Introduction
A special purpose acquisition company is an entity formed solely to raise funds in an initial public offering (IPO) , which it shall subsequently use to acquire or merge with an existing corporation. No business operations or stated acquisition targets exist for SPACs at the IPO.
SPAC shares are issued as trust units with a par value of $10 per share. High-profile private equity funds and celebrities , along with the general public , are investors in SPACs. SPACs have two years to accomplish an acquisition, or they must return the funding to the investors. In this article , we will discuss Special Purpose Acquisition Companies ( SPACs ), their process, advantages , and disadvantages.
Special Purpose Acquisition Companies (SPAC)
“Blank check companies” is another name for Special Purpose Acquisition Companies. A SPAC is a shell company that has no commercial operations other than raising funds through an Initial Public Offering (IPO) that it can utilize to acquire or merge with another company .
Although relatively obscure during most of their heyday-they were at their peak just before the onset of the financial crisis in 2007-2008 – SPACs experienced a phenomenal resurgence at the beginning of the 2020s, with a record number of SPAC IPOs and mergers, only to calm down in the mid-2020s.
SPACs also dominated the headlines with the highly publicized 2024 merger that ultimately made former President Donald Trump’s media company public under the ticker symbol.A SPAC has a specific timeframe within which it should finalize a deal, usually 18-24 months ; if it fails to do so, it must return the money to the investors.
As a result, if an investor invests early and does not pay a premium over the initial investors , they receive most or even all their money back. For the businesses that are acquired, a SPAC can be even better than an IPO.
How does a Special Purpose Acquisition Companies (SPAC) works
SPACs are typically sponsored by investors or individuals who possess knowledge of an industry or business sector, and they will generally target deals within that area. Founders of a SPAC often have an acquisition target they are interested in, but they do not disclose it, so they do not have to make disclosures during the IPO process.
SPACs provide their IPO investors with very little information before they invest, seeking underwriters and institutional investors before offering the shares to the public. During the SPAC boom at the very start of the 2020s, they attracted some of the highest names in the industry , such as Goldman Sachs, Credit Suisse, and Deutsche Bank, along with retired or semi-retired senior executives.
The process of SPACs
Step 1 – Formation of a SPAC
Sponsors form SPAC with a small amount of invested capital usually 20% and the remaining 80% will be held by shareholders through IPO.
Step 2 – IPO
SPAC goes public and raise fund through IPO.
Step 3 – Trading period
While sponsors search for a suitable target company, SPAC’s share will go public and start trading on stock exchange.
Step 4 – Target Identification
SPAC search for a target company to acquire or merge with.
Step 5 – Merger Announcement
If both parties agree SPAC will announce the merger with target company, revealing the details to investors.
Step 6 – PIPE Financing (if applicable)
In this stage, if needed extra funds may be raised through Private Investment in Public Equity (PIPE) financing.
Step 7 – Proxy statement filling
A detailed proxy statement filed with the SEC to provide information to shareholders.
Step 8 – Shareholder vote
Shareholder vote whether to approve merger, with the option to redeem their share if they decide not to participate.
Step 9 – Merger completion (De-SPAC transaction)
The SPAC and the target company merge and the combined company begins trading under a new ticker symbol
Step 10 – Post merger
The newly public company operate like other public companies and former SPAC sponsors often take the role of advisory or board seats.
Step 11 – Lock up period
In general, there is a lockup period during which the sponsors and particular shareholders cannot sell their shares, usually for 6 to 12 months.
Pros and cons of going public with SPAC
Pros
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Go public sooner.
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Could raise more funds.
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Access to the knowledge and experience of the founding sponsors.
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Target company value is established or at least fairly certain before the listing.
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The time to listing is shorter because the shell company has already had its IPO.
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It may even lead to the availability of ‘unicorn’ companies for investors.
Cons
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The SPAC might not discover the target company.
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Returns to investors are likely lower.
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SPACs have been associated with scams, which further cost them the public’s trust.
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Company sponsors, may exit immediately after the consolidation process.
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Some form of loss of independence on the part of the target.
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SPAC do not require the degree of due diligence that the IPO does.
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They can be given stocks, and then sell the same in days of listing, an event impacting the share price.
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A deadline of two years to close a deal may cause SPACs to make an overpayment on targets.
Conclusion
A SPAC is an investment vehicle formed to raise capital through an IPO to acquire a private company. It can be technically referred to as a “blank check company , ” as the SPAC is formed without preconceived notions of any specific acquisition target.
Once the SPAC has raised enough capital in its IPO, it invests that money into finding and acquiring a private company. That private company is taken public through a reverse merger. In other words , the private company gains access to public markets and, more importantly, additional capital without going through the traditional IPO process.