What is a SPAC?
Financial Education Series
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A SPAC (Special Purpose Acquisition Company) is a company that is formed strictly to raise capital through a “masked” IPO (Initial Public Offering) to be able to acquire/or merge with an already existing company. Often times when SPACs are formed nobody but the direct investors know so the stock price can remain unchanged for years.
Some details about SPACs and why they are used:
When a SPAC is formed there is no business being operated and the SPAC has 2 years to acquire/merge with a company or else the initial investor’s money has to be returned. Simply put it is a way for a company to launch on a stock exchange without the glamour and hype of a traditional IPO. Often called "Blank Check Companies" because when formed that outside/retail investors have no idea what company the SPAC will acquire.
Some Pros to being acquired by a SPAC:
1) Your company can go through the IPO process much quicker and seamless with the help of the more experienced guide of the SPAC
2) Market sentiment/IPO sentiment: As we have recently seen, IPOs generally in the past couple of years have not been successful. IPOs lately have been a nightmare for companies and most importantly SPACs lower the "IPO pressure". For instance, $LYFT and $UBER had a very hard time post IPO.
Don’t take my word for it, here is an article outlining 7 Reasons You Shouldn’t Buy an IPO
3) Through the SPAC process a company can add up around 20% to the sale price vs. a normal private equity deal.
Most recently (one can say infamously) $VTIQ was a SPAC that merged into $NKLA (Nikola Motors). The stock rocketed from $26 dollars a share to the high 90s in just a matter of days. Now, I do not recommend this stock in any sense currently (actually quite the opposite), but this was one of the first SPACs to explode that started the ripple effect of curiosity around the subject. The hype about SPACs is real but so are the dangers. SPACs are known to be highly speculative in nature because at the end of the day it is not guaranteed that a merger or acquisition will occur. If this falls through then the stock price will plummet and the warrants will be worthless. Generally, a SPAC also has very low revenue since it is still in the beginning stages of a well-established company so the share price can be rocky and unpredictable. If you are going to invest in a SPAC make sure you do your due diligence, you understand the risks, and you keep your asset allocation size small.
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