Special Purpose Acquisition Companies (SPACs) have been around for decades, functioning as vehicles for bringing companies public. Until 2020, SPACs—also known as blank-check companies—weren’t nearly as popular or common as the traditional initial public offering (IPO) process. Yet, with the onset of the COVID-19 pandemic—which ushered in an influx of new retail traders and investors, along with the unearthing of several speculative segments of the market—SPACs gained immense popularity.
Despite a boom-bust cycle already having played out in terms of SPAC issuance, investors are still left with several questions regarding them, not least being details around historical performance and potential risks. They are incredibly complex vehicles and differ widely in size, structure, and quality.
A faster track to public markets
SPACs generally offer a less arduous path for companies that wish to go public. They are created by a sponsor—ranging from a private equity firm to a former corporate executive—who works with an underwriter to bring the blank-check company public. Money is raised in a public stock offering and the SPAC trades on an exchange with the intent of finding a target company with which to merge. If and when a merger is completed, the SPAC takes the identity and ticker of the target company.
One of the main advantages for target companies—and effectively, SPACs—is the ability to talk about the future and make predictions, which is prohibited in the traditional IPO process. That is a particularly attractive proposition for SPACs that are hunting for innovators and disruptors. Also of interest to target companies is the lack of necessity for roadshows (a key part of the traditional IPO process), which typically consist of several meetings with institutional investors and are meant to secure capital. With SPACs, capital is already raised by a sponsor in one vehicle, making the match process with a target company a bit easier.
For the individual investor, SPACs offer a direct opportunity for access to new companies—which has historically been reserved for larger institutions and hedge funds. There is also an attractive affordability trait. In most cases, investors can purchase one unit of a blank-check firm for $10, which consists of a common share and a fraction of a warrant (which gives the right to buy more shares at a specified price in the future). The capital aggregated by the SPAC is invested in Treasury bills until a target company is found, by which time it is deployed to complete the merger process.
Fee structures vary but, in general, the sponsor’s equity stake amounts to 20%; so, after banking fees, the cost to public investors at the time of the SPAC’s IPO, and/or merger with a target company, there are many times when the costs associated with SPACs can be much higher than traditional IPOs.