Top 10 Frequently Asked Questions about SPACs (Special Purpose Acquisition Company)

SPAC IPO Listings on Nasdaq | Nasdaq
Hat tip: NASDAQ blog

1. What is a SPAC?

A SPAC is a Special Purpose Acquisition Company, also called blank check companies. These companies raise money in the public markets without having operations. They raise money so they can acquire a company. The company has an “IPO – Initial Public Offering”, only to raise money from external investors.

In simple terms think of them as getting a mortgage “pre-approved” before you buy a home. It is not exactly the same, but close.

SPACs look for companies that are private, which they can acquire and take public.

SPACs are usually run by experienced management teams who understand a market or industry well and want to buy a company (or a few) and take them public.

2. How many SPACs are there?

According to SPAC databases, in the last 11 years (2009 – 2020) there have been over 380 companies that have raised money in a SPAC vehicle. In 2020 alone, over 130 companies have raised money using SPACs. The most famous SPACs have acquired Virgin Galactic, Nikola, Draft Kings and Pershing Square Tontine Holdings.

3. How do SPACs work?

Similar to an IPO, the management team registers with the SEC, does a roadshow (presentations to potential investors such as pension funds, mutual funds, hedge fund managers) and requests commitments for capital.

Lets say SPAC-You wants to raise $200 Million. They might get commitments from 50 investors to raise that capital. They go public and the stock now lists at $10 per share to start. The money raised is held in a trust until a target company is identified, e.g. MyTechCo.

MyTechCo will now be acquired by SPAC-You, which puts the $200 Million into that investment. MyTechCo is free to raise more money as well, but it reduces the time and effort to go public and the cost as well.

In the old IPO method, 3% – 7% of the money raised goes to the bankers. Typically SPACs only charge 2% of capital raised.

4. Who invests in a SPAC?

Institutional investors such as Mutual Funds, Family offices, Pension Funds, Hedge Funds, Corporate funds, Endowment funds, Private Equity funds and Insurance companies invest in SPACs.

Retail investors (you and I) can also buy shares in a SPAC. They tend to be VERY long term investments. It would take at least 2+ years to see any movement in the stock price.

Stages in the life of SPAC | Download Scientific Diagram

5. How have SPACs performed?

Of the 380+ SPACs there have been about 10 that have outpaced the market, 20 that have performed below par and about 200+ that have still not made any acquisitions.

6. Why is there such a big interest in SPACs?

The main reasons are the cost of going public has been high and there are over 400+Unicorns (private companies with over $1 Billion in market capitalization). Over the last 2 decades the # of public companies has halved in the US. There are more companies going private than going public, and more companies getting acquired.

SPACs give companies capital without a short term quarterly focus on earnings (for a limited time) and have more patient investors.

7. Which are the most successful SPACs?

The most successful (in terms of money raised) have been

Pershing (PSTH.U),

Churchill Capital (CCIV.U),

Flying Eagle (FEAC.U),

Dragoneer Growth (DGNR.U) and

Red Ball Acquisition (RBAC.U).

8. How many businesses can a SPAC acquire?

A SPAC usually merges with one privately held company.

9. How do I go about starting a SPAC myself?

Going public
HBS report on SPAC time line

With a good management team, a banker to help you raise (or put together your own roadshow), you can raise a SPAC with all the legal paperwork to help you register with the SEC and launch one in 2-3 months.

10. What happens to the money in a SPAC?

The money raised by a SPAC is initially held in a trust until there is a target acquisition company.

Bonus Q: Should I invest in SPACs?

Since there is very little information available about SPAC (they have no operations) the founders and the team sponsoring the SPAC is crucial. Research the team well before you invest. You should have a 2-5 year horizon for the funds to generate value (if at all).