What is a special purpose acquisition company (SPAC)?
A Special Purpose Acquisition Company (SPAC) is a company that has no commercial operations and is formed strictly to raise capital through an initial public offering (IPO) to acquire or merge with an existing company. The company will have a defined time period to identify and complete an acquisition, usually two years. Once the purchase is complete, the SPAC becomes a subsidiary of the new company.
The term SPAC (special-purpose acquisition company) was coined in 2000 when the first of these companies was created to allow investors an opportunity to invest in a company that would be focused on making only one acquisition, rather than investing money into a larger company.
In 2020, 247 SPACs were created with approximately $80 billion invested. In just the first quarter of 2021, a record $96 billion was raised from 295 newly formed SPACs. By comparison, only 2 SPACs came to market in 2010.
How does a SPAC work?
SPACs are often founded by funders or sponsors with experience in a specific industry or market sector to seek transactions in that area. When founders form a SPAC, they frequently have at least one purchase goal in mind. Still, investors choose not to disclose their goal to avoid excessive reporting during the IPO process. This is why they are referred to as “blank check businesses,” as IPO investors often have no prior knowledge of the firm they are investing in.
Before issuing shares to the public, SPACs solicit underwriters and institutional investors. SPACs invest the proceeds from their initial public offerings in an interest-bearing trust account. These funds cannot be used for anything other than completing an acquisition or repaying shareholders if the SPAC is liquidated.
These companies have two years to complete a deal or face liquidation. After an acquisition, a SPAC is usually listed on one of the major stock exchanges.
Why would someone invest in a SPAC?
A special purpose acquisition company (SPAC) is a type of company that is used for the specific purpose of acquiring another company. They are often backed by high-profile investors, leading to stability in share prices, making them an attractive investment for many people.
Investors need to get on board when a special purpose acquisition company (SPAC) is in its early stages. This is because the price of shares will be higher than when the SPAC has found a merger partner and is finalizing the deal. The earlier an investor gets in, the more likely they will make a profit down the line.
When a person buys shares in a special purpose acquisition company, they are taking a leap of faith. However, the payoff can be substantial if the SPAC finds a good deal. Often, these deals involve buying another company or business to expand their operations. For this reason, potential investors need to do their due diligence before investing in a SPAC.
How to invest in a SPAC
A special purpose acquisition company (SPAC) is a type of publicly-traded company. They are often used for acquisitions, and as such, their stock prices tend to be more volatile than other stocks. You can invest in SPACs through your regular online brokerage account.
In addition, there are three SPAC-focused ETFs that investors can use to gain exposure to the space. In 2020, Defiance ETFs kicked off the first-to-market exchange-traded fund (ETF) (ticker: SPAK). SPAK now owns around 40% of pre-merger SPACs and 60% of post-merger SPACs, making it one of three SPAC-focused exchange-traded funds.
SPACs have historically offered attractive returns and diversification. Additionally, they are an excellent way to invest in the stock market without picking individual stocks.
Why are SPACs trending?
SPACs are popular because of the extreme market volatility caused by the COVID-19 pandemic. Companies and investors are looking for new ways to invest their money, and SPACs offer a way to do that while also limiting risk. They are also seen as a way to quickly get a company up and running without going through the time-consuming process of finding a CEO, raising money and building a team.
In recent years, Special Purpose Acquisition Companies (SPACs) have become an increasingly widespread way for businesses to go public. A SPAC merger allows a company to quickly and easily go public by acquiring an already-public company. Compared to the “gruelling process” of registering an IPO with the SEC, a SPAC acquisition can be closed in just a few months.
In a special purpose acquisition company (SPAC) merger, the target company can negotiate its own fixed valuation with the SPAC sponsors. This allows the target company more flexibility regarding what it can offer its shareholders.
Why do some private companies choose a SPAC over an IPO?
There are a few reasons why private companies might choose a SPAC over an IPO. One reason is that there are different valuation approaches with SPACs and IPOs. Another reason is that SPACs tend to be valued higher than IPOs. Private companies may also choose a SPAC over an IPO because they are not required to disclose financial information to the public. This allows the company more control over its future and prevents its stock price from being influenced by market forces.
A SPAC is attractive to a highly leveraged company because it allows founders and major shareholders to sell more of their ownership position without going through the rigorous IPO process.
Private companies may choose to go public through a SPAC rather than an IPO because the public market is more volatile and risky. Additionally, private companies may want to avoid publicity and focus on their business. A SPAC offers private companies more flexibility in raising money, which can be advantageous if they need to adapt to changing circumstances or new opportunities quickly.
Advantages of SPACs
Forming and going public through a SPAC is much quicker and more straightforward than the traditional IPO process. This makes them an attractive option for companies that want to go public but don’t want to wait the many months it can take to complete a conventional IPO.
The advantage of being acquired by or merging with a SPAC sponsored by prominent financiers and business executives is that the target company can gain experienced management and enhanced market visibility.
Another reason for the soaring popularity of SPACs may be that they offer a shorter time frame to go public. For example, many companies have decided to forego conventional IPOs because of the market volatility and uncertainty triggered by the global pandemic.
Additionally, SPACs are cheap. Many of them are priced at $10 a share, which is well within reach of retail investors. They also stay low for a while.
SPACs also tend to invest in hot areas. A new breed of SPACs, which focuses on ‘sexy’ sectors in the tech or consumer fields, has become increasingly popular. Some examples include Opendoor, Clover Health, and electric automaker Nikola, which went public via SPACs. Additionally, the high number of shares sold makes it easier for smaller investors to get a piece of the action. Finally, SPACs are popular among smaller investors because of their ease of participating.
Risks associated with SPACs
SPACs are often overhyped and lack the disclosure necessary to make informed investment decisions. This can lead to investors losing money when the SPAC fails to live up to expectations.
When a company goes public through a SPAC, it typically raises more money than a typical IPO. However, the company also takes on more risks. The hype around the SPAC may wear off after its initial public offering, and the stock price may not perform as well as the overall market.
SPAC is a risky investment because 70% of SPACs are trading below their $10 offer price. Furthermore, the acquired company may not be successful, and the SPAC shareholders could lose all or part of their investment.