If you are interested in investing in the stock market, you may have come across the term SPAC. But what exactly is a SPAC and how does it work? In this blog post, we will explain the basics of SPACs, their advantages and disadvantages, and some examples of recent SPAC deals.
What Is a SPAC?
A SPAC stands for Special Purpose Acquisition Company. It is a type of shell company that has no business operations or assets, except for the money it raises from investors through an initial public offering (IPO). The sole purpose of a SPAC is to use that money to acquire or merge with a private company, usually within a specific industry or sector, and take it public. The private company then becomes the publicly traded company and the SPAC ceases to exist.
A SPAC is also known as a blank check company because it gives its sponsors (the founders or managers of the SPAC) a blank check to find and buy a target company. The sponsors usually have some expertise or connections in the industry they are targeting, and they may have a potential target in mind, but they do not disclose it to the public or the investors until they sign a definitive agreement. This way, they avoid the lengthy and costly regulatory and disclosure requirements of a traditional IPO.
A SPAC typically has two years to find and complete a deal with a target company, or else it has to return the money to its investors and liquidate. During this period, the money raised from the IPO is held in a trust account and can only be used for the acquisition or for paying taxes. The sponsors usually receive a 20% stake in the SPAC as compensation for their efforts, and they may also invest some of their own money in the SPAC.
How Does a SPAC Work?
The process of creating and completing a SPAC deal involves several steps:
- Formation: The sponsors form a SPAC and register it with the Securities and Exchange Commission (SEC). They also choose an underwriter (a bank or a broker) to help them sell the shares to the public.
- IPO: The SPAC sells its shares to the public at a fixed price, usually $10 per share. Each share also comes with a warrant (an option to buy more shares at a later date) or a fraction of a warrant. The warrants are meant to entice investors and increase the value of the SPAC. The IPO usually raises between $100 million and $500 million, depending on the size and ambition of the SPAC.
- Searching: After the IPO, the SPAC begins to look for a suitable target company to acquire or merge with. The target company must have a valuation that is equal to or larger than 80% of the SPAC’s trust value (the amount of money raised from the IPO plus interest). The target company must also be willing to go public and agree to the terms of the deal.
- Announcement: Once the SPAC finds a target company and signs a letter of intent or a definitive agreement with it, it announces the deal to the public and files a proxy statement with the SEC. The proxy statement contains detailed information about both companies, such as their financials, business plans, risks, management teams, ownership structure, valuation methods, and deal terms.
- Approval: After filing the proxy statement, the SPAC must seek approval from its shareholders and regulators for the deal. The shareholders can vote for or against the deal, or they can redeem their shares for cash at their original price (plus interest) if they do not like the deal. The redemption option gives investors an exit opportunity and protects them from downside risk. The regulators, such as the SEC and antitrust authorities, must also review and approve the deal for compliance and fairness.
- Closing: If both shareholders and regulators approve