Special-purpose acquisition companies, also referred to as SPACs for short, are in essence an alternative route for privately owned companies to become publicly listed as opposed to the traditional initial public offer (IPO). Alternatively, SPACs are created with the sole purpose of generating funds by listing themselves via IPO. The resulting funds are then used to acquire a privately owned company looking to go public.
With the above in mind, SPACs are considered what is known as a ‘shell’ company as they essentially have no commercial ventures and instead offer investors stock in an undisclosed future acquisition. Due to this fact, SPACs are also referred to as ‘Blank Check Companies’ as initial investors are investing in a company that could quite literally look to acquire any business looking to go public.
This however does not make investing in Special-Purpose Acquisition Companies a matter of blind faith, as modern-day SPACs are mostly formed by reputable investors/sponsors with experience in specific markets, business acquisitions or operations. This experience and niche expertise is utilized by the SPAC founder to identify and target privately owned businesses looking to go public, with the goal of acquiring the company.
SPACs have grown increasingly popular over the past decade. In looking at data provided by Bloomberg.com, total SPAC issuance as increased from $2.5 billion in 2010, to $25 billion as of August 2020. But why is it now that we see this increase in popularity as it relates to SPACs? For many, this growth can be attributed to several factors.
The initial issue with SPACs in the early years of their development, was that their founders were largely unproven investors in the marketplace. As Sacramento Kings Owner and Investor Vivek Ranadivé stated, SPACs were perceived as “sleezy as people did not know the companies, people did not know the investors.” This has changed over time as we know see SPACs being founded by renowned financial groups such as Goldman Sachs and investors like Bill Ackman. The reputation of SPAC founders like the ones above have shifted the perception of SPACs into a positive light as the decades have passed.
SPACs offer a route for privately owned companies to become publicly listed that has a considerably lower number of guiding barriers. In other words, by being acquired by a SPAC, the process of merging together is streamlined and as a result, most of the regulatory paperwork that would be required through the federal Securities and Exchange Commission (govt. agency tasked with providing oversight and protection to investors) is streamlined as well. This leads to the second contributing reason as to why SPACs have seen a spike in popularity over the last decade.
Due to the expedited paperwork process that can result in a prolonged IPO filing and merger process, privately owned businesses that are looking to become publicly listed are able to gain access to the public market at a much greater speed. This efficient use of time grants a sense of instant gratification and turn around for all parties involved.
Upon finding a partnering business to acquire, the SPAC and said business will merge under the name of the acquired business. This process greatly benefits private businesses looking to become publicly listed as the IPO processes is simplified as the SPAC actively seeks them out and partners with them throughout the process. An additional advantage for the acquired business is that by selling to a SPAC, they are not as susceptible to rapid or unexpected change in the stock market.
As with all forms of investments, SPACs do carry both pros and cons. We have previously covered the pros that SPACs offer in that they are typically founded by experienced investors/sponsors, offer a streamlined public listing process with fewer regulatory hoops to jump through and quicker access to the market. But we will now look at the cons that are associated with SPACs.
One glaring issue in merging with a SPAC is that many of the investors are not considered to be ‘long-term’ as they may have had no previous intentions in investing in the acquired company before the SPAC was founded. This, in combination with higher underwriter and sponsor fees could cause trouble for those involved with the process. Additionally, as a personal investor, investing in SPACs (and in general) can result in net loss if market conditions take a downward turn.
Investing over the last several decades has evolved greatly for businesses both privately and publicly owned. This is increasingly apparent in the case of Special-Purpose Acquisition Companies. The evolution of such companies has opened the door for both potential investors and companies looking to become publicly traded, in a mutually beneficial way. However, as with all forms of investing, it is important for all participating parties to be cognizant of both the pros and cons that are associated with SPACs.