When a company goes public via an initial public offering (IPO), the stock price typically spikes in the day after, and sometimes for several days after. When that happens, retail investors are left paying a much higher price than the IPO price.
This is because the company that is issuing a traditional IPO is looking for large amounts of capital. This requires the kind of capital that is typically reserved for large investment banks. In very rare cases, if an individual investor is a client of an investment bank, and has the financial resources to do so, they may be invited to participate in the IPO through their broker.
A special purpose acquisition company (SPAC) is an alternative that benefits the sponsor, but also can benefit retail investors. This is because, unlike a traditional IPO, a SPAC allows investors an opportunity to get in on the ground floor. Also in contrast to a traditional IPO, there are minimal regulations with a SPAC so, once a deal is made, the process tends to move much faster.
In this article, we’ll review what a special purpose acquisition company is and describe the process that a SPAC takes to go to market. We’ll also look at the controversial history of SPACs and the regulations that are in place that makes them safer, and more mainstream investments today. We’ll also look at the benefits and the disadvantages of a SPAC. And finally, we’ll go over ways investors can identify SPACs to invest in.
For the uninitiated, the name is sort of self-explanatory. It may help to read it backwards. A special purpose acquisition company is one that is established with the intention of acquiring or merging with another company for a single (special) purpose. In this case, the purpose is to bring the acquired company public. This is typically, but not always, done by way of a reverse merger.
Actually, the term acquisition is the most misleading. A SPAC is more of a silent investor. Investors will frequently hear the words “blank check company” used to describe them. This is because a SPAC has no operations; it has no assets other than the cash that its founder (or founders) brings to the SPAC.
The founder or founders are called sponsors. Traditionally, these sponsors will be targeting a particular industry or business sector in which they have a strong background. When the SPAC launches, these sponsors raise money from other investors which it then uses to bring an existing company public.