What’s a SPAC, how is it created, how does it work, what does its capital structure look like, what’s in it for the creators of a SPAC and why do private companies like going public via a SPAC? This article provides you with all you need to know before investing in a SPAC.
A Special Acquisition Company isn’t new, but popular sponsors in the finance industry are using them more frequently to bring private companies to the public markets.
What is a SPAC?
A SPAC, or Special Purpose Acquisition Corporation, is a company that raises money through an IPO for the sole business purpose of acquiring an existing private company at some point in the future. Therefore, bringing that private company to the public markets. This is why people also refer to a SPAC as a “blank check company.”
How Is It Created?
A SPAC is formed when either an individual or company, referred to as the sponsor, submits a registration document with the Security Exchange Commission, the SEC. This document is called the S-1, and on this document the sponsor marks this new Corporation as a SPAC.
How Does It Work?
When a SPAC raises money on its IPO day, those funds are placed in an interest bearing trust account…[but] if no acquisition is completed by the closing date which is typically 18 to 24 months after the IPO date although a SPAC can request an extension of the time frame, and then the shareholders could approve or deny that request.
If a SPAC fails to complete a business acquisition by the closing date, and the shareholders don’t grant an extension, then the public shares are redeemed for a pro rata portion of the cash in the trust account and returned to the shareholders.
If a SPAC does complete a successful acquisition, then the company is usually listed on one of the major stock exchanges…
One stipulation of a SPAC acquisition though is that the fair market value, which is the price that the company would sell for in the open market of the target company, must be 80% or more of the SPAC’s trust funds…
What Does the Capital Structure of a SPAC Look Like?
When investors buy into the IPO of a SPAC, they’re usually buying what’s called a unit…[consisting of 1] common stock plus a a fraction or the entirety of a warrant which gives the investor the right to buy a share of stock later at a predetermined price at a specific time….Sometimes the structure of a warrant doesn’t allow the investor to exercise until specific events such as time, revenue goals, the share price of the existing float, etc. are triggered. When warrants are exercised, or force exercised by the company in some cases, it increases the shares outstanding on the market…diluting the existing shares being traded.
What Is In It For the Creators of a SPAC?
Well, they typically hold what’s called Founder Shares which entitle them to 20% of the common shares in the new company brought to the market…[which] is the trade off for the sponsor not being able to receive any salary or commission from all the work they do until the acquisition is completed. . There’s usually a lock up period of about one year on these shares, but in some special scenarios that time frame can be shorter. A lock up period protects the interests of the market, preventing these SPAC’s from being a get rich quick scheme.
…[A few advantages for the private companies include] gaining the expertise of a sponsor who has brought other companies to the public markets or skipping the long process and large fees of a traditional IPO. [On the other hand]…SPAC’s typically acquire companies at a premium, adding value to the private company for its earliest investors and management team.
SPAC’s are just a company created by people or companies with great reputations. Capital is raised and a private company is brought to the public market through an acquisition and, if the SPAC works correctly, then everyone wins.
Editor’s Note: The original article has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy read. The authors’ views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
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