A special purpose acquisition company (SPAC) is a shell company with no commercial operations, cash flow, or investments. Also dubbed “blank check companies,” these are shell companies erected for the sole purpose of raising capital through an IPO.
SPACs are generally formed by institutional investors (such as hedge funds) or wealthy individuals, called sponsors, with expertise in a certain industry or sector. The goal of a SPAC is to raise capital and then sniff out companies interested in going public via an acquisition or merger. If a SPAC is successful, it will list the newly minted public company’s shares on a stock exchange.
The founder of a SPAC typically has at least one acquisition target or sector in mind upon creation of the shell company. But to avoid extensive filing disclosures during the IPO process, they may avoid identifying an entity until after the first round of funding.
Q.ai Says: Sometimes, a SPAC may identify a specific industry or business in its IPO prospectus – but the company is not obligated to pursue its target after filing.
Typically, the original sponsor will seek capital from underwriters and institutional investors first, then retail investors. The funds raised usually goes into an interest-bearing trust account and cannot be redispersed except to a) complete an acquisition or merger, or b) refund investors in case of liquidation. (Note that the interest earned on the trust is often used as the SPAC’s working capital or to pay relevant fees and taxes.)
After its IPO, a SPAC generally has 18 months to two years to complete a merger or acquisition lest it face liquidation proceedings. The average period for a SPAC to find a suitable transaction ranges from a few months to over a year.
Once a SPAC finds an operating company of interest, management negotiates the terms of a deal for a potential initial business combination (the merger or acquisition). It’s not unusual to see these structured as a reverse merger wherein the operating company becomes part of the SPAC or a SPAC subsidiary.
The main upside for retail investors is getting in on a reputable SPAC (or a SPAC with reputable sponsors) that selects a company with solid upside potential. This has the potential to generate significant returns for retail investors and the original sponsors.
And have some SPACs have done well in this way – just look at Virgin Galactic and DraftKings.
So, if you want to get in on a SPAC, where do you start?
Like anything else in investing, the answer is: with a little research. Look at SPACs with high-quality management teams that are targeting competitive industries ripe for the picking. You’ll also want to get an idea of how big the SPAC is. While larger SPACs have their choice of target companies, they probably won’t go for smaller firms that have potentially larger upsides.
After that, it’s simply a matter of investing in the SPAC of your choice. If you’re interested in pre-IPO stock, for instance, you can look for filings on platforms like SPAC Insider and SPAC Research and contact prospective investments directly. Your wealth broker may also be able to link you into the SPAC investing community.
Or, if you can’t access a SPAC’s stock pre-IPO, you can get in on the ground floor when the stock goes public on the NYSE or Nasdaq.
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