This article is the second part to my three part series on investment. To start at the beginning of the series, read “Interpreting Investment Part 1: Going Public via Route SPAC“!
Q: So, what is a SPAC?
A: A SPAC, Special Purpose Acquisition Company, is essentially a shell company. It has no assets, does not sell any products, does not collect revenue, and does not have any underlying business operations. A SPAC can be set up by a team of institutional investors or even high-profile CEOs such as Richard Bramson, founder of the Virgin Group (think Virgin airlines),and a SPAC’s purpose is to identify and eventually acquire privately owned companies. In order to raise capital, the SPAC sells shares of the SPAC company, to the public in what is known as a SPAC IPO. The money the SPAC raises in its SPAC IPO is then placed into a trust account.
Q: How can a company go public with a SPAC?
A: SPAC sponsors, the investors who initially set up the SPAC, then have a limited amount of time, usually two years to find a private company, called a target company in the case of SPACs, to merge with. When the SPAC and the private company merge it is called the initial business combination of the de-SPAC transaction. If a deal is not made, then the money made from the SPAC IPO is returned to SPAC shareholders. SPAC shareholders typically need to approve of the de-SPAC transaction, a legal process that is overseen by the SEC. If a SPAC shareholder does not want to continue holding shares in SPAC after the de-SPAC transaction is made, perhaps the SPAC shareholder does not approve of the private company the SPAC is merging with, then the SPAC shareholder can request a return of their shares, get their money back, and in turn, exit all SPAC business.
Q: When investors buy shares in a SPAC IPO, do they know what target company will be acquired?
A: When a SPAC raises money via its SPAC IPO, the people buying into the IPO do not know what the eventual acquisition target company will be. With SPACs being created and run by professional investors, the recommendations that these individuals make to others carry a lot more ethos, leading people to feel comfortable in investing in the unknown. Hence why SPACs, in addition to being called shell companies, are also called blank check companies.
Let’s recap the life cycle of SPAC before we move on:
- The SPAC is formed by seasoned, professional investors.
- The SPAC establishes a SPAC IPO that the public can purchase shares in. The proceeds from the SPAC IPO are then placed in a trust.
- The SPAC identifies a private business as a target company in at most two years.
- The SPAC pitches the target company it wishes to merge with to the SPAC’s shareholders.
- If the majority of SPAC shareholders approve of the merger, the SPAC will merge with the target company in a process called a de-SPAC transaction.
Q: What is the difference between an IPO and a SPAC?
A: A SPAC is the reverse of an IPO. It goes public first with the intention of finding a private company to acquire and put in its “shell”. In other words, “an IPO is basically a company looking for money, while a SPAC is money looking for a company”.
SPACs are not new to the investment world. In fact, these shell companies have been around since 1990 and were originally focused on acquiring private companies in the technology, media, and healthcare industries. Since 2013, SPAC IPOs have increased steadily, and in 2020, this investment method experienced its greatest growth to date. From 2019 to 2020, the number of SPAC IPOs increased from 59 to 81, the amount raised in SPAC IPOs increased from 13.6 billion dollars to 33.1 billion dollars, and the average size of a SPAC IPO increased from 230.5 million dollars to 408.7 million dollars.
Q: Why this sudden increase in SPAC investment?
A: Like a lot of trends in 2020, the growth in SPAC IPOs is connected to the coronavirus pandemic. During the pandemic, the stock market was volatile, meaning that IPOs were increasing and decreasing at sharp, drastic rates, and with the U.S. presidential election, the market became increasingly difficult to predict. Many companies looking to go public then chose to stray off the beaten IPO path, fearing that market volatility would negatively affect their stock’s public debut, and instead, these companies chose the less travelled SPAC route.
Stay tuned for the third and final part of my investment series! In the next article, I will be detailing the benefits and drawbacks of SPACs and what Victoria Grace, founder of the $300 million female-led SPAC, Queen’s Gambit Growth Capital, has to say about the sustainability of SPACs.