A SPAC is a special purpose acquisition company, a shell company created for the specific purpose of merging with certain private companies in order to acquire that company more quickly than normal The company’s initial public offering (IPO) process.
SPAC stands for “Special Purpose Acquisition Company.”
Also known as a “blank check company” or “shell company.”
These shell companies go public and raise capital for the sole purpose of acquiring an attractive private company with explosive growth potential and taking it public in the process.
Investors are betting that management will deliver on its promise to find a compelling target and take it public through a merger.
Be a sponsor. Or the management team decides to launch a SPAC, where they create a holding company.
Sponsors find investors by marketing themselves, their deal experience, and the target industries in which they will be looking for companies to acquire.
Once outside investors generate enough interest, the sponsor sells units in the SPAC itself. SPACs typically IPO at $10 per unit.
Typically, a unit consists of one share and a fraction of a warrant .
The funds raised go into a blind trust. It is untouchable until shareholders approve the acquisition.
SPACs trade on exchanges just like any other public stock.
SPAC sponsors have 18−24 months to close the deal, depending on the prospectus.
Sponsors are motivated to close the deal. Their issuances account for about 20% of IPO issuances.
These shares are worth millions of dollars and are called “Founders Stock” or “Promotional Stock.” They act as compensation for closing the deal.
If the sponsor fails to close a deal within the stipulated time, the SPAC will dissolve and shareholders will get their money back.
Once a deal is found and acquisition terms negotiated, shareholders will vote on whether to approve the deal.
If the deal is approved, the sponsor will proceed with taking the company public, pending regulatory approval of the deal and the SPAC having the capital necessary to acquire the company. (Shareholders can choose to withdraw funds and interest at this time.)
If funding is still required, the promoters will turn to private investors for a “PIPE” transaction (Private Equity Investment).
Quality companies such as Blackrock, Fidelity, T. Rowe Price and others have been PIPE investors.
Once approved, the SPAC’s ticker symbol changes to reflect the newly acquired company. Shareholders who own shares in the SPAC now own shares in the newly acquired company.
While SPACs have been around for decades, they are far less well-known than traditional IPOs.
Traditional IPOs are suitable for more mature companies that have private investors looking for an exit.
SPACs, on the other hand, target companies that are in the early stages of their growth cycle. This means they have greater upside potential than IPOs.
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