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SPACs: A Guide for Investors

A Special Purpose Acquisition Company (SPAC) is a shell corporation created by institutional investors to raise capital through an initial public offering (IPO) with the intent to later merge with or acquire an existing company. Individuals and private equity funds purchase SPAC shares without knowing the target, relying on the SPAC's performance. The process involves three stages - incorporating and issuing founder shares, identifying potential targets, and completing a merger or acquisition deal within 1.5-2 years of raising capital. SPACs allow firms to go public faster and cheaper than traditional IPOs and are regulated like public companies.

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38 views13 pages

SPACs: A Guide for Investors

A Special Purpose Acquisition Company (SPAC) is a shell corporation created by institutional investors to raise capital through an initial public offering (IPO) with the intent to later merge with or acquire an existing company. Individuals and private equity funds purchase SPAC shares without knowing the target, relying on the SPAC's performance. The process involves three stages - incorporating and issuing founder shares, identifying potential targets, and completing a merger or acquisition deal within 1.5-2 years of raising capital. SPACs allow firms to go public faster and cheaper than traditional IPOs and are regulated like public companies.

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 A Special Purpose Acquisition Company (SPAC) refers to an entity

with no commercial operations but intends to merge with or acquire


an existing business. The shell firm created or sponsored by
institutional investors and underwriters raises capital to incorporate
and go public through an initial public offering (IPO).

 Individuals and private equity funds buy special purpose acquisition


company stocks or shares without knowing the target business.
However, they are solely responsible for assessing the investment
risks based on how the SPAC performs. A SPAC owns no assets
other than cash and sells shares to the general public after being
listed on a stock exchange.
 A Special Purpose Acquisition Company enables a firm to go
public via merger or acquisition. It is a faster and less
expensive method than traditional initial public
offerings (IPOs). SPAC is referred to as a shell
corporation because it issues an IPO to raise funds for the deal.
It is also known as a blank check firm because it has no
business model, product or service, or specified purpose.
 A group of management professionals called founders or sponsors
provide the initial funds to the SPAC in exchange for significant
ownership in the target business. Next, the company selects an
investment bank to help with the issuance and management of the
IPO selling securities at a unit price. Finally, investors must find and
finalize the deal within 1.5-2 years of raising the capital and profit.

 The entire process takes place in three stages – incorporating and


issuing founder shares, identifying potential merger or acquisition
targets, and concluding merger or acquisition deals. SPACs are
regulated by the U.S. Securities and Exchange Commission (SEC)
and trade like public companies. As a result, the general public can
purchase its shares post-merger or acquisition.
These firms are quickly becoming the most effective way to get a
company listed on a stock exchange. Here are a few quick points to
understand a SPAC better:
 Creates a pool of resources by selling stocks, with each share
typically selling for $10.
 Includes a warrant or contract that allows investors to buy a whole
share of common stock in cash at a specified price and a later date.
 Places funds raised in a trust account until it finds a target firm for
merger or acquisition within two years.
 This account generates interest for use as working capital for the
company.
 After the SPAC goes public, it lists on a stock exchange.
 Failure to conclude a deal leads to liquidation of the company and
the return of IPO funds to investors and public shareholders.
 The expertise and reputation of sponsors determine the performance
of the SPAC.
 Sponsors receive 20% of founder shares in the SPAC at a discounted
price. However, it makes it a not-so-profitable deal for public
shareholders who purchase the remaining 80% SPAC shares through
units at a fixed market price.
 The special purpose acquisition company definition describes a
company with no commercial operations but plans to merge with or
buy another company. Institutional investors create it to raise capital
and go public through an initial public offering (IPO).
 Sponsors form the SPAC, investors purchase stocks, and targets are
firms the shell company plans to merge with or acquire.
 The process comprises three stages – incorporation and issuance of
founder shares, identification of potential merger or acquisition
targets, and completion of the merger or acquisition contract.
 The U.S. Securities and Exchange Commission (SEC) regulates
SPACs, which trade like public companies on a stock exchange.

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