Those launching SPACs aren’t just former CEOs or private equity investors anymore. Celebrities, like Colin Kaepernick, Shaquille O’Neal, Tony Hawk, and Jay-Z, have gotten in on the action. The US Securities and Exchange Commission has even taken notice of the trend and opened an inquiry into the craze. A Form 8-K with equivalent information that would be required in a Form 10 filing of the target company (commonly referred to as the ‘Super’ 8-K) must be filed with the SEC within four business days of closing.
- Also known as blank check companies, SPACs have existed for decades, but their popularity has soared in recent years.
- The shares are intended to compensate the management team, who are not allowed to receive any salary or commission from the company until an acquisition transaction is completed.
- When issuing the IPO, the management team of the SPAC contracts an investment bank to handle the IPO.
- A SPAC’s IPO is typically based on an investment thesis focused on a sector and geography, such as the intent to acquire a technology company in North America, or a sponsor’s experience and background.
- When a blank-check company does go public, it usually sells “units,” almost always at $10.00 per share.
In 2019, SPAC Switchback Energy Acquisition (SBE) saw a 323% share price increase in just its first few months, for instance. But as with stock picking in general, it’s hard, if not impossible, to root out the winners from the losers. Because SPACs allow all investors to invest in them from the get go, this helps level the playing field and help everyone benefit from stock growth similarly, even if you aren’t sure quite what you’re buying when you start. With large institutional investors and other billionaire backers launching SPACs left and right, the trend is unlikely to disappear overnight. SPAC management may take a seat or two on the board or get involved in management to help guide the going-forward company and look out for the interests of public shareholders. This all adds up to a grand total of $7.5 million needed to fund the risk capital for a $200 million SPAC.
What Is a SPAC?
If the SPAC fails to strike a deal, investors get their $10 back plus interest. The money raised from the IPO goes directly into an untouchable trust, where it accrues interest until the SPAC finds a private company and uses the funds to merge with that company. For example, the team would receive 2.5 million shares on top of the 10 million shares issued in the IPO.
The share prices of new IPO companies often jump substantially above the initial listed price, even in the first few minutes or hours of public trading. By the time the average investor is able to snag a share, the price may be drastically higher than was advertised. But prices don’t tend to stay that high—at least in the short term—and everyday investors might end up buying high at a price that won’t be matched again for a long time, if ever. A special purpose acquisitions company is essentially a shell company set up by investors with the sole purpose of raising money through an IPO to eventually acquire another company. A SPAC may also be founded by a team of well-connected private investors like billionaire Bill Ackman, institutional investors, private equity or hedge funds, or even high-profile CEOs like Richard Branson and even Donald Trump. The target company must prepare a MD&A disclosure for all periods presented in the financial statements so that investors understand the target company’s financial condition and results of operation.
When investing in any asset class or special situation, understanding some of the specific rules of the game can help you avoid big losses and set yourself up for outperformance. A month later, the commission released an updated bulletin to further educate investors about SPACs. “This is unlike anything else in my career,” Grantham told Financial Times. While SPACs can be used to bring any sort of company public, they’re frequently being used to merge with companies in emerging fields. For instance, Fisker (FSR), Lordstown Motors (RIDE) and Nikola (NKLA) are just a few of the dozen or so electric-vehicle companies that have either gone public via SPAC or are expected to do so. With two decades of business and finance journalism experience, Ben has covered breaking market news, written on equity markets for Investopedia, and edited personal finance content for Bankrate and LendingTree.
Compared to an IPO, the SPAC is much less risky for the target company. In a SPAC acquisition, the target company only needs to sign a deal with the SPAC for a fixed amount of money at a negotiated price. Whereas if the company decides to go the IPO route, the target company is uncertain about the size, price or even https://www.dowjonesanalysis.com/ potential demand. The founders and sponsors provide the starting capital for the company and they stand to benefit from a sizeable stake in the acquired company. When the SPAC raises the required funds through an IPO, the money is held in a trust until a predetermined period elapses or the desired acquisition is made.
Edelman said the process of filing and hearing back from the SEC typically takes about 30 days. Then, to actually take the SPAC public, the team and its lawyers prepare and file the S-1 registration statement with the Securities and Exchange Commission — just like anyone else seeking to IPO. But in 2020, the number of SPACs on the market quadrupled from the year before, according to SPAC Insider data. Already this year, the number has already surpassed 2020’s record with 298 SPACs and more than $97 billion raised.
But those 2.5 million shares won’t be worth anything until the SPAC merges with a private company. For example, celebrities are more expensive to insure and so are managers with a riskier business history. Recently, the SEC warned investors against buying into a SPAC just because it has a celebrity name attached to it. According to Ari Edelman, a partner at Reed Smith who specializes in SPACs, these people are typically confident in their network and their ability to make a deal happen.
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“Average investors are very unlikely to have access to the hottest IPO,” she says, at least until the company goes public and stock prices blast off. “But they do have access to a ‘blank check’ [SPAC] company as soon as it goes public,” before it’s acquired private company. Most retail investors cannot invest in promising privately held companies.
At last, Klymochko said the SPAC “changes the name and ticker symbol, and then they’re off to the races” as the new public company. A majority of shareholders have to agree it’s a good deal, but Klymochko said he’s never seen a deal get voted down. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. The popularity of SPACs in 2020 may have been triggered by the global COVID-19 pandemic, as many companies chose to forego conventional IPOs because of market volatility and uncertainty. Interest in SPACs increased in 2020 and 2021, with as much as $83.4 billion raised in 2020 and $162.5 billion in 2021.
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This year, it hasn’t been unusual to see a SPAC trade at $12 or $13 per share, even after going public at $10. Shares no longer represent just a shell company, but a more concrete opportunity that might very well generate large profits down the road. As we mentioned earlier, blank-check companies typically https://www.forexbox.info/ go public at $10 per share. At that price, the SPAC is funded with enough capital to make an acquisition based on the number of shares outstanding. For example, space transportation company Momentus announced in October 2020 that it would go public via a SPAC named Stable Road Acquisition (SRAC).
Once the deal terms and pipe financing are in place, the SPAC publicly announces the merger and pulls in public relations representatives to help market the deal through press releases, podcasts, and elsewhere, Klymochko said. Once a SPAC finds a company to merge with, the management team will go looking for “pipe financing.” Lastly, the team needs about $1.5 million https://www.forex-world.net/ for two years of Directors and Officers, or D&O, insurance, which protects the SPAC management team from lawsuits. For a team targeting the creation of a $200 million SPAC, they’ll need about $7.5 million in risk capital. Former President Donald Trump’s conservative Truth Social app was brought public via a SPAC known as Digital World Acquisition Corp. (DWAC).
At this point, stockholders can redeem their shares if they don’t like the deal. That means they’ll get their $10 per share plus interest back from the trust. The SPAC doesn’t have to stick with whatever industry it lists in the filing. “It’s hilarious because there were a bunch of cannabis SPACs, and not one of them did a cannabis deal,” Klymochko said. So, they create an LLC, or limited liability corporation, typically in Delaware. In industry speak, this is called the “sponsor.” The team needs the help of lawyers and bankers to get started, and they will rely on those specialists from beginning to end.
The shares are intended to compensate the management team, who are not allowed to receive any salary or commission from the company until an acquisition transaction is completed. SPACs are commonly formed by investors or sponsors with expertise in a particular industry or business sector, and they pursue deals in that area. SPAC founders may have an acquisition target in mind, but they don’t identify that target to avoid disclosures during the IPO process. Pro forma financial statements are typically required and will provide a comprehensive view of the SPAC merger. The accounting acquirer is the entity that has obtained control of the other entity (i.e., the acquiree) and may be different from the legal acquirer.
A SPAC’s IPO is typically based on an investment thesis focused on a sector and geography, such as the intent to acquire a technology company in North America, or a sponsor’s experience and background. Following the IPO, proceeds are placed into a trust account and the SPAC typically has months to identify and complete a merger with a target company, sometimes referred to as de-SPACing. If the SPAC does not complete a merger within that time frame, the SPAC liquidates and the IPO proceeds are returned to the public shareholders. The target company’s management team will need to focus on being ready to operate as a public company within three to five months of signing a letter of intent. A SPAC is a special purpose acquisition company, also frequently called a blank check company. SPACs are a publicly traded vehicles that exist solely to raise money and acquire existing private companies.
A special purpose acquisition company really only exists to seek out another firm that it can bring to the public markets via a merger. First, though most SPACs start out with share prices of around $10, this price can rise substantially due to the fame of those behind them or the announcement of their target acquisitions. If you end up paying more than the initial offering price of a SPAC, you could stand to lose more than your initial investment if no deal materializes since you’d only recoup the $10 per share price, minus expenses. As they are public companies listed on major exchanges, you can invest in SPACs like you can any other publicly traded stock—through your online brokerage account. A company may also opt for a SPAC over an IPO to democratize the stock purchasing process. Since SPACs themselves are public companies basically from the beginning, anyone can by extension invest in the private companies they’ll acquire at a relatively low price of about $10 a share.