSP Recovery is well-positioned to continue to expand its footprint" in a "promising market."

Sternberg also has executed SPAC deals involving South Florida-based fast food chain BurgerFi and sustainability-tech company Security Matters. Like MSP Recovery, those companies have seen significant declines in their stock value since going public.

The stock price plunges coincided with a broad pullback in the post-merger-SPAC market in 2022. As of December 2022, the stock prices of SPACs that merged between July 2020 and December 2021 had declined more than 60 percent from their pre-merger level.

Often referred to as blank-check companies, SPACs raise money from investors (typically institutional players) to acquire a private company, and they have an 18- to 24-month window to close a deal. If stakeholders approve, the acquired company (MSP Recovery, for example) merges with the publicly traded SPAC; if not, the SPAC is dissolved. SPAC investors have the right to redeem their full investment plus interest at the time of the merger, even if they had voted in favor of the deal.

While advocates claim SPAC deals provide a unique way for early-stage companies to swiftly go public, critics have warned they shortcut the traditional public-offering process and have the propensity to create large profits for SPAC institutional investors and sponsors while less sophisticated retail investors suffer losses after the post-merger decline.

SPACs were all the rage between 2020 and 2021. Over those two years, more than 860 SPACs hit the public markets with average gross public proceeds of $336 million in 2020 and $265 million in 2021, according to SPAC Insider. The boom coincided with a COVID-era stock market bubble during which money poured into tech companies, and the Nasdaq exchange was flying high.

Marquee names like Richard Branson's space company Virgin Galactic and fantasy sports outfit DraftKings went public through SPACs.

After a successful track record in New York City real estate investment and development, Sternberg set his sights on the SPAC space as its popularity was waxing in 2019. As founder and chief executive of Lionheart Capital, he had already built a portfolio of lucrative real estate transactions in South Florida, including the development of The Ritz-Carlton Residences in Miami Beach and Singer Island in Palm Beach. According to Lionheart's website, he also kicked off development projects in the Miami Design District and closed Lionheart's sale of Miami Beach's Seagull Hotel for $120 million.

At the height of the SPAC craze, Sternberg served as chairman and chief executive at OPES Acquisition Corp., the blank-check company that merged with BurgerFi in a $100 million deal and brought the company public in December 2020.

A South Florida success story, BurgerFi opened its first location in Lauderdale-by-the-Sea in 2011 and quickly ballooned into one of the fastest-growing restaurant chains in the country. It now has nearly 120 franchised and corporate-owned restaurants in 22 states and Puerto Rico.

OPES's share price rallied upon announcement of the BurgerFi deal, reaching $19.92 in June 2020, and post-merger, BurgerFi stock traded in the mid-teens throughout much of 2021. But against the backdrop of an economic downturn, hopes were tempered that the company would rapidly attain Chipotle-level prowess in the realm of sleek-but-streamlined corporate eateries. BurgerFi's stock price has been decimated since late 2021, and as of April 26 close, the stock was worth $1.03 a share.

The company is currently the target of a shareholder class action alleging that it misled investors with regard to its acquisition of Anthony's Coal Fired Pizza, which BurgerFi bought out for $157 million in November 2021, about a year after going public.

Filed April 6 on behalf of a proposed investor class, the complaint claims executives made "materially false and misleading statements regarding the company's business, operations, and prospects." The company "overstated the effectiveness of its acquisition and growth strategies and misrepresented benefits of the Anthony's acquisition," the lawsuit alleges.

A BurgerFi spokesperson tells New Times that the company "believes the claims are without merit" and that it intends "to defend the matter vigorously."

Sternberg declined to comment. When the Anthony's acquisition was announced, he said in a public statement that the deal "marks a significant step forward in BurgerFi's ongoing growth strategy and transition into a premium multi-brand platform."

In mid-2021, while BurgerFi stock was still performing well, Sternberg led Lionheart Acquisition Corp. II in another SPAC deal: the bid to take Ruiz's company MSP Recovery public, in which Lionheart pledged up to $230 million in capital.

Ruiz, a boat-racing enthusiast and prominent Miami litigator, had previously worked with Sternberg on a buyout of luxury powerboat company Cigarette Racing, which was not a subject of the SPAC deals and is not publicly traded.

Ruiz and Sternberg closed the MSP Recovery merger and took the company public in May 2022.

In the time leading up to closing, marketing materials for the merger touted a $32 billion valuation for MSP, claiming the company was poised to recover huge sums from auto insurance companies and other insurers who had improperly offloaded medical claim costs onto third parties. In addition to its litigation recovery revenue, LifeWallet marketed technology to identify claims incorrectly paid by Medicare rather than the responsible parties.

While similar blank-check companies have taken private companies public with high valuations, the MSP Recovery deal left some scratching their heads. During negotiations in 2021, Ruiz had vouched for a valuation as high as $50 billion based on early models, according to an interview with Financial Times.

"For a zero revenue company, this is in a class by itself," Michael Klausner, a Stanford Law professor, told Financial Times in the days following the announcement of the deal. "The comparables would be the spaceship companies or the flying cars, but even they have lower valuations."

LifeWallet's shares have lost the vast majority of their value since going public. Although the company projected it would make nearly $1 billion in gross revenue in 2022, its last quarterly report indicated that over the nine months ending September 30, 2022, the company brought in $21.79 million.

Meanwhile, LifeWallet this month delayed filing its 2022 annual report and revealed that its financial statements from June 30, 2022, to September 30, 2022, are no longer reliable because of accounting errors. The company received a delisting warning from Nasdaq on April 18, citing its failure to file the annual report.

The company said in a press release that "despite the current economic downturn affecting U.S. businesses, LifeWallet is confident in its financial future" and would continue to build on its revenue sources.

The recent pullback in the SPAC market apparently didn't deter Lionheart from pursuing another special acquisition-company deal. Its latest blank-check firm, Lionheart Acquisition Corp. III, merged with Israel-based Security Matters, a company initially valued at $360 million. The company, which has since sunk to a $28 million market valuation, markets technology designed to track consumer products and help companies reuse materials and maintain sustainable manufacturing practices.

Security Matters opened trading on the Nasdaq on March 8 at around $3 a share. As of April 27, the share price sat at 98 cents.

Peppered among product updates, Security Matters' social media pages lay out allegations of "potentially illegal short selling and manipulation of its stock" while asserting that the company is assembling a legal team to explore remedies. 

Though signs were already emerging in late 2021 that the reverse-merger craze was dwindling, the SPAC market came crashing down in 2022, thanks in part to rising interest rates, stalled deals, bad press, and the specter of increased regulatory scrutiny. Compared to the more than 600 SPAC IPOs in 2021, the pace slowed in 2022 to only 86 SPAC IPOs.

A report by Massachusetts Senator Elizabeth Warren's office in May 2022 warned that SPAC business models include "myriad ways for sponsors and institutional investors to profit even when the initial SPAC investment goes bad."

"These misaligned incentives are a feature rather than a bug of SPACs, rewarding serial SPAC creators and the giant financial institutions that bankroll them even if the companies they take public flail," the report states.

Before the crash, some had predicted a brighter future for SPACs. In a 2021 article for the Harvard Business Review, Max H. Bazerman and Paresh Patel suggested that SPACs were "here to stay" because they offer "investors and targets a new set of financing opportunities that compete with later-stage venture capital, private equity, direct listings, and the traditional IPO process."