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A special purpose acquisition company (SPAC) is formed for the purpose of raising capital through an IPO and using those funds to acquire an operating business. SPACs bring together experienced management teams, often comprising industry veterans, private equity sponsors or other financing experts who can leverage their expertise to raise capital to acquire, then operate, a new public company within 24 months or less, a SPAC will find an attractive company to acquire and, once that transaction is completed, a new publicly traded company is formed.
WHAT YOU NEED TO KNOW ABOUT SPACs
An increasingly popular way of listing companies to the stock exchange market is through Special Purpose Acquisition Companies (SPACs), also known as “blank check companies”. If you are not familiar with SPACs, you may have heard of Virgin Galactic, Nikola or DraftKings. All three companies entered the market through the SPAC route.
In this editorial we update you on the background information of SPACs and discuss how much popularity these products have gained in recent years.
WHAT IS A SPAC?
SPACs are businesses that use a stock exchange listing to raise capital to acquire or merge existing companies. They are also known as “blank check companies” because when getting established they often do not have a defined acquisition target. At the initial public offering (IPO) of a SPAC, ensuing the investors do not know which company they ultimately invest in. SPACs neither have existing business operations on the day of their IPO.
HOW DOES A SPAC WORK?
A SPAC collects money through an IPO that includes shares and warrants from the SPAC. These shares and warrants are bundled and sold as a unit. A unit costs $10. Proceeding the IPO, the units split into shares and warrants that can be traded on the market.
The proceeds of the IPO are being kept in a trust fund and later used for an acquisition. Typically, a SPAC takes up to two years to realize a complete takeover. If the acquisition does not terminate within the predetermined time schedule; the assets in the trust fund will be liquidated and returned to the shareholders.
In the event that an investor does not consent the acquisition, it is possible to sell the purchased shares. In such a case, the warrants are reserved. On the other hand, when the takeover turns out better than the exited investor expected, the investor will be able to rebuy shares by exchanging the warrants for the determined fixed price of $11.50USD. This may be tempting to those who believe that after the IPO of the company the SPAC takes on, the final company’s stock share prices will increase.
After the acquisition, the SPAC often changes its name and symbol/ticker to represent the acquired company. The terms of the warrants generally remain the same.
Compared to traditional IPOs, where businesses are being acquired or merged, a SPAC is generally a less costly manner to enter the market in terms of expenditure and time. The traditional IPO process can take months whereas the SPAC process takes several weeks on average.
EXAMPLE OF A SPAC
Here we’ll display an example of Virgin Galactic to further explain the term “SPAC” and display how it works.
In 2017, a shell company called Social Capital Hedosophia (SCH) accessed the market and became tradable under the ticker IPOA. In July 2019, Virgin Galactic announced its merge with SCH whereby SCH would seize 49% of Virgin Galactic’s shares, from which arose a company called Virgin Galactic Holdings. This transition was completed in October 2020. Shares, units and warrants of Virgin Galactic Holdings became tradable under the tickers “SPCE”, “SPCE.U” and “SPCE WS”. (In March 2020, Virgin Galactic announced it would redeem outstanding warrants, resulting in the only possibility to trade Virgin Galactic shares.)
HOW HAVE SPACs GAINED POPULARITY?
The first listing of a SPAC dates back to 1993, but only recently, it was picked up by the general public. According to Bloomberg, SPACs have already raised $ 41 billion in financial markets from the start of this year to the end of September. To give you a clearer perspective; that is more than the past ten years combined. About $29 billion from the total $41 billion has been collected since July 1st. Bloomberg also noted that SPACs vouched for about 40% of this year’s IPO volume.