- Fintech SoFi announced plans to go public through Chamath Palihapitiya’s SPAC in early January.
- Palihapitiya has publicized Virgin Galactic, Opendoor and Clover Health through SPACs for the past two years.
- Social Capital Hedosophia Holdings Corp V, the SPAC set to acquire SoFi, spoke with over 33 companies before choosing the fintech.
- Visit the Business Insider homepage for more stories.
News broke on Jan. 7 that personal finance startup SoFi, last valued at $4.3 billion, prepares to go public via special purpose acquisition company Share capital Hedosophia Holdings Corp V (SCH).
Chamath Palihapitiya, founder and CEO of venture capital firm Social Capital, raised capital in July 2019 and is the product of a partnership between Social Capital and Hedosophia, a venture capital firm led by Ian Osborne. In October, SCH enters the public markets.raised by billionaire tech investor
Palihapitiya, meanwhile, is no stranger to the SPAC world. In 2020, Palihapitiya-backed SPACs initiated mergers that took Clover Health and Opendoor (and in 2019, Virgin Galactic) public.
The deal will nearly double SoFi’s valuation to $8.7 billion, and the company is expected to generate proceeds of over $2.4 billion.
SoFi filed its S-4 documents, which outlines its IPO plans. Here are five things that stood out in the soon-to-be-public company filing.
SCH spoke to over 33 companies (and evaluated over 100) before choosing SoFi
One of the more interesting notes on the record is how many companies SCH looked at before choosing SoFi. SCH’s large distribution network is indicative of the competitiveness of the market for SPACs. In 2020, more than 200 SPACs launched, raise over $73 billion.
SCH analyzed “more than 100 potential business combination targets,” contacting 33 of them to discuss a potential deal, the filing said. Among the companies examined by SCH were those involved in healthcare, sports, semiconductors and e-commerce, among other industries.
“SCH considered companies that it believed had attractive long-term growth potential, were well positioned in their industry, and would benefit from the substantial intellectual capital, operational experience and network of SCH’s management team” , indicates the folder.
And while SPAC eventually reached nondisclosure agreements with three companies, a meeting between SoFi CEO Anthony Noto and SCH Chairman and Director Ian Osborne on Dec. non-binding intention to make fintech public.
SoFi plans to offer riskier home loans
SoFi likes to hammer its customers’ high FICO scores as proof that it’s a responsible lender, but the company said in Monday’s filing that it was considering offering mortgages to riskier customers, which which could expose them to the risk of litigation.
“We do not currently offer but may expand the product selection to offer non-qualifying home loans, which, unlike qualifying home loans, do not benefit from a presumption that the borrower has the ability to repay the loan,” indicates the folder.
Ineligible mortgages are those that don’t meet typical borrowing standards, with different requirements for things like income verification and credit scores.
And while legislation in the wake of the Great
and the housing crisis of the 2000s, provided that lenders generally cannot be held liable in court if qualified home loans were to go south, these same protections do not apply to non-qualified loans.
That being said, SoFi is not looking to expand the “credit box” of home loans currently on offer – in other words, to lower their credit standards – but is more interested in easing some of the technical restrictions typically associated with mortgages. qualified, such as debt-income ratios.
A national banking charter is key to SoFi’s future plans
The S-4 detailed why SoFi believes a national banking charterwhich he applied for in July, will benefit his business.
“A key part of our long-term strategy is to obtain a national banking charter, which we believe would improve the profitability of our lending capabilities and improve the value proposition of our SoFi Money product,” the filing said.
SoFi Money, launched in 2019, is a digital deposit account service for customers. But since SoFi is not a bank, it had to partner with others to offer cash management services. The company received conditional approval of the Office of the Comptroller of the Currency charter in October. But a denial of the charter could lower SoFi’s share price once it goes public.
Admittedly, fintech is still considering other ways to obtain a charter. SoFi mentioned in its S-4 filing that the company was considering buying a bank as a way to quickly acquire a bank footprint.
This is a decision that would be subject to further regulatory approval from the
and OCC, but might be more efficient than building what they call a de novo bank from scratch.
At least one other startup has taken a similar path. LendingClub announced in early 2020 its intention to acquires Boston-based digital bank Radius Bank for its charter.
COVID-19 debt programs could hurt lender’s bottom line
Palihapitiya has been outspoken throughout the pandemic about the need for US federal government do more to help average Americans during the COVID-19 pandemic.
However, debt relief programs implemented over the past year could hurt SoFi’s bottom line and pose a risk to its business.
“In response to the COVID-19 pandemic, states and other regulators across the United States are implementing various debt collection restrictions, including in some cases collection bans or normal legal remedies. To the extent these regimes apply to us, they could limit our ability to service our defaulted loans and pursue collections from members, which could result in higher losses and associated loss,” the S-4 filing noted.
Some states, for example, barred debt collectors from seizing the $1,200 relief check distributed under the federal CARES Act last spring.
And some states banned further debt collection lawsuits early in the pandemic. Meanwhile, the latest round of federal relief passed in December included language that would prevent debt collectors from seizing relief checks.
That being said, SoFi has generally tended to extend personal loans to higher-income, higher-credit individuals in the past, with personal loan default rates generally remaining flat throughout the pandemic, a source says. close to the location.
SoFi worries about the future of student debt
As SoFi expanded its offering to include savings, investing, and trading, the company began to focus on refinancing student loans. However, a new regulatory regime could challenge this line of business.
A key stipulation of the CARES Act was forbearance from federal student loans beginning in March. This has since been extended through January 31 and will likely be extended again under the Biden administration.
It’s to say nothing of Biden’s proposal to cancel a minimum of $10,000 in federal student loans after taking office.
“If student loans were canceled or canceled on a significant scale, our profitability, results of operations, financial condition, cash flows or future business prospects could be materially and adversely affected,” SoFi said in the statement. case.
A source familiar with the situation said SoFi was generally supportive of the $10,000 write-off, but would prefer to see a more targeted — or “means-tested” — student debt forgiveness from the administration. Biden.
In addition to canceling student debt, the COVID-19 pandemic has also led to a drop in the number of prospective students enrolling in college, which means lower loan volumes for SoFi.
“According to the National Student Clearinghouse, there has been a significant drop in the number of students entering college in the class of 2024 compared to the number of students in the class of 2023, which has contributed in part and may continue to contribute, to a reduction in the volume and amount of school loans we issue and student loans we refinance,” the filing said.