What is a SPAC?
SPAC stands for Special Purpose Acquisition Company, also known as a blank check company. A SPAC is a shell company used to raise money that can be used to take a private company public. This enables company to bypass the traditional IPO process. SPAC’s can be used to fund mergers and acquisitions as well. This gives an opportunity to retail investors to take part in private-equity type transactions. All the money raised from an IPO is held in a trust account. From the time of the IPO, the SPAC’s have a time limit before which it should acquire an operating business and perform a reverse merger, causing the private company to become public. Companies selling to a SPAC can get a higher sale price than a private equity deal making it attractive for companies. The founders benefit from the common stock portion in the new company and the investors receive an equity interest. The downside for an investor is capped by the fact that they have a redemption option if they do not like the acquisition target.
In 2019, there were 59 SPAC IPOs that collectively raised $13.6 billion. Year to date, a total of 55 SPACs have raised $22.5 billion. Some famous SPAC IPO’s include Nikola, Virgin Galactic, Pershing Square Tontine Holdings. Michael Bloomberg is in talks with hedge fund manager Bill Ackman to take his media empire public.
Thinking of Using a SPAC to Go Public? Here’s What to Consider