SPAC

Special Purpose Acquisition Company  

Special purpose acquisition companies (SPACs) are listed firms whose sole mission is to raise money and buy out existing private enterprises. SPACs have been available for a while and have frequently been used as a last resort by small companies that would otherwise have had difficulty raising capital on the open market. But, due to the tremendous market volatility brought on, in part, by the COVID pandemic, they have recently started to appear more frequently. 

What is a SPAC? 

A corporation established specifically to obtain investment capital through an IPO is known as a SPAC. With such a business model, investors can put money into a fund that will be used to buy one or more unnamed enterprises that are revealed following the initial public offering (IPO). As a result, this kind of shell firm structure is frequently referred to as a “blank-check company” in the media. 

 

Understanding a SPAC 

A SPAC is a kind of investment vehicle created to generate money through an IPO to buy a private firm. SPACs are an alternative to IPOs for companies looking to go public since the procedure can be completed more rapidly, with lower costs and more stringent financial disclosure standards. For example, the two-year time limit for SPACs encourages sponsors to locate an acquisition target and complete a deal. While smaller businesses sort through the reporting requirements and wooing process, IPOs may keep them private longer. If a company wants to make stock purchases more accessible, it may choose a SPAC over an IPO. Everyone can invest in the private companies SPACs will buy because they are virtually public corporations from the outset and sell their shares for roughly US$10 each. 

Working of a SPAC 

SPACs comprise seasoned businesspeople who are certain that their expertise and experience will enable them to choose a successful business to acquire. The founders contribute to the company’s initial funding. The purchased company benefits from this capital. The SPAC’s management issues the IPO by entering into agreements with an investment bank. The sold securities are offered at a unit price, corresponding to several common stock shares. Its fair market value must equal at least 80% of the assets of the SPAC in purchasing the target company. The founders receive around 20% of the profit from their ownership stake in the company once it is bought. Depending on their capital investment, other investors receive equity stakes. If the specified period expires or certain legal conditions are not met, the SPAC is dissolved, and the investors’ contributions are returned to them. The SPAC’s management is only compensated once the contract is finalised. 

Advantages of a SPAC 

SPACs have advantages for companies looking to go public. While the procedure for a traditional IPO might take anywhere from six months to more than a year, the route to public offering utilising a SPAC may take a few months. Due to the short window of opportunity to start a deal, the target company’s owners may also be able to negotiate a higher price when selling to a SPAC. The target company will benefit from experienced management and increased market awareness if acquired by or merged with a SPAC sponsored by well-known financiers and business executives. The COVID-19 pandemic may have been the impetus for the rise of SPACs in 2020, as many businesses opted against traditional IPOs due to market volatility and uncertainty. 

Risks of a SPAC 

Special Purpose Acquisition Company  

The following are a few of the risks and concerns relating to SPACs: 

  • The surge of investor corporations pursuing SPACs and searching for target businesses has tipped the scales in Favour of investee enterprises. Theoretically, this would restrict returns for retail (individual) investors following the merger. 
  • Disappointing results have prompted shareholders to file class action lawsuits and open investigations against SPAC sponsors in several instances. More investor protection from fraud and conflicts of interest, as well as more investor disclosures, are encouraged by the US Securities and Exchange Commission. 
  • Many SPACs are frantically searching for desirable target companies since they must start looking for one after listing and because the entire transaction must be completed by a specific deadline. 
  • The two-year lifespan of SPACs makes it possible for investors to make rash judgements due to the time constraint, which could drive away dissident shareholders and lower total returns. 

Frequently Asked Questions

Like the stocks typical investors regularly invest in, you can purchase shares of individual securities to invest in SPACs or purchase an exchange-traded fund. 

 

A SPAC liquidates and returns all funds to investors if it cannot merge within the stipulated time. 

 

Throughout its lifecycle, a SPAC experiences many phases and processes. 

  • The prospectus filing is the first phase of the SPAC lifecycle. The target industry or segment emphasis of the SPAC and the terms and structure of the SPAC offering are all disclosed in this filing. 
  • The underwriter plans the roadshow so the sponsor group can meet potential IPO investors during the marketing phase. In comparison to a conventional IPO, this roadshow is less extensive. 
  • The foundation of SPACs of today is a set of common traits. IPO pricing is one of these traits. The cost of the IPO units is US$10. 

 

In a traditional IPO, a private firm issues new shares and sells them on a public exchange with the aid of an underwriter. In a SPAC transaction, the private company merges with a listed shell company (SPAC) that serves as the special-purpose acquisition company to become publicly traded. 

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