In recent years a controversial method for companies to go public has become more mainstream. Special Purpose Acquisition Companies or SPACs are public shell companies whose sole purpose is to acquire a private company, thus bringing the company public quickly and without going through the traditional IPO process. While SPACs have been around for decades, they have started to gain widespread acceptance only in the past few years with blue chip companies and institutional Wall Street investors getting involved in the process. With SPACs raising more money than traditional IPOs in 2020, the trend does not seem to be slowing down anytime soon. This blog will give an overview of what SPACs are, how they work, and the risks and benefits associated with them.
How SPACs Work
A SPAC is a public shell company, meaning that it is traded on stock exchanges but has no underlying business that generates revenue. It exists only as a temporary vehicle for bringing a targeted private company public after which the SPAC becomes the target company, taking on its name. Once the acquisition goes through, the company is treated like any other publicly traded company and would no longer be classified as a SPAC. While both a traditional IPO and the SPAC acquisition process both have the same goal (bringing a private company public), the SPAC acquisition process is treated more as a corporate acquisition or merger rather than the more regulatory traditional IPO process. Below is a simplified outline of the process:
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A SPAC sells shares to raise money for an acquisition |
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The SPAC uses the capital raised to buy or merge with a target company |
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The SPAC becomes the acquired company |
An Easier Way To Go Public?
By going public through a SPAC, private companies can bypass the traditional IPO process, which is long, volatile, and imposes significant regulatory burdens. Private companies going through the IPO process are restricted in several ways, possibly the most significant being that they cannot promote their shares until after the IPO. This does not apply to companies going public through SPAC deals.
IPOs can also fall apart at any point throughout the months-long process due to a number of reasons, so using a potentially faster, more efficient process has proven to be an attractive alternative for some companies. A common reason that IPOs collapse is market volatility, which can cause a company’s valuation to fluctuate dramatically in short periods of time. If a company’s valuation falls significantly overnight then going public may no longer be worth it or even possible. The market volatility that has been present throughout the coronavirus pandemic may help to explain why SPAC deals have become more popular recently.
Investing In SPACs
SPACs are usually owned primarily by experienced corporate leaders and private equity firms, with a much smaller percentage of shares sold to the public than most publicly traded companies. Potential investors may believe that since they are operated by experienced corporate professionals, SPACs will have the knowledge and resources to strike a good deal with a target company. Individuals who invest in SPACs do so without knowing what company will end up being acquired, which is why SPACs are also referred to as “blank check companies''. As the nickname suggests, investing in a SPAC may be risky and requires a good amount of trust that the people operating the SPAC will achieve a profitable deal. If the SPAC is unable to strike a deal within a given timeline (typically two years), then investors get their money back. Investing in a SPAC before a target company is identified is basically investing in the competence of those operating the SPAC to make a good deal.
The Securities and Exchange Commission (SEC) has raised some concerns about SPACs, and with the process starting to become more common, more scrutiny may be coming. Some of the concerns they have raised include:
While SPACs might provide an easier process for going public, there is no shortage of regulatory requirements for companies to keep up with. If your company wants to make compliance easy, contact us to learn more about our Transform™ SEC Reporting software.