Recent headlines have shown a number of firms brought to public markets through special acquisition companies (SPAC). SPACs are often called blank check companies because investors who purchase the offering do not know the exact target to which their funds will be directed to acquire.
What is a SPAC and how do they benefit both firms and investors? A SPAC typically has no operations or profit and is a shell company designed to bring another company public. SPACs are a publicly traded company that collects capital. SPACS are usually invested in a trust filled with low duration high quality bonds. Most SPAC’s have a 24 month window with which they have to acquire or merge with another company and bring them public. If they do not make that merger, they must return investors capital, many times with interest.
Special Acquisition Companies have been on a half-decade increase in capital raised. In 2015 an approximate 3.9 billion in funding was raised that fueled 20 initial public offerings . 2019 saw approximately 13.9 billion dollar raised and 59 IPO’s (2). The increase in funds raised and IPO’s offered through SPAC’s can likely be attributed the simplicity with which companies can be brought public. A traditional initial public offering (IPO) can be an onerous process that involves underwriters and the long process of pitching to large institutions. An Direct Public Offering (DPO) additionally can wrack up costly offering fees and has an onerous filing process, without the backstop of institutional capital on launch. The Special Acquisition Company offering approach allows the less regulatory scrutiny of both a IPO and a DPO with less banking costs prior to launch.
What does that mean for investors? As with any investment vehicle, there are both pros and cons for the investor. A SPAC public offering does have its costs, usually with a 5.5% premium awarded to the management team in two parts. A hurdle the investment must overcome. Additionally, a SPAC cannot disclose to investors what the target company for acquisition or IPO is until the acquisition is lined up. Meaning that a bio tech driven SPAC could be raised to take any number of companies public creating risk for the investor not knowing whether it will be a good company or one that will not see success. Some of the most remark worthy SPAC offerings recently have been to facilitate Nikola, UTZ and Fiskar enter into the public markets.